Demand and supply shock

1 min read

With the impact of the coronavirus growing, concerns are mounting that component shortages will start to have a serious impact in a matter of weeks.

The analyst group, Oxford Economics, has warned that should the virus spread beyond China, and with the latest news that it has not only reached Italy, Iran and South Korea but that there are now cases in Austria and Croatia, there will be serious consequences for the global economy. The virus is already having a “chilling effect” on China, with extensive factory closures. As a result, it is looking more likely that companies will struggle to source components and finished goods.

Apple has warned investors that it’s not going to meet its quarterly revenue target, because of the “temporarily constrained” supply of iPhones and there has been a dramatic drop in Chinese spending by consumers.

It is a prime example of the type of demand and a supply shock that electronic suppliers and customers may be facing, and while Apple says that production will return to normal that process is taking far longer than expected.

Interestingly, according to market analysts Omdia, the semiconductor industry appears to have escaped the impact of the coronavirus crisis - so far – but, should the virus spread then it’s possible we could see production reduced or even suspended, as factories are closed.

For the moment, despite logistical, packaging and test challenges, fabs in China appear to be functioning normally, but any disruption could have profound global repercussions.

The semiconductor market represents a huge component of the global economy, generating an estimated $425 billion last year alone, so the danger comes with disruption to manufacturers – many of whom operate in China and are already functioning at below 20 per cent capacity.

Problems with import and export logistics are growing but are being mitigated by the fact that the first quarter tends to be the slowest period of the year for the global electronics business.

The worry has to be that as the coronavirus continues to spread and spur significant public-health problems beyond China, it will start to raise serious long term problems for electronics suppliers and manufacturers who may be forced to slow manufacturing further or even shut down their operations.

Rather than the green shoots of a recovery, we may just be seeing brown weeds instead.