WCA May/July 2020

From the Americas Isaac Larian, chief executive of toy maker MGA Entertainment, describes the situation as “a disaster, frankly,” and fears the virus could “cause a major downturn on the whole consumer goods business – electronics, shoes, apparel.” Mr Larian’s company is among those reliant on goods from China; he explained that timing was key to the current situation for manufacturing, as workers at Chinese plants had returned home to celebrate the New Year and “now they’re stuck, they cannot come back to the factories” because of quarantine. “Some of the factories that did open can’t get raw materials, like fabric and plastics, to make the products. And if they can make products, they can’t get them on the road to the ships because the quarantines mean you can’t travel from one area to another,” he added. Apple Inc’s manufacturing partners, such as Hon Hai Precision Industry Co (Foxconn), imposed quarantines on workers returning from holiday and brought device assembly operations to a halt. The delays “will be a shock to the system, and disrupt the supply chain further for Apple on both its core iPhone franchise and AirPods unit production, which is already facing a short supply,” wrote analyst Dan Ives of Wedbush Securities. Apple warned investors it would miss its revenue guidance for the first quarter, blaming production bottlenecks in China and lower demand within the country. China makes 80 per cent of the world’s smartphones and tablets, and exports 55 per cent of the world’s handsets and computers. In February, Facebook Inc stopped taking new orders for its back-ordered Oculus Quest virtual reality headset due to delays in hardware production, and chip manufacturer Qualcomm Inc warned shareholders that the virus had introduced “significant uncertainty” into the company’s overseas supply chain, with chief executive Steve Mollenkopf calling the outbreak an “unprecedented situation”. Gene Seroka, executive director of the Port of Los Angeles, predicted fewer cargo sailings into the port and estimated 350,000 fewer shipping containers received within weeks. The effect on the US aerospace industry may yet be muted, or delayed. Due to the strict government regulations, components are not typically imported directly from China, but materials from China can be made into parts elsewhere and are ultimately used in US planes and vehicles. COVID-19 has exposed the lack of a back-up plan The automotive industry has proved to be particularly vulnerable to the supply chain crisis caused by the virus outbreak, and industry analysts fear that the lack of alternatives will cause major disruption. By mid-February, lack of parts had already forced manufacturers and suppliers to slow or cease production in China and South Korea. “Auto parts production in China is worth over $40bn, with almost half of that headed to US and US-based companies,” estimates Razat Gaurav, CEO of LLamasoft, an

agency that uses data to advise automakers and suppliers on supply chain strategy. LLamasoft clients include General Motors, Ford and Bridgestone. “Come mid-March, if we’re still in the same boat [it’s] going to create shortages in a wide range of industries,” Mr Gaurav predicted in an interview. As part of its Manufacturing CFO Outlook survey, the accounting and business services firm BDO USA polled the chief financial officers of manufacturing companies with revenues between $250mn and $3bn. The survey revealed 21 per cent of respondents reporting supply chain disruptions for a number of reasons, including the coronavirus. “What our clients are learning is that they’re not as prepared as they could, or should, be,” said Jeffrey Pratt, supply chain leader at BDO. “What we’re learning is not only as a result of coronavirus, but also some of the trade and tariff wars; having so much supply concentrated with suppliers in China and not being so geographically dispersed. That’s sort of been a longer term effort that started with the trade wars, and it’s exacerbated by the coronavirus.” The nature of the auto manufacturing industry has been to develop and fine-tune short lead times for parts and components, utilising just-in-time delivery to keep stock inventories low. While most companies will have what Mr Gaurav calls “buffer inventory” to see them through short interruptions, those supplies are unlikely to last beyond a month. “It’s really going to force them to consider trade-offs between operating on that lean principle, and carrying some of that buffer inventory you need during unfortunate situations like this,” Mr Gaurav said. “Those are not very straightforward decisions.” A further challenge for automakers will be tracing and securing alternative suppliers. BDO’s Jeffrey Pratt explained, “Part of the limitation [of] industries like automotive is the investment and sharing of design information, certification of the suppliers – you know it’s a pretty big investment.” And very often those backup suppliers are also based in China. “As companies rethink the design structure of the supply chain, factoring these sort of risks will become more important,” said Mr Gaurav. “I think companies will invest a lot more in contingency planning. The problem is, no one knows the cost of not having a well-thought-out contingency plan for a catastrophic situation,” until it happens, of course. How long is it likely to take for the automotive industry to recover, once the virus outbreak is behind us? Mr Pratt’s prediction: “It may take a quarter for things to get back to normal.” US officials considering curbs to China exports February’s meeting of US government officials to discuss further curbs on exports to Huawei and China was set to go ahead, despite tweets from President Donald Trump against

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Wire & Cable ASIA – May/July 2020

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