Coronavirus/COVID-19 Strikes The Tech Industry - Part 2 - Forbes

The global spread of the COVID-19 virus — Countries with confirmed cases of the coronavirus/COVID-19 as of February 17, 2020
Centers for Disease Control and Prevention

In my previous article I noted the potential issues the coronavirus, now officially named COVID-19, would have on Mobile World Congress (MWC) and other issues. Less than a week later, MWC has been cancelled and information on COVID-19 is becoming clearer. Unfortunately, the situation could have significant ramifications for not just the tech industry, but also the global economy.

Throughout last week, companies rapidly canceled their participation in MWC over concerns of the virus to the extent that it was canceled for the first time in its 30-year history. At the same time, it appeared that new cases and deaths from the virus were leveling off. That quickly changed when the Chinese changed the way officials “classify” cases and the numbers rapidly spiked. The change in numbers was not completely unexpected as many had concerns that the numbers were being under reported. The Diamond Princess cruise ship harbored in Japan has provided an isolated example of how contagious the virus is as it continues to spread. So far, 542 passengers and crew out of a total of 3,700 have tested positive for the virus and the numbers have increased daily. The same is expected in China and other locations as experts appear unclear about the ways in which the virus can spread. In addition to the questions over the spread of the virus, there are also questions as to how long the virus will last. Some experts believe that warmer temperatures may have an impact on the virus as with SARS and MERS, but others have said that containment may be an issue beyond 2020.

In addition to the virus, there are economic concerns over the virus outbreak. The virus is already impacting global travel and tourism, trade shows, sporting events, and the shipment of goods. As I noted in the previous article, in the tech and other manufacturing industries, there will be concerns of shortages throughout the supply chain from raw materials to finished goods, even when shipping resumes. Getting to that point may be much more challenging than previously thought. I’ve had the opportunity to talk to contacts in or close to China, and the situation and impact could be much worse.

In terms of the numbers for the outbreak, they could still be severely under reported. Both masks and virus test kits are in extremely short supply in China. As a result, many people showing some or no signs of illness are not being tested. And those that have already died are not being tested. As a result, the numbers could be several factors higher than even the revised official numbers. However, the Chinese are taking drastic steps to prevent the spread of the virus and prevent over taxing already strained medical resources. While the national government is involved, in some cases, local governments are left to determine the course of action. In some cities/regions, residents are being confined to their homes or wherever they are presently located. In other locations, only one person is being allowed to leave a domicile once a day or once every other day to get food. Additionally, some of the ill are being quarantined in their residence rather than in the hospitals and are being brought food and care. Additionally, the restrictions on travel mean those that were away on holiday may not be able to return to their homes. And, even if they can return to their home, they may not be able to return to work if it is in a different city or region.

The Chinese government is concerned about the economic impact of the virus outbreak and is encouraging companies to restart under certain conditions. The government is encouraging those that work in offices to work at home. If they do not have the resources to do so, the company must provide a plan to adhere to some safety standards, such as disinfectant showers and desks at least a meter apart or separated by an approved partition. Manufacturing is a greater challenge. Some companies shut down completely for the holidays and need the manpower to return in order to restart. Others were operating on skeleton crews working long hours. In the later case, crews are reaching exhaustion and there is the potential for running out of resources once inventories are depleted and/or not being able to ship products. With the largest concentration of electronics products assembled in China, this creates huge problems for the entire tech industry. Everything from semiconductors to printed circuit boards (PCBs) to complete systems for consumer electronics, cars, and industrial applications could be negatively impacted.

The same is true for other segments leveraging Chinese natural resources and manufacturing. But it doesn’t end there. There is concern that the outbreak may spread to other developing nations that have even fewer resources. Regions such as India, North Korea, and several Middle Eastern countries that share borders with China. In addition to the potential death toll, the global economy could be thrown into a recession.

Logos of the MWC, Embedded World, and RSA conferences — Cancellations continue to rise at upcoming technology conferences
Tirias Research

For the tech industry, Tirias Research believes that there will be spot resource and device shortages impacting the tech industry throughout the first half of 2020. In addition, this threatens many industry events, especially large global ones like MWC. According to recent announcements, Embedded World (EW) will proceed in Nuremberg, Germany next week, the same time that MWC was scheduled to be held. The presumption is that EW will have a smaller Asian contingent than MWC and thus has lower risk of spreading the virus. I don’t agree with that rational and apparently so do others. Several companies have withdrawn from EW including Arm, Bridgetek, Digi-Key, FTDI, NXP, Rohm, SolidRun, and STMicroelectronics. Companies are also questioning attendance at other industry events. IBM has cancelled its participation in the RSA conference, which is also scheduled for next week but located in San Francisco. While we believe this will impact normal business functions for the entire tech industry, such as sales and marketing, product development, and manufacturing, we do not believe there will be a prolonged impact on the shipment of goods due to disinfectant procedures being put in place.

Of greater concern to the tech industry is what the outbreak could do to consumer spending. This will undoubtedly reduce consumer sentiment in China, which will lower sales of electronic products. However, any spread or prolonging of the virus outbreak beyond the next eight weeks could have an impact on the entire global economy. As is, the virus could shave off one to two percentage points from global GDP growth for 2020, which the International Monetary Fund (IMF) forecast to be 3.3%. If there is a resolution by summer, the economy could bounce back in late Q3 and throughout Q4. But, if the outbreak spreads or is prolonged, the global economy could be forced into a recession.

Despite the potential doom and gloom in the worst case scenarios, the tech industry is still bound for growth in 2020 if the outbreak subsides due to renewed growth in PCs that began in 2019, the rollout of 5G devices and networks, and the innovation around artificial intelligence (AI) and machine learning (ML). Let’s hope for the best, but plan for the worst.