The electronics supply chain has confronted several challenges over the past year that have significantly impacted the sector. None larger than the pandemic itself, COVID-19 exposed the vulnerability of the supply chain, having a ripple effect that stemmed production and choked off critical components, which slowed normal production and canceled or delayed new product launches.
As the market transitioned through global lockdowns and manufacturing shutdowns, followed by substantial increases in demand, the supply chain was disrupted by the ongoing tariff war between the United States and China, adding to logistical challenges of sourcing and, subsequently, rising costs of material that have combined to create havoc for manufacturers and OEMs in the global supply of electronics components.
By the time the world finally came to grips with the reality of the enormity of the pandemic, the electronics supply chain had already begun to falter. The factory shutdowns in China began in the Hubei province, where well over a third of electronic components for export are manufactured, immediately jeopardizing the supply chain. Contract manufacturing operations in China greatly suffered as the virus spread, with production interrupted with every lockdown. OEMs and manufacturers wishing to shift suppliers from China to countries in Southeast Asia had to contend with a lack of infrastructure, qualified suppliers, and skilled labor.
Lockdowns and Restrictions
Supply chains were also affected by the unpredictable spread of COVID-19 from one country to another. Lockdowns and restrictions occurred at different times, further complicating production and supply lines. Though electronics manufacturers are classified as essential, they still must operate under restrictions such as workforce shift size reduction due to maintain social distancing protocols. In Europe and the United States, lockdowns and restrictions contributed to increasing shortages and slowdowns that disrupted the supply chain fourfold.
Tariffs and International Shipping
It’s not just COVID-19 that has disrupted the electronics supply chain, the tariff war between the United States and China was heating up long before the outbreak. The tariffs were already increasing the costs of materials, eroding profit margins, and bringing conventional methods of sourcing into question. Because of the tariffs followed by the pandemic, manufacturers and OEMs alike look to other countries than China to supply electronic components. A handful of top electronics manufacturers have even relocated from China to Southeast Asian countries such as Vietnam and Thailand. GoPro, Kyocera and Nintendo moved their manufacturing to the former while Casio, Daikin and Ricoh relocated to the latter.
Though TEUs (twenty-foot equivalent units) of electronic imports have grown in countries like Vietnam, increasing from 12,000 units in 2019 to 35,000 units in 2020, China dropped by over 40,000 units, from 173,000 to 132,000. Even with such a decline in TEUs, China far and away remains the leader. Those increases may be more reflective of the pandemic than the tariffs. With specialized production capacities so entrenched in China, shifting to other countries presents its own set of logistical challenges in lack of infrastructure which only further complicates the supply chain. For many OEMs and tech companies then, they have no choice but to remain in China, and to pass through increased costs to their customers.
The Cause of Increased Costs
Where the pandemic stemmed the flow of production, created a shortfall in stock and a scarcity of supplies, the market conditions created by the tariffs further intensified global trade restrictions. With such high demand comes a cost, literally and figuratively. With profit margins already eroding, increases in raw materials, product testing, assembly, packaging and manufacturing capacity, and the constraints due to the pandemic and tariffs have led to increased costs. Production capacity is being allocated to maximize the efficiency of manufacturing operations to those companies that lock in orders to maintain supplies and to meet medium-to-long-term demand. This may continue or improve the electronic supply chain, but have unintended effects such as stretching, if not constraining, a given company’s capital.
Disruptions from COVID-19 as well as the tariff wars have impacted all aspects of the global supply chain for electronic components. Lockdowns and restrictions followed by strong demands have factored greatly into the disruption. Tariffs have caused manufacturers and OEMs to rethink sourcing initiatives in other countries, ones that present their own logistical challenges. Ultimately, the effects of COVID-19 on the electronics supply chain have been disruptive and costly. As a result, rising costs are being passed through to customers with aggressive terms intended to ensure continued supply lines.
If 2020 taught the electronics supply chain industry anything, it was revealing its own vulnerability. To deal with any future disruptions, the supply chain industry must show resilience and preparation to respond and recover as quickly as possible when an unexpected crisis threatens it again.