Coronavirus could tank China's economy

coronavirus
Analysts see long-term effects to the China economy if coronavirus is not brought under control soon. (Pixabay)

The coronavirus outbreak that has been put a stranglehold on China since December needs to be brought under control soon before more long-term damage to the Chinese economy results, according to several industry observers and analysts. The crisis may also force China to make long-term structural changes in its economy.

So far, coronavirus has crippled the daily lives of Chinese citizens during the normally festive Lunar New Year season. Companies with China facilities have delayed resuming operations, and severe travel restrictions have kept many people at home. Global coronavirus concerns have forced businesses to cancel or postpone travel to conferences and trade shows. The impact outside China includes cancellation of Mobile World Congress, the world's largest exhibition for the mobile industry, originally slated to occur next week in Barcelona.

While analysts say the impact has been mitigated somewhat by the normal business slowdown during Lunar New Year, a slow recovery could have disastrous effects.

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“The COVID-19 outbreak will have a greater impact on the overall economy than the SARS outbreak in 2003,” said Kitty Fok, Managing Director of IDC China, in a report. “We expect the impact to be significant in the first quarter, but gradually lessen in subsequent quarters – with a limited impact on the full-year economic growth.”

Panos Kouvelis, director of The Boeing Center for Supply Chain Innovation and Emerson Distinguished Professor of Operations and Manufacturing Management at the Olin Business School at Washington University in St. Louis, warned that the impact from coronavirus will be “worse than SARS crisis” if it is not brought under control within the next month.

In a recent interview with FierceElectronics, Kouvelis explained that if Chinese factories do not return to at least near normal operation because workers cannot travel and get to work, production of goods such as smartphones and automobiles will likely slow down. China reportedly accounts for one-sixth of Apple’s business. China, and in particular Wuhan, is a center for automotive manufacturing and they supply major global automakers with automotive components and subassemblies.

Kouvelis added that subsequent production slowdowns will eventually create shortages as inventories are depleted.

Near term, Kouvelis believes the crisis could result in China exhibiting flat or in best-case low single-digit economic growth. This which would have ripple effects worldwide, because so many large companies have plants and other economic investments in China.

If the crisis lingers for say, six months, Kouvelis warned the global economy could go into recession.

Market research firm Omdia (formerly IHS Markit) said in a report earlier this week that he semiconductor industry appears to have escaped the direct impact of the coronavirus crisis so far, but the market is likely to suffer the repercussions as the outbreak slows or suspends production among electronics manufacturers.

“Global chip supply through the first two months of 2020 appears to be largely unaffected by the coronavirus outbreak,” said Len Jelinek, research vice president, components & devices, for Omdia, in the report. “There’s plenty of chip inventory in the channel, compensating for any coronavirus-related production shortfalls at semiconductor fabs located in the Wuhan area and elsewhere in China. Also, few semiconductor suppliers are located in areas affected by the virus, and all of the parts sold by these companies can easily be sourced from other chipmakers.”

But other technology areas could be in trouble. Jelinek warned of dangers to other key sectors, including electronics manufacturing services and backend production and packaging services.

“With electronic manufacturing services (EMS) and original design manufacturing (ODM) companies facing challenges regarding the number of workers returning from the Lunar New Year closings, the global market will face serious challenges as it enters the second quarter,” Jelinek stated. “China is a major center for manufacturing services, with organizations including Foxconn basing massive factories in the country. These companies represent major purchasers of semiconductors, accounting for 29% of global purchasing this year.”

According to Omdia, major EMS/ODM operations in the region include Foxconn’s iPhone production operations located about 300 miles from Wuhan in Zhengzhou. The plant is currently operating at only 10 to 20% of capacity due to workforce issues. Due to labor shortages from workers not returning to work, capacity utilization for all electronics manufacturers in China is lower than normal.

Omdia noted that labor shortages have forced many semiconductor packaging and testing plants in China to reduce or even stop operations. The result has been a bottleneck for chip companies that rely on such back-end package and testing capacity.

At present, many small and medium-sized chip design companies are faced with a dilemma of being unable to obtain sufficient production capacity from both fabs and package suppliers. If this production slowdown continues for an extended period, these design companies may face bankruptcy, or acquisition, the report noted.

The display sector is also starting to take a hit. Omdia released another report Thursday projecting unit production of televisions for signage applications is to decline by 10.9% the first quarter of 2020 compared to the same period in 2019. Production of interactive flat panels (IFPs)/touch displays will decline by 20.9% during the same period, while signage and information-display products will undergo a 28.5 percent decrease. 

“Digital-signage production lines are highly concentrated in Guangdong and Zhejiang provinces, where the coronavirus is having the biggest impact,” said Tay Kim, research and analysis associate director at Omdia. 

Logistics is also affected. “For foreign semiconductor companies, especially fabless firms, the greatest challenge is import and export logistics,” said Hui He, principal semiconductor analyst for Omdia. “Because of the controls placed on flights in and out of China, many government staff members haven’t returned to work. As a result, the import/export process in China now is taking much longer than before, slowing the pace of commerce.”

Elsewhere, the impact on China’s information and communications technology (ICT) market will also be greater than in 2003 in view of the much greater role of ICT today than in 2003. The digital economy enabled by ICT accounted for 37.8% of the Chinese economy in 2019. The macroeconomic disruption brought by the outbreak is expected to significantly affect China’s ICT market and drag it down by approximately 10% in the first quarter of 2020,” said IDC’s Fok.

According to IDC, coronavirus will have a greater impact on China’s ICT market compared to the Chinese economy, and its impact on hardware and consumers will be greater compared to software and businesses. IDC projects the ICT market to fall approximately 10% in the first quarter of 2020 – with at least a 30% fall for PC and smartphone sales, and a greater than 15% fall for server, network and storage sales. AI and big data will be affected as well but will continue to grow, while emerging technologies such as IoT and security will experience minimal declines.

IDC foresees coronavirus forcing China to make changes in its economic structure. Those changes include modernization of governmental operations, decentralization of city clusters and central cities, accelerating healthcare system transformation, accelerating the rise of contactless businesses and services, and acceleration of the China+1 global supply chain strategy. These changes which will bring massive opportunities for China’s ICT market.

According to IDC, central government and local governments have rolled out many support measures for enterprises in addressing the negative impact on the economy with a view to stabilizing it. The measures include investing in support of the production of key epidemic containment supplies, fiscal and credit support, tax reduction and exemption and subsidies, reducing administrative fees, administrative streamlining, and dedicated support funds. IDC expects more proactive fiscal measures and looser monetary measures to be rolled later this year.

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