Assessing the Coronavirus Fallout for Tech

How is the outbreak affecting technology companies?

CCS Insight’s vice president of forecasting, Marina Koytcheva, explores the implications of Covid-19 for the technology industry. Marina will also be sharing additional thoughts in our forthcoming free webinar.

The outbreak of the coronavirus that causes Covid-19 has already affected the lives of millions of people. Most of them are in China, where the death toll is nearing 2,000. Tens of thousands of people have been confirmed to be infected with the virus, and millions have seen their normal life, work or studies hugely disrupted.

The humanitarian impact is undoubtedly the most important aspect of the current situation, but the Chinese and the global economy will also suffer as a result. Here we focus on the expected effects on the technology industry.

It’s important to note that this analysis is based on a high level of uncertainty. Nobody yet knows exactly how the epidemic will evolve and whether it will grow into a pandemic. The effect on the global economy and on each industry sector will largely depend on how the virus spreads, affecting the lives and work of people around the globe. We calibrate our assessment of the situation with new information appearing every day and every hour, yet it will be weeks and months before the full effect of the Covid-19 outbreak on people, the economy and the technology sector becomes clear.

For now, let’s focus on what we know about the impact on the technology industry. As a start, we should separate the short-term from the long-term effects.

Two main short-term concerns: demand in China and global supply chain

The demand for technology products, particularly hardware, in China has fallen significantly. Sales in physical stores have been badly hurt, as many stores have been closed for a prolonged period of time, with some still closed. Even when they are open, it’s painfully obvious from the widely shared pictures of empty streets in the big, typically buzzing cities of China that people may not be willing to go shopping.

Online sales have also suffered. Last week, Alibaba — China’s largest e-commerce company — confirmed that sales of consumer electronics online have fallen. People are reluctant to spend as much as before on non-essential products in the face of uncertainty, particularly when they don’t know how long this difficult time will last. Against this backdrop, we currently expect that demand for mobile phones in China in 1Q20 will be a good one-third (33%) lower than our projections before the outbreak of Covid-19.

The second short-term business concern for the tech sector is the disruption to the global supply chain. China is a massive manufacturing hub, and although we hear that many factories and transport links are open, few, if any, are working at full capacity, mostly because people are quarantined and unable to return to work.

As it stands, we expect that supply constraints will lead to shortages of some technology products worldwide. Some products will be more affected than others, depending on where their components and the final products are manufactured. Newer, more innovative products are likely to be more vulnerable, as they rely on some components that will be hard to source from alternative places, at least in the short term. Specifically, in the mobile phone market, we currently expect sales of mobile phones outside China to possibly fall as much as 10% short of what we expected in 1Q20 before the epidemic broke out.

We get asked the question, “Which companies will be affected more and which less?” Yesterday, Apple issued a statement to investors, warning that it’s unlikely to meet the revenue guidance it provided on 28 January for 1Q20. This doesn’t necessarily mean that the situation is worse than it was three weeks ago; it simply means that Apple now has more information and, on that basis, it has changed its expectations. The original guidance was provided during the Chinese New Year holidays, and since then it has become clear that the return to normalcy in China is slow. Still, we now know from Apple that manufacturing is ramping up, which is good news.

Apple is heavily reliant on China for the manufacturing of its products and will therefore be hamstrung by the situation. That said, we struggle to think of a company that’s fully protected from it. Samsung, for example, no longer manufactures mobile phones in China, but we believe it uses at least some components made in China, so it’s not immune to impact. But Samsung and Apple are slightly sheltered from the low domestic demand in China, as their dependence on sales in the country isn’t significant and is certainly smaller than it used to be.

For companies like Huawei, Xiaomi, Oppo and Vivo, which are highly dependent on the domestic Chinese market and have huge operations in China, the impact is likely to be severe, one way or another: through their employees or through lower demand for their products in China.

