Three weeks ago, Hu Kai left his city to visit his family for Chinese New Year. The journey home was the same as previous ones—the 25-year-old Hubei native has made the trip every year since he began working three years ago.
Like every other time, he got into a carpool with a big backpack full of la tiao, a popular spicy snack, for his two sisters. Arriving about an hour and a half later, he rushed to his family’s house to try to get as much time as possible with his parents. After all, they would only have seven days together, or so he thought.
But Hu’s hometown is Huangshi in Hubei, just about 100 kilometers from Wuhan, and it soon became clear this would be no ordinary New Year. As he arrived, he was told to stay home for a 14-day self-quarantine.
Then, his family had to cancel all holiday plans and stay in.
As China’s top health expert Zhong Nanshan told state broadcaster CCTV that night that a mysterious illness could be transmitted from human to human, it gave the young worker his first pang of anxiety.
Three days later, on January 23, the government of Wuhan stopped all transportation to and from the city. The coronavirus was now in full swing.
Since Hu’s departure from Wuhan, more than 600 people have died from the coronavirus, and the government has placed his province under lockdown.
“I heard about the cases in Huanan Seafood Market before I left the factory for home, but I didn’t know it was this serious,” he said.
Hu was not alone in being caught off-guard by the rapid spiral of events. Indeed, China-watchers and economists now predict far-reaching consequences for a wide swath of industries, especially Hu’s own. He is a factory worker at Lenovo, one of China’s major consumer electronics manufacturers, and smartphone shipments are expected to take a 30% hit due to the virus. Workers like him, who face travel restrictions that impede their ability to keep factories and supply chains running, now find themselves at the center of the industry’s biggest crisis to date.
The coronavirus outbreak, which the World Health Organization has declared a Public Health Emergency of International Concern, has grounded much of China’s factory activities. Pundits and rating agencies predicted that the impact on the economy could be worse than that of SARS, and Fitch on Thursday slashed the country’s GDP growth to about 3% in the first quarter.
This crisis comes at an especially hard time for China’s smartphone vendors, including Lenovo. In 2019, domestic smartphone shipments recorded a 6.2% annual drop from 2018. Now, they are bracing for an enormous blow to their business, with research firms drastically cutting their forecasts for shipments. Strategy Analytics said in a recent report that the coronavirus epidemic could knock nearly a third off China’s smartphone sales for the first quarter, and 5% throughout 2020. Canalys forecasted a 40% to 50% drop for the country’s smartphone shipments this quarter if the situation can recover to pre-outbreak levels by the end of February.
Nicole Peng, vice president of mobility at Canalys, told KrASIA that the first blow would come from offline sales effectively disappearing during Chinese New Year, which is an important time for companies to offload their inventory.
“Vendors that rely on offline sales, such as Huawei, Xiaomi, Oppo and Vivo, will be affected directly,” read a recent Canalys report authored by Peng.
The epidemic outbreak caught China’s smartphone vendors, who were hopeful for a rebound of sales in the first quarter, by surprise.
“In the past, people thought that the first quarter of the year would be a good quarter because many vendors would launch new models,” said Fu Liang, an independent telecom analyst in Beijing. Now, with transportation restrictions and a halt of essentially all public events throughout China, new phone launches and marketing activities are impossible.
“In general, the impact [of coronavirus outbreak on] sales figure for the first quarter will be very huge,” he said.
Echoing Peng and Fu’s concern, Ming-Chi Kuo, an analyst from TF International Securities, wrote in a recent report that China’s smartphone shipments during the Chinese New Year holiday recorded up to 60% annual negative growth, leaving the whole industry with an overstock of 50 to 60 million units.
The second blow to the smartphone industry might be even worse: Industry insiders are now worried about what could be a tremendous disruption to production.
“[The disruption of the supply chain] has not yet emerged, but it will soon,” Canalys’ Peng told KrASIA. The problem on the production end, such as a failure to ramp up production capacity by March or April, would send a ripple through the global market. China’s smartphone manufacturing industry accounts for 70% of the global production capacity.
Though most smartphone production is concentrated in coastal provinces—Guangdong, Zhejiang and Jiangsu—Wuhan plays a unique and crucial role in the smartphone supply chain. The country’s top three display panel suppliers, namely BOE, TCL, and Tianma, have all invested heavily in the city.
Yangtze Memory Technologies, China’s leading NAND flash memory producer, which shoulders the country’s hopes for breaking market dominance of foreign memory suppliers, is based in the city. Wuhan also sits along the country’s economic lifeline, the Yangtze River, and is the most important transportation hub linking China’s north and south.
Lenovo, the world’s largest PC maker and owner of Motorola, has 50 assembly lines and roughly 60% of its smartphone production in Wuhan. The company said its production center in the city, which reportedly employs more than 11,000 workers, would “inevitably” suffer short-term production delays because of the epidemic outbreak.
TCL also said in a recent stock market filing that some of its production materials could suffer temporary delivery delays due to its supplier postponing operations and logistic issues.
But a greater production disruption risk exists in the form of a labor shortage, if workers should be unable to get back to work as usual.
“Any delay of operations for factories, by quarantine or travel restriction, will inevitably cause a temporary labor-supply shortage,” Strategy Analytics’ analyst Linda Sui warned in a blog post late last month.
Citing the current excess capacity of China’s usually strained railway system, which indicates that workers as not returning to cities after the holiday to look for work as usual, Fu said the risk of a labour-supply shortage would be nationwide. “Migrant workers might choose to stay home for a few months if the outbreak continues. That way, no matter where your factory is based, be it in Jiangsu or elsewhere, it would be effected,” he said.
Even if some migrant workers decide to return to their factories, they are likely to be required to have another 14-day quarantine before they can join the production line again.
A quick resumption of manufacturing operations is in itself a big “if”.
Hu, for example, said he was ready to return to work next Friday. But Lenovo, his employer, said they are still waiting for “further notice” from the central and provincial government before they can have the exact date for the resumption of operations.
“We are reporting our temperatures to a WeChat group every day,” Hu said. “It’s been too long and I want to go back to work soon.”
One smartphone industry veteran, who wishes to remain anonymous, is pessimistic.
“Some of the biggest factory compounds in China have tens of thousands of workers living together and eating together. These crowds are high risks in the eyes of local governments whose top priority right now is containing the outbreak,” he said. “Plus, with the face mask shortage across the country, where do they get enough masks for production activities?”