Front End I Electronic Components Supply Network
The impact of coronavirus on the UK electronic components supply network…
seems to have slowed the spread of the infection but it’s still early days, and despite efforts of governments and international health organisations, high levels of uncertainty remain. The best- case trajectory of coronavirus infection in China suggests that nothing will become certain until at least April 2020. In the meantime, the outlook remains bleak. The entire Hubei Province remains in lockdown with residents being ‘asked’ to stay at home, which in effect has brought a halt to all but essential business and commerce in the district. The fear and anxiety within the wider population in China is also slowing the return to work after the Lunar New Year holidays. When you consider that in many organisations employees live in very close proximity to their workplace and their co-workers, the potential risk of infection is huge. Their reticence is easy to understand.
Adam Fletcher M
embers of the Electronic Components Supply Network (ecsn) took into consideration all the obvious risk factors i.e. trade wars, under-investment, new legislation etc., when collaborating to formulate the association’s 2020 forecast for the UK electronic components markets. They concluded that the greatest threats to economic growth in 2020 and beyond are likely to be geopolitical in nature. What they didn’t factor in was the emergence of a Chinese epidemic with pandemic potential. China is playing down concerns about a global spread of the new coronavirus (COVID19) but the disease may yet prove to be highly disruptive to global economic growth. In this article, ecsn chairman Adam Fletcher reviews events to date and provides some thoughts on how the virus may impact the UK electronic components markets. The emergence in December 2019 of
the coronavirus (COVID19) has brought untold misery for millions of people in China and increasingly, for people in many other nations. At the time of writing (mid-February 2020) China has admitted to 48,548 cases and 1,381 deaths, and 505 cases have been confirmed in 24 other countries. The swift and draconian measures implemented by the Chinese government has reduced infection rates, which alongside the quarantine actions taken in many other countries
10 March 2020
Over the past twenty years China has become a key, and possibly the dominant, supplier to many international organisations of both components and finished goods. Many large international manufacturers are reliant for both their primary and secondary sourcing on goods produced by Chinese manufacturers and are attempting to switch their source of supply to other locations but in the short term, this is proving all but impossible to do. Their sourcing policy has attracted much criticism over recent years especially from manufacturers in other countries who have complained about the uneven playing field that has resulted from Beijing’s overt (financial incentives) and covert (exchange rate manipulation, IP theft) subsidies for its domestic organisations. Re-shoring this manufacturing capacity to Western Economies is desirable but likely to take a generation, even when supported by significant government and private sector investment, so a return to a geographically distributed multiple sourcing scenario any time soon looks possible but unlikely.
Logistics Coronavirus has caused severe disruption to China’s road, rail, sea and air routes. In Hubei Province, and particularly in Wuhan, city road, rail, sea and air routes have been closed and are not expected to re-open until at least mid-March. Sea logistics continue to operate elsewhere in China
Components in Electronics
but many ports including Shanghai, Tianjin and Ningbo are currently very congested. The cost of storage has exploded while the efficiency of loading and discharging operations have been severely impacted due to lack of space and workers. The shipping industry has reported that over 44 per cent of shipping operations in Asia have been affected by schedule changes (delays or cancellations) to operating sailings, which is forcing a rapid rise in freight rates. Air logistics are also affected: The lockdown has caused a dramatic reduction in the passenger flights on which many high- value, low-weight, low-volume products are frequently carried. Dedicated air freight services are still operational from most Chinese airports, but capacity availability is well below normal, so here too prices have reached premium levels. In some locations, a lack of workers is resulting in reduced ability to move goods by road, rail or air resulting in backlogs of goods and a shortage of warehouse space. No carrier is able to guarantee delivery timings on large urgent shipments of goods, all they can promise is their “best effort”.
Economic impacts
Whilst it is not yet possible to assess the full global economic impact of Coronavirus, most analysts are suggesting that the Chinese economy will post almost no GDP growth in the first half of 2020. As China is the second largest contributor to the global economy this will inevitably slow global growth in the current year. Prospects for many product markets including electronic components are closely linked to the growth in global GDP and can’t help but be affected. In the UK, the vast majority of customers are supported via manufacturer authorised distributors who were quick to increase the overall inventory of electronic components in the UK in the range four to six weeks average demand to support their customers during Brexit. The economic slowdown in the second half 2019 has resulted in these companies retaining much of this inventory and having gone through the Brexit process they are in the fortunate position of making this inventory available to support their customers through the worst of the Coronavirus crisis. Assuming that the growth rates into Q1 2020 are much in-line with ecsn members’ forecasts and that
shipments from manufacturers to their authorised distributors will stabilise into Q2 2020 then theoretically at least, UK customers should experience few components shortages. Components most at risk from shortages are likely to be ‘merchant market’ commodity (multi-sourced) products, i.e. some memory, logic, passives and PCB connectors. Availability of most proprietary (single sourced or near single sourced) products is likely to remain good. That said, manufacturers quoted lead-times are almost certain to extend again, probably doubling by Q2 2020, a calendar quarter earlier than originally forecast.
Final thoughts Coronavirus is a dynamic situation and may quickly occasion both positive and negative changes. Realistically, things will probably get a little more challenging in the global electronic components supply network over 2020 and organisations within it must plan for a wide range of different scenarios and particularly how they can best protect their employees. However, I believe that the real threat for UK electronic components supply lies in the lack of control and/or certainty. I remain confident that closer collaboration between all parties in the network with mutual sharing of business intelligence will improve the outcomes for customers and suppliers alike.
Adam Fletcher is Chairman of the
Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components throughout their entire lifecycle. He is also Chairman of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to share best industry practice.
ecsn-uk.org
www.cieonline.co.uk
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