Obsolescence Insurance, a New High-Margin Business for EMS Companies
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For months, economists – and, frankly, a lot of market research firms-- have practiced a “wait and see” attitude toward the global economic impact of the coronavirus, or Covid-19. As the virus spreads worldwide, the stock market tanks and rebounds and China begins to stabilize, the experts are speaking out:
Patrick Gourley, University of New Haven Professor
Patrick Gourley, University of New Haven Professor
"As the coronavirus shifts from a regional epidemic to a worldwide pandemic, supply chain issues are going to grow exponentially. Despite concerns about the spread of Covid-19 to dozens of countries, for now China remains the most seriously afflicted. Given China's role as the world's producer, even if the virus stays mostly contained within its borders many industries are at risk.”
“China is the world's leading exporter, sending over $2 trillion worth of goods abroad each year. That should give any company in the United States that sells "Made in China" products pause. The true problem, however, is far worse. Not only is China involved in the production of many final goods, but they produce many intermediate goods that are then sold to a second country before coming to the United States. For many American firms, their production process is an opaque network of contractors and subcontractors. Exactly who is involved in a production process from start to finish might involve four countries and a dozen firms.”
“Say an independent clothing boutique in San Francisco decides to make the decision and switch to a supplier whose factory is in Vietnam. It will cost more money, but our store owner believes it to be a good business decision to play it safe and keep clothes on the racks. The issue is that the garment factory in Vietnam is not the first step. They may be buying their fabric from a second business who is buying their wool from a third. All three business have machines that are produced by a fourth business that in turn has its own suppliers. If any of these firms are located in China that could derail the production process, and our store owner in California will still have rent to pay and no products to sell.”
“This complexity has led to an enormous amount of economic growth. Since 1990 alone, over a billion people have been lifted out of extreme poverty. This is because wealthy consumers in the United States can be matched with poor workers in China, as well as other countries. The downside to all this interconnectivity means that a crisis somewhere can cause problems everywhere.”
Guy Benstead, Portfolio Manager at Shelton Capital Management
"Global economic forecasts are being revised downward by 2-4 percent as factory closures, quarantines, travel bans begin impacting both supply chain dynamics and demand factors across the board. For example, on Friday China reported a drop in PMI for February from 50.0 to 35.7, a drop not seen since the 2008 financial crisis. In addition, we are seeing downward revisions of corporate earnings forecasts across industry sectors, markets and regions at a pace not seen before outside of a recession."
"Citing the evolving risk coronavirus poses to economic activity, the U.S. Federal Reserve voted for an emergency cut to the Fed Funds rate by 50 bp to a range of 1 percent to 1.25 percent on March 3, 2020. Given the increasing severity of the situation, a near-term, preemptive and coordinated response from global central banks is not out of the question, though rate cuts alone will not provide a complete solution to the markets turmoil. We will likely need to see a coordinated global response to finding a health policy solution to containing COVID-19 in order to prevent a collapse of consumer confidence".
"Risk markets, mainly equities, credit and commodities suffered historic losses in the past week, while haven assets rallied. US Treasury yields again reached all-time lows."
"U.S. municipal bonds dismissed any risk-off concerns as investment grade, high yield, and taxable munis rallied and have provided some of the best MTD and YTD returns across all fixed income markets."
"In the high yield corporate credit markets, we have observed that estimated dealer inventories have declined sharply from near-term highs to near-term lows, even entering negative territory. While we can’t know precisely when risk markets will turn around, this net-short dealer positioning indicates to us that when it does it may be rapid."
Omdia, a market research firm
Although the coronavirus outbreak has had only a minimal impact on the video surveillance market so far, the industry still faces a risk from falling demand and a potential production bottleneck spurred by labor and component shortages in China.
Source: Omdia
Production of video surveillance equipment is heavily concentrated in China, with the country accounting for 90 percent of global production of video surveillance cameras, and 45 percent of worldwide global market revenue in 2019. As a result, any coronavirus-related disruption to production, supply chains or workforces in the country could have a significant impact for a global video surveillance market totaling $19.9 billion in 2019.
“Given China’s status as the world’s largest producer and consumer of video-surveillance cameras, the country wields a proportionately massive influence on the global market for these products,” said By Tommy Zhu, senior analyst, video surveillance, at Omdia. “Video surveillance equipment suppliers in China currently are contending with reduced production because of a lack of manpower and delays following the Lunar New Year. Meanwhile, domestic demand for general-purpose video surveillance products is likely to cease or suffer delays as the Chinese government focuses on coronavirus control.”
Freightos, a global freight expert
The coronavirus outbreak continues to be profoundly disruptive to the global supply chain, especially for importers heavily reliant on Chinese manufacturing, according to Eytan Buchman, CMO, Freightos.
