Research conducted by ByteSnap Design in the UK last month, found that among electronics companies innovation, flexibility, operating as leanly as possible, while engaging in good financial management were seen as critical in terms of their survival.
According to the report, “With resilience, adaptability, cash, good leadership and a mix of customers, across a range of different industries, electronics firms should have good survival rates.”
Whatever the future holds, the crisis has highlighted several issues, one being how dependent the electronics industry’s supply chain is on Chinese manufacturers.
When the crisis struck China the initial reaction was, that while it would cause severe disruption to the global supply chain, business would be able to operate as normal. However, as Covid-19 went global, while the impact on the supply side eased as China’s factories began to return to work, the shock to the demand side proved profound. The long term consequences, of which, are only now starting to play out.
The halting or slowing down of supply chains began in January, says Steve Rawlins, CEO, Anglia Components. “We first saw the effect in January when Chinese manufacturing started to close down. Anglia operates with a stock turn of one and hold inventory at a level of 50% of our annual sales – which is five-six times the level of the industry norm. We look to maintain a substantial buffer to insulate customers against inevitable but unpredictable disruptions, such as Covid-19, that can occur.”
“The China shut down affected raw material supplies. Luckily we hold pretty good buffer stocks, so we weren’t that badly affected,” says William Heath, Commercial Director, OMC. “While suppliers are quoting longer lead times on materials, it’s manageable; it is just making things harder for production planning. Lead times are long and everyone is being generally cautious.”
“For RS Components, being a global business actually helped. Due to our initial response to the crisis in China we were able to apply what we’d learned when the crisis became global,” explains Debbie Lentz, RS Components’ President Global Supply Chain.
“As a distributor it’s critical that we got up and running quickly and we deployed split shifts and social distancing to ensure our employees were kept safe.”
According to Lentz, “Supply chain disruption meant that the company had to connect and work closely with suppliers. Production, once it re-started in China, was sporadic but as we hold stock at 12 different distribution centres around the world we were able to protect out supply chains – we used different source points, switching between the Far East and Europe when required.”
According to Tyson Tuttle, CEO of Silicon Labs, “We had real supply chain worries when this hit China, there was an inability to transact but, as China began to unlock, communications started up again.
“As for Silicon Labs we are set up to work virtually, so as we monitored the situation in February and March and as the pandemic spread we had plans already in place to deal with it, i.e working from home, identifying essential employees and handling social distancing.”
Tuttle makes the point that being exposed to the impact of the crisis via China meant that the company was relatively well prepared.
“As it went global we wanted to deal with the crisis proactively and navigate through it as effectively as possible. So as factories were hit and supplies affected we worked out how we would continue working using our network of design centres.”
While, “everything just kept going,” Tuttle concedes that for a lot of companies working remotely brought considerable challenges and they’ve had to learn how to be more productive in a virtual environment.
Surge in freight costs
One critical issue that severely impacted electronic supply chains was the jump in freight costs.
“The costs associated with air freight are up significantly,” explains Lentz. “But a lot depends on the lane. From China to Europe and the US freight costs are very high, likewise from the UK to Japan, APAC and the US. A lot of freight goes in passenger planes so with airlines being grounded there’s been a real and sizeable impact – it’s a simple matter of supply and demand.”
According to Jeff Schnabel, President CUI Devices, “The shut-down happened quickly and our ability to respond was limited. We had to work with partners and sub-components suppliers to get manufacturing up and running and it took 6-8 weeks to get back to 60-80 per cent normal capacity. We’re back to normal today.
“In that time, costs have certainly gone up in terms of freight. We are seeing the big carriers implement restrictions on weight per company that they’re willing to move, and while we have a specific partner, with whom we have a good rate, when it comes to finding other sources it’s a lot more expensive. I would say it’s the biggest cost impact by far, and it certainly affected lead times.”
“Covid-19 has pitilessly exposed the fragility of the supply chain in our industry,” Rawlins believes. “The simple fact is that there wasn’t enough inventory in the system.”
Supply chain disruption was a concern for a fifth of respondents to the ByteSnap survey and there were calls for the government to address design and manufacturing security, as well as a warning over the current reliance on Chinese imports.
According to Heath, “I think we’ll see higher-level assembly starting to take place in the West, operations in which the most value is added. Component manufacture is unlikely to come back on any great scale, due to the sheer order of magnitude of difference in cost. Then there are components such as semiconductors for which a huge amount of manufacturing infrastructure would need to be built. Perhaps efforts will be made to source more widely, from other lower-cost countries rather than predominantly China, in order to spread the exposure.”
Infection control efforts
Heath also makes the point that infection control measures will, “affect supplier productivity for some time to come and to a degree we will have to get used to this.”
The fact that companies now have to adhere to new regulations and guidelines to better contain Covid-19, means that they have to take precautions to keep both employees and customers safe and better informed.
