Covid-19 and the problem with IT supply chains

Here’s an article I wrote the other week for IDG Connect. The situation is rapidly evolving, but most of the commentary is still bang on:chinese flag

As the world’s IT manufacturing centre and a huge market in its own right, anything that happens in the China can have a significant impact on the tech industry. So the boardrooms of multi-national IT players everywhere will once again be on high alert as the new coronavirus brings factories to a halt in the Middle Kingdom.

As if the persistent threat posed by Donald Trump’s protectionist trade war wasn’t enough to contend with, the newly named Covid-19 is already having a chilling effect on key supply chains and components. It may further accelerate plans for manufacturers to move facilities out of China and could even impact 5G deployments, according to analysts.

Bigger and badder than SARS

First reported to the World Health Organisation (WHO) on December 31, Covid-19 has now claimed over 1,000 victims and infected nearly 43,000, mainly in China. As such, it’s now more deadly than the SARS epidemic of 2002-3, which had a major impact on the Chinese and global economy at the start of the century.

It’s impact on tech is two-fold: in closing down factories in quarantined areas and preventing workers from travelling to facilities; and in subduing the usual sales bonanza in China around the Lunar New Year holidays at the end of January. In many cases, it appears as if workers have been stranded in their home towns, unable to travel back to the regions in which they usually live and work.

The annual Mobile World Congress (MWC) event in Barcelona has even been cancelled after big-name Asian firms pulled out. This is not insignificant, according to Forrester analyst, Alla Valente.

“For the thousands, if not millions of meetings, conversations and deals that would have taken place, this has long-term implications for vendors, suppliers and customers,” she tells me by email.

Huawei also postponed its annual developer conference in Shenzhen this week. Analysts tell me that tech giants including Dell, HP, Apple, Samsung, Qualcomm, Microsoft, Google, Intel, Sony, LG and even Facebooks’ Oculus brand are in the firing line. But some sectors are more exposed than others.

Where is Covid-19 hitting hardest?

Displays: With five large display factories located in the Covid-19 ground zero of Wuhan, it’s perhaps not surprising that this sector is impacted. According to analyst Omdia, utilisation rates at Chinese display fabs will drop by 20-25% in February with total production/output set to fall by 40-50%. Producers are hit by both component and labour shortages thanks to quarantining efforts by the Chinese government.

LCD polarisers and LCD module printed circuit boards (PCBs) are in particularly short supply due to logistics issues, even as most facilities resume production. This could apparently affect 5G smartphone production as well as other products: China reportedly makes around half the world’s supply of TVs, laptops, and PC monitors.

Smartphones: Along with the problems in LCD displays, many of the world’s biggest producers of smartphones including Apple have major production facilities in China. Two major Foxconn facilities used by the iPhone-maker were reportedly given the green light to reopen this week, but only 10% of workers had so far been able to return. Foxconn shares slumped 11% since markets reopened following the New Year break. Analyst Trendforce reportedly cut its forecast for iPhone production in the first quarter of 2020 by around 10% to 41 million handsets.

It’s not just production of smartphones that’s at stake. Although the giant Chinese market was set to rebound in 2020, this now seems unlikely, in the short term at least. IDC expects China’s smartphone shipments to slump more than 30% year-on-year in Q1 2020, and warned of “uncertainty in product launch plans, the supply chain, and distribution channels, in the mid and long term.”

Servers: According to reports from Taiwan, server shipments grew by over 13% in Q4 2019 but are expected to be affected by Covid-19 in the first three months of 2020. Although demand from large datacentres remains strong, the virus outbreak has impacted the upstream supply chain, which will cause shipments to decline 9.8% from the previous quarter, versus a previous estimate of 1.2% growth.

What happens next?

Although some reports from China claim hopefully that the disease appears to be slowing, it took five months before the SARS outbreak was officially recognised by the WHO as contained. As such, it’s still far from certain when travel restrictions will be relaxed by Beijing so that workers can return to production plants. The longer the current situation continues, the bigger the potential impact on supply chains.

Omdia claims, for example, that while currently global semiconductor supply appears unaffected, this could change if the public health situation worsens. Meanwhile, IDC analysts warned in an emailed note: “Since a large amount of the surface mount technology (SMT) and PCB manufacturing factories for both consumer goods and datacentre products are produced in China, and even in Wuhan in some cases, much of the supply chain is at the mercy of the government closure of critical infrastructure.”

For Forrester’s Valente, Covid-19 has the potential to disrupt not just 5G rollouts but the wider global economy.

“It will delay product launches – if they’re lucky. With so many supply chains adopting the Just-In-Time approach to inventory and manufacturing, some launches may need to be cancelled outright,” she argues.

“As the pandemic impacts more supply chains, what happened when products, parts, resources run out? Will all the business depending on them experience disruption? The long-term impact is greater than the economy of China or the region. We’re living in an interconnected business economy, and Covid-19 could impact the global economy.”

