Covid-19: The Situation so Far

Article By : AspenCore Global Editorial Team

Covid-19 has accelerated the shift of manufacturing from China to elsewhere (other countries in Asia) – which had been already happening due to the U.S.- China trade conflict. We may be witnessing the beginning of China’s hollowing out.

After two months of covering the Covid-19 outbreak in China, we see the rest of the world now in panic mode over the coronavirus epidemic, which is now spreading faster outside of China than inside. The crisis is no longer China’s problem. It is the world’s problem.

Most companies in the global electronics industry we talk to, however, don’t like to discuss what’s really happening in China, or what they themselves are going through right now. “Now is not the time,” is the standard answer they fall back on.

In other words, the crisis isn’t over yet, and they have no time to look back and opine on the lessons they learned.

With the ongoing crisis threatening the global economy, they are no doubt scrambling to keep the disruption to a minimum. No single company has a wide enough view.

But Aspencore, which owns EE Times, has a global team of editors in a position to provide that wider snapshot. We asked our editors to fan out and collect the industry’s reactions and observations. Opinions vary but one thing stood out:

Covid-19 has accelerated the shift of manufacturing from China to elsewhere (other countries in Asia) — which had been already happening due to the U.S.-China trade conflict. We may be witnessing the beginning of China’s hollowing out.

Here’s what we’ve gathered thus far:

1. Spread the risk: Never a single supplier

“Never depend on a single supplier,” advises Echo Zhao, senior analyst at EE Times China. Although large suppliers in China have resumed their basic operations, Zhao said that smaller suppliers seem to have disappeared.

Take manufacturers of thermometers or any other medical equipment — urgently needed to respond to the epidemic. “When you can’t find a few screws which you used to source from a single supplier, and that single supplier is not to be found, your production line must stop,” said Zhao.

If you must rely on a single supplier, it is imperative for you to ensure that a certain inventory and early warning mechanism is put in place.

Dave Leggett

The same point was stressed by David Leggett, automotive analyst at GlobalData, to Gina Roos, editor in chief of Electronic Products (another Aspencore website).

One obvious strategy is to have multiple sources for different products rather than be tied into one supplier. Companies must spread the risk.

But that’s easier said than done. There has been a lot of cost pressure to give suppliers scale in contracts so that they can lower the unit price, Leggett acknowledged. While dual sources make sense, there is an implied cost for having multiple sources for some products, he added.

2. Building buffer stocks

If you don’t dual-source, “build buffer stocks for critical components,” Leggett suggested. “Any procurement manager working for a car manufacturer will look at all the different strategies in terms of contracts, suppliers, and risk mitigation — keep stock, alternative suppliers, etc. There are things that they can do but it all comes with cost.”

3. Collaborate with suppliers

In 2011, severe monsoons in Thailand affected the supply of display panels and caused a massive problem for some automotive OEMs, recalled Leggett. “There are lessons to learn from the LCD panel shortages tied to the Thai floods. They need to work collaboratively with their suppliers, particularly key suppliers, to ensure that they’re not exposed in the event of some unforeseen disruption.”

Leggett adds a note of caution: “The trouble with the supply chain is that it is quite elongated. It’s not just the direct component supplied by a company; it could be Chinese content buried in a sub-assembly or subsystem that is suddenly in short supply. They’ve got to take a holistic approach to work out the whole supply chain to know where to mitigate those risks.”

4. Components aren’t moving

Early in the crisis, our concern was focused on when Chinese companies could resume work again. The production lines are slowly but steadily coming back, according to Fendy Wang, an international electronic business analyst at ESM China, another of Aspencore’s publications.

But the impact on logistics hasn’t been well understood, according to Yole’s president and CEO Jean-Christophe Eloy, whom Anne-Françoise Pelé, the editor at EE Times Europe, recently interviewed in Lyon.

Jean-Christophe Eloy

Eloy explained: To contain the spread of the epidemic, the Chinese government has taken strict measures. Hubei province has remained sealed off for almost a month, restricting the movement of more than 50 million people. Roads are blocked. Airports are closed. Railway stations are shut down.

“That means the supply chain is broken, not because nobody is manufacturing, but because components are not moving from one part of China to the other,” said Eloy. “Nobody and nothing is moving.”

Although we anticipated the disruptions in production, we did not predict that transportation would be at a standstill for so long. “Even if plants are working, products can’t be shipped to the next level of the supply chain,” said Eloy.

It takes time to get all parts back on track, much more time than the workers coming back to the factories, observed Eloy. “All the supply chain has to be up and running to be able to restart, and when you have 200 suppliers across China, it is a huge problem. Even if the factories are able to produce, they are not delivering, and from what I have seen and heard from our customers, this was not planned as a risk management.

5. Broken integrity of supply chains

Extraordinary times sometimes require extraordinary measures.

EE Times China’s Zhao reported that when a company found some key materials were missing, sometimes it required the boss himself to deliver them from the source to the production site. Zhao also had a friend in Shenzhen, whose supplier was isolated in Hubei, and could not come to Shenzhen. The supplier ended up authorizing Zhao’s friend to go to his warehouse and smash the lock to take out the material.