“What was initially seen as a quality of life issue i.e. working from home, is now a necessity, so at Silicon Labs we’ve been using Zoom and Teams,” says Tuttle. “Our engineering and corporate systems are cloud based and we’ve been able to support our staff and customers by working remotely.”
Digi-Key quickly implemented strict social distancing and workplace sanitisation measures, and began to evaluate additional ways to reduce contact, explains Ian Wallace, Director, EMEA Business Development.
“For example, over 8,000 plus totes travel through the receiving, picking and packing departments at Digi-Key every day and they were seen as a risk to employee health. The team developed a 4.5-metre ultraviolet sanitisation tunnel built into the curve of the conveyor belt that sanitises all totes that travel through the facility every day – drastically reducing potential virus contact for employees.”
“We started taking our first steps in late February and by mid-March we had already imposed a 2m distancing rule to protect our staff,” records Heath. “We’re fortunate that our building has several entrances and a lot of facilities, so implementing social distancing wasn’t disruptive. We actually took steps progressively as things appeared to be getting more serious – we already had a pandemic policy from when we updated our business disaster recovery plan – but we never really expected to have to use it!”
According to Heath the company suspended face-to- face meetings with external parties and took other steps such as special handling and de-contamination of incoming goods.
“We segregated the whole company into smaller groups, so that if one person got sick, it would limit the spread. We also looked at how we could prevent cross-infection when goods and tools passed from one staff member to another.”
While the Harwin factory in Portsmouth is spread out some additional measures were required to enable production to continue safely.
“We’ve added some additional spacing to accommodate social distancing rules and we put in place a one way system when walking around the business. Throughout the building we’ve sought to direct people walking around and made PPE available to all staff – we benefitted from a large shipment of masks from our Asian branch quite early on,” explains the company’s CEO, Damon de Lazslo.
Demand variations
While certain sectors are successfully riding the storm many others, in particular those supplying components to the automotive and consumer sectors, have seen demand collapse.
ByteSnap’s research found that demand for IoT and medical products was growing, significantly, while for automotive and industrial levels of demand had fallen back precipitously with 60 per cent of those questioned saying it was down.
According to Heath, the impact of the pandemic remains difficult to evaluate, as OMC’s products are manufactured to a lead time and are scheduled orders.
“We have seen a sudden move to hand-to-mouth ordering from customers, however, so if you look at something like average order value, then it looks like a dramatic impact, but really this is more an effect of our customers changing how they are ordering rather than how much they are ordering.”
“Certain industry sectors have experienced very high demand for their products from the very beginning,” explains Mike Britchfield, VP Sales, EMEA, Analog Devices. “Healthcare is the obvious use case, and we’ve had to ensure that these customers have been able to operate effectively within the limitations that the pandemic imposed.
“With the automotive industry, the pandemic has caused a significant drop in demand, but that could reflect that individuals are not only becoming more budget conscious with their spending but also that the latest models packed with the newest features might not be a priority.”
Tuttle agrees. “I think the most challenged market is the automotive one. Not only are factories shut but traffic numbers have fallen significantly and people are just unwilling, or unable, to buy cars.
“We’re predicting something like a 25-30 per cent drop in sales across 2020. But beyond that the sector has to now respond to the electric transition. That transformation is going to be costly at a time when revenues are down and many companies are seeking state support.”
One sector that has reported strong growth has been communications.
“Communications is a core business for us, and we’ve seen increased demand, even more so as it appears that the trend towards working from
home is going to require a more robust and effective communications infrastructure,” suggests Britchfield.
“Wireless networks and overall connectivity are two areas where remote working is going to have a significant impact both now and in the not-so-distant future.”
“Anything to do with communications is on fire at the moment,” adds Tuttle, “whether that involves data centres, communications infrastructure or 5G.”
The crisis is seen as accelerating the drive towards greater digitalisation across many different sectors, according to the CEOs interviewed.
From greater automation and teleworking to buildings needing to have advanced sensing and monitoring devices that can track movement and body temperature, many of the tools needed to succeed are already available but the actual impact of COVID-19 will certainly be hard to quantify.
“It will only be when people start returning to work, children head back to school, and fans are let back into concert venues or sports stadia, that we will know the role that the electronics industry will have to play in the post-pandemic world,” says Britchfield.
“The simple truth, however, is that it’s almost impossible to know what the world will look like in the months ahead.”
ByteSnap’s survey found that 86% of those surveyed said that they believed the UK, rather optimistically, would be back to normal within a year. However, a sizeable number expect a severe recession in 2020-21, with 36 per cent expecting a drop in demand.
In truth, we are still months away from beginning to see the real impact that the pandemic will have had on the electronics industry, and even then, analysis will be relatively limited.
Only when all this is over will we start to ‘tentatively’ see how the industry has really performed.
Note: A link to the research conducted by ByteSnap can be found below.