Chinese manufacturing took definite steps towards normal this week as quarantine periods in many areas came to an end and travel restrictions were eased. The vast majority of factories are back online, with many operating at as much as 80 percent capacity. Inter-province trucking, which last week was a major pain point, has also benefited from these developments and is now operating at about 80 percent capacity as well.
Nearly all major ports are likewise coming to life. Port call data from maritime analytics and insights specialist Windward indicate that while activity levels at Chinese ports had the Chinese New Year lull extended by two weeks compared to 2019, the trend is clearly toward a resumption of activity.
But given flagging manufacturing and transport to ports, demand for transpacific ocean freight remains low. Carriers have buoyed rates (chart below) since the start of the shutdown by cancelling ships. Though the relatively few blank sailings this week could also be a sign of recovery.
The record cancellation of sailings since the shutdown has backhaul rates on many lanes already starting to climb. These blankings also mean that whenever production does pick up, capacity will likely be tight not only because there will be fewer ships but also because many empty containers have been stranded outside of China. Rate increases announced for April 1 show that carriers expect a slow March followed by a strong April and beyond.
The ripple effects of the shutdown are already being felt from South Korea to the US. A sample of surveyed Freightos.com marketplace users show that for many US SMB importers from China the shutdown has already had a negative impact on inventory (78 percent) and bottom lines (66 percent).
GlobalData, a market research firm
Source: GlobalData
Global light vehicle sales figures from the first month of 2020 should make for alarming reading. Just 6.2 million were sold in January, - the lowest monthly figure since January 2012, which saw 5.9 million units sold, according to GlobalData, a leading data and analytics company.
Driving the drop in sales was the emergence in December 2019 of the coronavirus (Covid-19) in Wuhan, China. The disease has spread rapidly and has already infected more than 80,000 people and caused at least 2,800 deaths worldwide.
Lux Research, a market research firm
Analyst Lisheng Gao:
"The factories in China are not running, making the businesses in China stop producing sensors and sourcing sensors. We are looking at surplus and shortage of sensors at the same time, depending on the manufacturing location. For example, if the sensors are produced in Japan and used to assemble devices in China, then there would be excess supply. Of course, the manufacturers outside China can shift part of the business to products for the non-China market and postpone the supplies for Chinese factories. However, those companies heavily relying on sensors from China may experience difficulties in sourcing those components and maintaining the same costs because of lacking economies of scale outside China."
Director of Research Jon Melnick:
"Digital tools are helping companies gain further insights into supply chain disruptions, whether they are caused by weather, earthquake, drought, pandemics, or any other source by mapping out entire value chains. As a result, when there is an area that has a disruption, tools exist so companies can better understand the supply chain risks associated with that disruption and find alternative suppliers before they would otherwise feel the impact. Some industries, which are particularly susceptible to these types of disruptions, like food and agriculture, have been some of the earliest innovators and adaptors, but we’re seeing more companies beginning to deploy these types of digital capabilities to mitigate their risk."
IPC, an electronics industry association
Electronics manufacturers anticipate at least a five-week product shipment delay from suppliers due to the coronavirus epidemic, according to a survey conducted by IPC, a global electronics manufacturing association. The group says shipping delays from China and other countries where the virus has spread are already having negative impacts on manufacturers.
Roughly 65 percent of manufacturers report their suppliers expect, on average, a three-week delay. However, electronics manufacturers expect delays to be longer than what their suppliers are currently quoting. On average, executives expect shipment delays to be at least five weeks.
“The delays will likely have ripple effects for the rest of the year,” said John Mitchell, IPC’s president and CEO. "The longer China is affected by the epidemic, and the more it spreads to other parts of the world, the supply chain will experience more and varied strains and disruptions.”
An overwhelming majority (84 percent) of electronics manufacturers and suppliers are worried about the epidemic’s impact on their business operations. Delays in receiving supplier inputs can lead to factory downtime, higher average costs, transportation bottlenecks, pressure for alternative sourcing, delayed sales, and delayed prototyping that slows the introduction of new products.
“In most cases, it’s not easy for manufacturers to switch suppliers, if that’s what turns out to be necessary,” added Mitchell. “Securing alternate sources requires an investment of significant time and money that must be weighed against the value gained.”
IPC surveyed industry professionals at electronics manufacturing companies, including original equipment manufacturers (OEMs), electronics manufacturing services (EMS) companies, and printed circuit board (PCB) fabricators. Almost half of the survey respondents represent the contract electronics manufacturing services (EMS) industry. This segment performs an estimated 25 percent of North American electronics manufacturing for OEMs. The survey was conducted between February 11–16, 2020.
ECIA, an electronics industry organization
ECIA will hold a webinar on coronavirus on March 6.
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