For sure, this is an anecdote that shows the supplier saved the day for the manufacturer in Shenzhen. But this is also an example for how the integrity of the upstream and downstream supply chains are now getting broken.

6. Hard times for everyone

Chinese enterprises are in a dire need of a predictable cash flow, EE Times China’s Zhao wrote. “Now, even some listed companies are considering a cut in their employees’ pay,” she reported.

With little cash flow reserved to respond to emergencies, some SMEs cannot survive.

7. Know your suppliers, build a continuous monitoring system, and get business continuity plans

Bindiya Vakil, CEO and founder of supply chain risk analysis firm Resilinc, suggested three strategies to mitigate design and supply chain risk to Electronic Products’ (EP’s) Roos. Map the supply chain, put a continuous monitoring system in place to alert when events happen, and get business continuity plans from suppliers.

Bindiya Vakil

“The one thing that everybody always realizes during events [coronavirus] like this is they don’t know enough about their suppliers,” said Vakil. A recent case in point: the senior leader of Jaguar Land Rover reported that the company didn’t know enough about their suppliers and didn’t have enough visibility into their supply chain.

“This is something companies always realize in hindsight as they’re actively managing events, they don’t know where their suppliers’ manufacturing sites are located, where the parts are stored, and where they are distributed from. These are very basic things that companies have not taken the time to find out,” Vakil said.

It’s not enough to just find locations, it’s also important to have a central place to store the information so it’s readily available.

“Everyone is scrambling and trying to find out information at this moment from suppliers, and it’s already too late. In this particular case [coronavirus] many of them are going through quarantine, so companies are really struggling to get information. What they need to do before any event happens is to have a program in their organization to map their supply chain and inform their experts about where their supply chain mapping data resides, and to train them on how to access it in a bind,” Vakil said.

8. Diversify your employees – which regions are they from?

As EE Times China’s Zhao reported, at a time like Covid-19 epidemic, “It’s miserable to ask and mention the employee’s regionality.”

In one case, Zhao said that more than half of one company’s employees are stranded in provinces with restricted traffic. Because this is a manufacturing company, it resumed work on Feb. 17th, with a quarter of its workforce. In the future, management plans to consider the employee’s province in the recruitment.

9. Can we produce things closer to home?

“The question is ‘should we be creating these expansive global supply chains’?” posed GlobalData’s Leggett.

“Perhaps there’s something that could be done closer to home that an OEM has more control over,” he told EP’s Roos. “If you’re a U.S. OEM, for example, there could be an argument made to source locally in North America or to look at the level of vertical integration — doing more things in-house rather than using contractors.”

Similar viewpoints were shared by Dan Breznitz, Munk Chair of Innovation Studies at the University of Toronto and co-author of an influential book on China’s transformation, Run of the Red Queen. EE Times’ George Leopold interviewed Breznitz. The key questions, Leopold wrote, are whether the Wuhan virus or other factors eventually change western perceptions of China as the world’s manufacturer, and whether western investors will take steps to mitigate future risks.

“The question is at what point those kinds of risks are deemed so high that not just the companies and their managers but their very active investors — hedge funds — understand that you have to invest billions of dollars over multiple years in order to recreate those sets of skills and capabilities somewhere else,” Breznitz told Leopold.

10. They are not coming back

One of the strongest points Yole’s Eloy made to EETimes’ Pelé was that the spread of Covid-19 is likely to accelerate the migration of manufacturing out of China to other countries.

Eloy explained that the U.S.-China trade war had prompted a debate over whether China should remain the manufacturing capital of the world. Multinationals, along with Chinese companies themselves, already started to take actions to move some of their production from China to other Asian countries. The coronavirus outbreak has accelerated the trend even further, Eloy explained.

“The flow of investments in Vietnam and Southeast Asia has been incredible for the past months,” he said. None of them is a minor investment. Eloy said that once the production in China shifted to other Asian countries, “It [production] will never come back.

11. Pay attention to cloud/remote office

In the electronics industry, software development seems like one segment that’s least affected by the coronavirus crisis.

For IC design companies, telecommuting seems also feasible — in theory, wrote EE Times China’s Zhao. As she interviewed chip designers in Shenzhen, she found out that although the design and analysis work can be done remotely at home, debugging is something that can’t be done from a remote location.

“You can only do it once you return to the company for actual debugging and measurement.” Because approvals are needed now to enter the work site, there are strict time limits, she wrote. It is necessary to use workplaces to meet with the high requirements on the simulation. And the accuracy of the simulation determines the workload of debugging, she added.

12. Change the supply chain, but can you diversify the customer base?

Factories may rumble back into action, but companies continue to face labor shortages, Yole’s Eloy told Pele. “This is particularly affecting the electronics manufacturing services (EMS) companies, compared to the front-end manufacturing where there is a lot of automation.”

In his opinion, if companies such as Apple ask the EMS companies to have their manufacturing plants in Vietnam, they will do it, Eloy said. They could even support them by funding. However, “if you have Huawei and Xiaomi in your customer base, you can’t find alternatives and have to have enough cash to wait for the restart of the market.”

Changing the supply chain is the simplest part. Diversifying its customer base is much trickier and it takes more time.

— Compiled by Junko Yoshida, Aspencore’s global co-editor-in-chief


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