Sticking with the mobile phone market, which is the largest consumer electronics market in the world, we expect that global unit sales in 1Q20 will fall 17% short of our expectations made before the outbreak of Covid-19, and 14% from 1Q19. But let’s reiterate that these are our current expectations, and we may change our assessment as we gather more information on a daily and hourly basis.

All electronics hardware markets, from consumer smart speakers and automotive components to agriculture sensors and surveillance cameras, will feel similar effects, although the extent will vary sector by sector.

Too early to assess the impact on the tech sector beyond 1Q20

We first need to understand the short-term effects and get better forecasts for whether the outbreak will be contained or will spread. At present, there are more questions than answers, but there are at least two aspects to consider.

Firstly, the technology industry leans heavily on macroeconomic growth and the effect of the virus outbreak on the global economy is still unknown. The most-trusted international organizations are still working on their assessment, and as Kristalina Georgieva, managing director of the International Monetary Fund, said a few days ago, they’re still building scenarios, not projections. She particularly warned against easy parallels with the SARS outbreak of 2003: China was a smaller part of the world economy then, and now it makes up 19% of it; the world economy was also in a better place than it is now. So any disruption to the Chinese economy is likely to have a significant effect on the world economy, and on the technology industry after that. The mobile phone market was booming in the early 2000s, and it’s now a mature market, not at all immune to the macroeconomic fluctuations.

Secondly, in specific sectors like mobile phones, large Chinese competitors might be heavily wounded by the current situation. Facing mostly each other in their difficult home market, the competition will become even more cutthroat than before. Prices of 5G devices could start falling faster than previously anticipated, as phone-makers fight to maintain position and scale in China. International markets will become increasingly important for Huawei, Xiaomi, Oppo and Vivo, and their rivals should be prepared for aggressive moves by these Chinese companies.

In the long run, Covid-19 will be a catalyst for changes in the tech industry

In the grand scheme of the global economy, the epidemic only adds to the worries, inflamed by the trade war between the US and China, that many technology companies have about their high exposure to China. Although the virus outbreak and the trade war have absolutely nothing to do with each other, some companies might speed up their efforts to diversify their exposure to a single country when it comes to sourcing and manufacturing.

China is ready for this, at least to some extent. It has been working hard to move away from being the factory of the world to becoming a service economy, incubator of many innovations. It has ambitious plans for 5G, the Internet of things, artificial intelligence, extended reality and more. Its focus on these areas of the economy is likely to intensify if manufacturing starts shifting out of China faster.

Technology is playing an important role in relieving some of the current troubles for millions of people in China. Chinese people have become keen technology users over the past two decades, but the current situation has caused a step change in the way they use technology in everyday life. Millions have adopted solutions for remote working and collaboration — Alibaba’s DingTalk and Microsoft Teams appear to have become particularly popular services in a short period of time. On 10 February, 50 million children in China returned from their prolonged vacation to school in virtual classrooms through DingTalk. People are also using the app for health check-ins, to declare if they’re healthy or have symptoms of Covid-19. The role of technology in people’s lives will grow in the future, and this crisis is showing new ways of development.

Finally, governments around the globe will start to learn to collaborate more closely with technology companies in emergencies like this. Many governments see the tech giants — or agenda setters, as CCS Insight calls them — as way too powerful, but cooperation with them can be hugely beneficial for people. The example of the Chinese government asking Alibaba and Tencent for help in tracking people’s health status in large cities like Hangzhou offers food for thought and future ideas for cooperative action.

In conclusion, the future is always uncertain, but it appears even more so in times of crisis like with the coronavirus outbreak. We continue to monitor the situation constantly, discussing new information as it emerges and adjusting our assessment of the impact on the technology industry, not forgetting that the biggest burden is on the shoulders of millions of ordinary people.

Clients of CCS Insight’s mobile phone service suite will receive our current forecast for 2020 with our Quarterly Market Analysis, due to be published shortly.