U.S Electronics Makers Face ‘Double Whammy’ With Supply Chain Delays, Slowed Demand

U.S. electronics manufacturers are faced with multiple challenges of historic proportions, including transportation delays, dwindling demand and supply chain disruption, after the deadly COVID-19 outbreak upended China’s biggest production hubs.

Even though China, which makes as much as 90 percent of the world’s computers and 70 percent of mobile phones, has been slowly reopening its factories, the extended production halt in February will have a domino effect on the global supply chain for months to come, industry experts said.

In the meantime, looming recession and lockdown orders around the world have caused consumer demand for some products to flatline. World smartphone shipments in the first quarter suffered the largest annual decline ever, the International Data Corp. said last week.

“You’ve got a double whammy: You can’t get things from your supply chain and you are not really in a position to sell much of anything either,” said Rosemary Coates, executive director of the Reshoring Institute. “Companies are really hurting in the U.S. as a result of those two things.”

The unprecedented scale of the COVID-19 pandemic has imploded financial markets and slowed down the global economy, rippling through industries like automotive and aerospace and sending many companies into survival mode.

Last week, iRobot, the maker of the autonomous Roomba vacuum, suspended the go-to-market plans for its Terra robot lawnmower because of the pandemic, saying its first-quarter revenue was impacted by disruptions to sales and manufacturing supply chain activities.

Meanwhile, semiconductors company Broadcom Inc has been telling customers to place orders for parts at least six months ahead of time, signaling widespread supply chain challenges, Bloomberg reported.

According to a recent survey conducted by the Institute of Supply Management (ISM), nearly 95 percent of respondents said their supply chain would be or already has been affected by the pandemic, citing lack of materials, delays in shipments and workplace and operational issues, the industry group said in a white paper published last week.

Companies are also facing a reduction in global manufacturing capacity. While respondents said domestic manufacturing is operating at 79 percent of normal capacity, other regions, including Canada and Mexico, have been more constrained.

“The economic consequences of the coronavirus outbreak have shifted and become more severe in parallel with the global expansion of the pandemic,” ISM CEO Thomas Derry wrote in the report. “What began as a supply shock due to a production lockdown in China expanded to production declines in Europe and now North America. No sector and no business is unaffected by either the supply or demand shock.”

As governments rushed to close borders and implement transportation restrictions, manufacturers are waiting longer for deliveries of components. Average lead times are at least twice as long compared with "normal" operations with 222 percent lead time lengthening for inputs sourced in China, 201 percent in Europe and 200 percent in the U.S., according to ISM.

Global disruptions may double this month, according to Resilinc, a supply chain risk management tech firm, which reports a 400 percent monthly growth in the number of supplier impacts, with manufacturing operations delayed on average by 3.3 weeks.

“These trends will probably continue for the foreseeable future,” Jon Bovit, head of marketing and business development, said during a webinar last month.

While some tech giants like Apple are able to aggressively control their network of suppliers, many U.S. companies are not even aware of their dependency on a complicated web of factories across Asia, producing small, inexpensive parts like caps, resistors and diodes.

“You could have everything else available and ready to build, but something very inexpensive could bring down your entire factory line,” Resilinc CEO Bindiya Vakil said.

Meanwhile, some suppliers, forced to operate at 50 percent of capacity, have been rationing essential products, such as helium, that are used in both electronics and healthcare industries.

“If somebody needs these types of products that are critical for healthcare or life science-type applications, then high tech companies might get bumped back to the end of the line,” she said. 

In order to maintain a healthy supply chain, Vakil advises her clients to increase communication with suppliers, track their financials and accelerate payments. Last month, defense contractor Lockheed Martin, for example, pledged to advance more than $50 million to its suppliers to help thwart the effects of the pandemic.

Getting components from China is also a challenge after prolonged commercial flight restrictions have created a gridlock. And because passenger airlines normally carry about half of global air shipments, rates skyrocketed as air traffic fell sharply, says Shawn DuBravac, chief economist at IPC, a trade association for the electronic interconnection industry. 

Airfreight costs for Asia-North America routes, for example, have risen more than 60 percent compared with last year, while rates for some European routes have doubled.

“Over half of manufacturers we have spoken to are seeing excessively high shipping costs, especially air freight costs, because capacity has become so constrained in that marketplace,” DuBravac said.

Many companies have been turning to regional, domestic or multiple-source suppliers, seeking to cut their dependency on one sequential supply chain from China, according to ISM. Others have adjusted their inventories, with 40 percent saying that they are holding more inventory than normal.

While respondents to ISM’s survey said recovery was likely to take 18 to 24 months, they projected an easing of operational issues and lead times by the end of the year, according to ISM.

“If there’s one overarching supply management lesson to be learned from the pandemic, it’s that overemphasis on total lowest cost has been revealed to be a myopic objective,” ISM’s Derry wrote in the report. “Supply management needs to redefine itself as the critical enabler of the corporate top line, not merely a contributor to the corporate bottom line.”