Impact of Covid-19 and Travel Ban
After a challenging 2019, 2020 started with a lot of optimism backed up by positive indicators from most sectors in the 4th quarter. IC Insights 2020 edition of The McClean Report predicted that 26 out of the 33 IC product categories would show positive growth in 2020 with 5 products categories, NAND, Automotive special-purpose IC, DRAM, display drivers and embedded MPU expected to have double-digit growth.
However, by the end of January, a “black swan” event had occurred and the COVID-19 outbreak, as it is now known, had hit China and would soon spread to the rest of the world. The first case was reported in Wuhan China on 31 Dec. Still, it was not until almost a month later that the outbreak was officially declared a Public Health Emergency by the World Health Organisation. The initial reaction by the Chinese government was to extend the traditional Chinese New Year holiday by 1 week, which prevented companies from opening until at least 10 February. In addition, many cities were quarantined, and travel was shut down across much of China which prevented workers from returning to their workplaces. This immediately started to cause supply chain problems as companies did not start shipping as expected after the Chinese New Year Holiday.
In early February, western semiconductor companies started to scramble to get clarity on when shipments would resume from China since so many companies rely on China for materials, components and finished goods. However, with many Chinese companies still closed or working with skeleton workforces, the picture was very unclear. At the same time,
many companies were imposing travel restrictions on travelling to China and worldwide travel. In addition, many trade conferences were being cancelled or postponed. SEMICON Korea, SEMICON China and the Mobile World Congress in Barcelona were all cancelled as exhibitors
and attendees cancelled their trips.
Workforce and Supply Chain Challenges
Even after 10 February, the reopening of companies in China was slow as companies had to get permission to reopen from local government authorities, and there was a queue to get approved. Staff from out of state were not allowed to return or had to undergo 14 days quarantine before being allowed to go back to work. This meant that the start-up was very slow since many companies were with less than 50% workforce.
Singapore was also impacted as the Singapore government raised the Dorscon level to orange on 8 February after new cases with no clear link to China were being reported. This impacted the way of life of many companies with team segregation being implemented, and recautionary measures such as daily temperature checks have become the norm to prevent the spread of the virus. Home quarantine was imposed on people returning from China and work pass holders with recent travel history to China were not allowed to return without government approval.
By late February, the picture in China was becoming clearer with wafer manufacturers being less affected and running near to full capacity. It is because they typically do not shut down over Chinese New Year and therefore were not impacted by the restrictions to reopen. Besides, their manufacturing lines are less labour-intensive with a higher level of automation. The main impact is being seen downstream in assembly and other components like optics and sensor manufacturing sites where due to the labour-intensive nature of the manufacturing. Besides, a lot of these factories closed over Chinese New Year and therefore were not allowed to restart until 10 Feb or even later whilst they were waiting for approval from the local government. Moreover, even when they could restart, many companies struggled to get back their full workforce with many people having to undergo the 14-day quarantine. It was reported that a third of all workers are still not allowed to return to work. Another sector impacting the supply chain was the logistics of shipping products, with many transport links shut down or severely reduced. Therefore, even if products could be produced, getting them to reach their customers is a major challenge.
Impact on the Whole World
All these meant that factory activity in China fell at a record rate in February, with the manufacturing purchasing managers’ index (PMI), a key measure of the manufacturing activity, dropping to 35.7 from 50 in January (any value below 50 indicates contraction in the economy). With China being responsible for a third of worldwide manufacturing, this drop is sure to have an impact on the rest of the world. Here in Singapore, February’s PMI fell to 48.7 in February, the biggest decline in 6 years and the lowest level since February 2016.
In February, Apple issued a rare revenue warning that the March quarter would be lower than previous guidance due to the impact of COVID-19 on their manufacturing lines. However, Apple did not give a revised guidance. It is also expected other Chinese phone companies like Huawei, Oppo and Xiaomi who mainly produce in China as well as suppliers like Foxconn, will be impacted.
In late February, South Korea became one of the largest hotspots outside China as Samsung confirmed one case of coronavirus infection at its mobile device factory in the southeastern city of Gumi, South Korea. The entire facility has been shut down for 4 days. Colleagues were placed in self quarantine and the worker’s floor was shut down. The plant produces only a small proportion of Samsung’s phones, mainly the Galazy Z fold phone, while the flagship S20 phones are made in Vietnam. Elsewhere in South Korea, semiconductor manufacturers were putting in strict measures to prevent factories from being shut down, which may cause many hundreds of employees to be in quarantine.
Even assembly in Vietnam is reported to be impacted by the COVID-19 as Vietnam’s industry agency announced that it was experiencing supply chain problems with getting enough components from China required for production schedules. Besides the direct impact on supply chains, the travel restrictions put in place by most semiconductor companies are starting to have an impact on new projects and developments with many projects being delayed as workers cannot travel to discuss project details.
By the beginning of March, there were over 80,000 confirmed cases reported in China, with almost 2,800 deaths, the majority in Wuhan and the surrounding Hubei province area. In addition, over 10,000 people were confirmed infected outside of China from 72 countries with major clusters in South Korea, Italy, and Iran. The number of new cases reported outside China has exceeded those inside the country for the first time. This situation is very worrying since if the outbreak spreads to the rest of the world as it has in China, there will be a further economic impact.
With such widespread impact of COVID-19, market research companies have started revising their forecasts for 2020. They now see the semiconductor market growing anywhere from 5% to 12.5% in 2020 with the median value at 7.95%, while they see the semiconductor capex growth anywhere from growing +4.7% to declining -6%. All these forecasts are down compared to a quarter ago.
Also, according to IDC, the smartphone market is now expected to decline by around 2% in 2020. Shipments expected to be significantly lower in 1H 2020 before starting to grow in 2H 2020 and 2021 driven by demand 5G phones. Similarly, sales of personal computing devices are expected to decline 9% overall in 2020, with shipments dropping up to 25% year on year in Q1 due to material shortages, workforce shortages and logistics issues.
ABOUT THE AUTHOR
Head of Global Subcon