Coronavirus set to upset China’s smart device market

Monday, February 03 2020

The coronavirus broke out in China’s Hubei province in early January and has since spread to most of China. Recent government updates confirm that the virus is still spreading, and there is little indication as to when it will peak or be contained. Canalys analysts have been in constant discussion with the supply chain and vendors in China on the developments and impact of the coronavirus since the beginning of the outbreak. Here is what we know so far:

  • China’s central and provincial government has imposed firm restrictions on business resumption to limit the chances of the virus spreading caused by cross-provincial migrant workers returning to their workplaces. Businesses in tier-one cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, and provinces, such as Shandong, Anhui, Yunnan and Guangdong, are delaying their employees’ return by postponing resumption of work after 9 February. Returning workers who travelled are asked to stay at home for 14 days before returning to their workplaces.
  • Citizens are asked to refrain from going to public places and attending any major public events, leading to the cancellation of business events and tradeshows. An increasing number of cities have applied restrictions to limit residents from stepping out of their homes, mainly in Hubei province, though also in Zhejiang province.
  • Prior to the virus outbreak, component manufacturers and ODMs were maintaining production at a minimum level during the Chinese New Year holiday, with limited personnel on-site. But there are already component factories in Zhejiang and Jiangsu that have been forced to shut down due to the spread of the coronavirus outside of Hubei province.

Potential risks to the market

In our previous release, Canalys forecast a 7% decline in smartphone shipments between Q4 2019 and Q1 2020, and an 8% fall for PCs. But given currently available information, we are dramatically revised our forecasts to a 40%-to-50% drop for smartphones and 20% for PCs, with the proviso that the situation recovers to pre-outbreak levels by the end of February, giving the market a full month to recover in March. But the forecast scenario might deteriorate or improve rapidly as more information becomes available. There are four key impacts on the short-term outlook:

Impact 1: retail sector and offline channel

Given the strict health and safety guidelines given to businesses and consumers, there has been an immediate impact on retail sales. Apple has temporarily closed all its Apple Stores in China. It is likely that other vendors will follow suit, closing some or all of their retail stores in heavily affected areas, or limiting business hours, to comply with government guidelines and minimize the potential risk of spreading the virus. Offline retailers and distributors, especially smaller ones, are likely to be affected, given their reliance on a healthy cashflow and liquidity. Vendors that rely on offline sales, such as Huawei, Xiaomi, Oppo and Vivo, will be affected directly. Logistics vendors are also working at a limited operational capacity due to the Chinese New Year holiday and, as of now, will not return to full operation until 10 February. Therefore, online sales are also being limited, with the number of available delivery workers likely to be the main bottleneck. The first quarter is usually a slow time for the Chinese market, but the current situation will likely lead to some of the worst ever shipment numbers.

Impact 2: consumer demand

Previous retail statistics showed consumption rebounded quickly after 2003’s SARS outbreak was contained. But it is currently hard to predict how the coronavirus situation will develop. It has spread more widely, with a higher number of confirmed cases, in a shorter period of time than SARS. The likely impact on small and medium-sized businesses in China will in turn affect jobs and employment, salary increases and disposable incomes, especially in the heavily affected areas. These factors lead Canalys to give a conservative outlook for China. For products that are heavily driven by consumer upgrades, such as smartphones, growth will slow for the whole of 2020, leading to declines of 10% to 15% compared with 2019. Even lower-priced consumer IoT devices, such as smart speakers, wearables and hearable devices, are likely to suffer a major impact on shipments as people are expected to focus on necessities during this time. For productivity devices, such as notebooks, demand from the commercial sector, especially the increasing need for remote working, will help support shipments while the consumer segment will likely soften.

Impact 3: 5G and product launches

Vendors’ planned product launches will be cancelled or delayed, given that large public events are not allowed in China. The public and media focus is on coronavirus developments, and technology vendors are likely to stall marketing activities as they are unlikely to divert attention to new product launches, such as 5G devices. Previously planned large overseas launch events will likely to be suspended or reduced in size given the travel bans and restrictions imposed by various countries. It will take time for vendors to change their product launch roadmaps in China, which is likely to dampen 5G shipments in 2020.

Impact 4: Production and effect on worldwide markets

As smartphone and PC production is not concentrated in Hubei province, and most component suppliers, some ODMs and EMS are retaining minimum production levels during the Chinese New Year, there is no immediate risk of production shutting down. But ODMs assembling devices that require a large number of human workers are likely to follow the work restrictions imposed by the government. There is a high risk that component providers and ODMs will not be able to ramp up to normal capacity if the outbreak is prolonged. More widely spread supply disruptions are to be expected soon, even if just a few key components fall behind in production, or raw materials are not available to fulfil production demand, given the limited transportation service. There is also a risk of more key component manufacturers and ODMs being forced to close if the coronavirus spreads further in provinces such as Sichuan, Zhejiang and Guangdong, China’s key production bases. If large supply chain manufacturers, ODMs and EMS, such as Foxconn and Compal, find their operations affected, there will be a serious impact on the global market and vendors, such as Apple, which rely on Chinese production. Canalys will release a new research note to reflect further changes to its forecasts as the situation unfolds.

 

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