The future: diversify

In the meantime, the best thing organisations can do to mitigate the risks posed by the next Covid-19 is to revise and update business impact analyses (BIAs), according to Forrester. This should include four main steps:

  • Classify business processes according to criticality
  • Improve supply chain resilience by diversifying with multiple suppliers and geographies
  • Identify which customers should receive priority treatment
  • Provide extra resources and enhance automation to take the strain off your reduced workforce

The analyst warned that climate change will make pandemics like this more common in the future. As the tech industry picks up the pieces once Covid-19 has blown over, the lasting impact may be an acceleration of a trend already begun thanks to the US trade war. Namely, moving tech production out of China.

 


Apple taking one for the team in new labour rights abuse report

foxconn workerOne of the biggest stories of the past week I’ve covered in the Asia technology space was the latest report from China Labor Watch into alleged rights abuses at Apple supplier Pegatron.

In terms of the abuses uncovered by the rights group, they’re pretty similar to those detailed at Foxconn over the years which led to a landmark agreement between Apple, the Fair Labor Association and the Taiwanese manufacturer to sort out conditions at its plants.

When I say “similar” I mean things like overworking and underpaying staff, breaking local employment laws through discriminatory hiring, excessive overtime and the like and subjecting employees to sub-standard living conditions.

You can usually gauge the seriousness of the allegations by the speed of the tech giant in question’s response and the length of its statement. So it was that Apple came back within a few hours with a long response claiming it had undertaken 15 audits at Pegatron and that it had been “in close contact” with CLW investigating findings highlighted by the group.

It added:

Their latest report contains claims that are new to us and we will investigate them immediately. Our audit teams will return to Pegatron, RiTeng and AVY for special inspections this week. If our audits find that workers have been underpaid or denied compensation for any time they’ve worked, we will require that Pegatron reimburse them in full.

One para that was lopped off my story referred to the fact that Pegatron facilities, including the ones mentioned in the report, produce gear for a raft of big name technology brands besides Apple. Microsoft, Dell, HP, Nokia and Asus have all had kit made by the Taiwanese headquartered manufacturer in the past.

Beyond Pegatron too there have reports of various rights abuses, in Samsung suppliers, and Chinese manufacturers making kit for firms including Telstra, Sony and Phillips.

However, the fruity-themed Cupertino giant, unfortunately for it, now has a reputation which makes it easier for hacks like me and rights groups like CLW to build a compelling narrative around such incidents.

For better or worse that’s the way it is but hopefully with Apple taking a lead, as it is certainly appears to be trying to do, on improving labour rights among its suppliers, others will follow. We mustn’t forget Apple boss Tim Cook used to be the firm’s COO and so will be well aware just how big a task it is to clean up the supply chain.

This is a process which will take years, not months, but it’s reassuring to an extent that stories like this still make the headlines, because once they stop then the whole process of improving the rights of shop workers in countries like China is likely to grind to a halt too.


Samsung latest to be hit by supplier labour abuse scandal

factoryAnother week, another woeful tale of big tech brands taking advantage of weakly enforced labour laws and immoral supply chain manufacturers.

This time it was Samsung that had its supplier factories investigated, and what was revealed, as always, was not pretty.

HEG Electronics’ plant in Guangdong – which apparently makes phones, MP3 players and other electrical kit for the Korean giant – was infiltrated by spies from not-for-profit China Labor Watch, yup, the same group that warned of severe irregularities in the auditing system of the tech supply chain.

The same old problems came to light as at Foxconn and VTech, of low pay, staff bullying and physical abuse, dangerous working conditions and forced and excessive overtime.

However, HEG was also accused of employing kids as young as 14 year’s old – illegal even in China –and paying them, and the huge intake of student interns it uses to man its factory, just 70 per cent of their rightful salary.

To its credit, Samsung did respond with a little more than we got from VTech and its customers:

Samsung Electronics has conducted two separate on-site inspections on HEG’s working conditions this year but found no irregularities on those occasions.

Given the report, we will conduct another field survey at the earliest possible time to ensure our previous inspections have been based on full information and to take appropriate measures to correct any problems that may surface.

Samsung Electronics is a company held to the highest standards of working conditions and we try to maintain that at our facilities and the facilities of partner companies around the world.

The issue here again goes back to the validity of the inspections. Unless they are independent – conducted for example by not-for-profits like China Labor Watch – and unannounced then they are virtually useless.

Samsung, if you remember, was highlighted as a client of Intertek, the professional auditing company that has in the past been found guilty of accepting bribes from clients in return for passing a clean bill of health.

There’s no suggestion that happened at its HEG audits, but it’s clear that the audit card should no longer be accepted as a reasonable explanation of such irregularities.