The Coronavirus—now officially designated COVID-19—has infected more than an estimated 75,000 people and claimed the lives of more than 2,000. The human toll is staggering and far from fully paid, and that should be the first thought anyone has when discussing this topic, with the impact on industries and markets a distant second. At IDC, we issue quarterly market forecast updates across a wide range of categories, and this quarter’s device forecasts proved dramatically more challenging than usual. Today I’ll share some of what I learned through the process.
Dozens of Inputs, Loads of Uncertainty
At IDC, I have the privilege of working with analysts all over the world who are very good at their jobs. We have people looking at individual component manufacturers, tracking the creation of processors, graphics chips, memory, storage, and more. We have an amazing ODM team that tracks the companies that build the device for major OEMs such as Apple, Samsung, Dell, HP, Lenovo, and more. And, of course, we have device analysts that track the shipments of those final products into regional and country-level channels. Each of these teams has done a remarkable job of collecting information at every step of the manufacturing and shipment process. And here’s what we’ve learned: Nobody knows exactly what is happening, or what will happen.
In a highly fluid situation like this, the best way to approach a forecast is to build out scenarios using the best available information. My colleague Linn Huang issued a series of tweets yesterday based upon a pending document that spells out IDC’s current assumptions around the long-term impact of COVID-19 on the smartphone and PC markets. I’m not going to repeat what he describes there except to say that even our best-case scenario shows the virus impacting unit volumes in the first half of 2020, our probable scenario shows an impact lasting well into the second half, and our worst-case scenario impacts the full year and beyond. I encourage you to read Linn’s tweets, and when the final document does appear on IDC.com, I’d be happy to share it.
Look Beyond Factories Reopening
Over the last few weeks, I’ve been on dozens of calls talking to supply chain companies, vendors, and Wall Street, and one of the things many of these folks—especially the latter—have focused upon is the word from China that factories are reopening. Obviously, this is a key indicator, but I’d caution against reading too much into this single factor. While it’s true that many manufacturing plants have reopened after extending closures a week or more beyond the traditional Lunar New Year shutdowns, most of these factories are operating at well below capacity.
Why? Because the workers can’t (or won’t) return to work. In many cases, workers are stuck in cities far from home, in places where they traveled during the holiday break. In other cases, people are simply staying home, unwilling to risk infection. Until we have definite word that China has contained the outbreak, and infections have begun to decline, it is nearly impossible to predict the ramp in production. We know manufacturing for most of February will have been negligible, and whether it increases to one third, one half or more capacity in March and April remains to be seen.
It’s also important to note that China does much more than assemble the final goods. In many cases, the component flow through the country, too. For example, the fabrication of most PC processors happens outside of China, but some volume of those chips goes to the country for final packaging. In other words, even parts and products manufactured outside of China are likely to be impacted.
And production is just part of the supply equation. Another is logistics, and that too is and will continue to be impacted by the same factors. In other words, even as the factories begin to produce new products, there is a strong probability that shipment of those products could face delays as warehouse workers, truck drivers, ship captains, and others sit at home, waiting for the epidemic to play out.
Long-Term Impacts on China and WW Markets
Obviously, China is and will continue to experience the worst impact of COVID-19 as it decimates both production and consumption in the country. With streets empty and stores closed, people simply aren’t buying devices there this quarter. As a result. IDC’s China team has forecasted a notable drop in volumes there for the first quarter, a reality that Apple acknowledged in an earnings warning earlier this week. I expect to see more such warnings from other vendors in the coming weeks.
At a worldwide level, the virus isn’t impacting demand, but as noted earlier, it will undoubtedly impact supply. In fact, the timing for the PC industry couldn’t be worse. After a better-than-expected 4Q19, the PC industry headed into the new year with a strong head of steam that will now likely be constrained by supply. While it’s clear some of the strength in the holiday quarter was related to inventory pull in the US driven by fears of December tariffs, the Windows 7 EOS in January was also driving many small and medium businesses to buy new PCs. The industry is likely to struggle to regain this momentum.
Beyond the near-term, the crisis in China is already driving additional changes in the broader device industry. In the lead up to the outbreak, many companies had already begun to look to diversify their manufacturing beyond China. COVID-19 has many accelerating those plans. That said, there’s no chance that China cedes its dominant position as the manufacturer to the world any time soon, as no other countries have the environment or resources to do what China can do.
Inside China, I also expect the government to pull out all the stops to drive a rapid recovery once it has fully contained the virus. Expect to see huge investments that jumpstart the economy in a way that no other country could muster.
In the meantime, the keyword for the device industry: Patience. Don’t overreact to positive or negative news out of China. Take the word of factories opening with a grain of salt and remember that production is just one element of a complex supply ecosystem. Finally, remember that millions of people’s lives have been dramatically disrupted or worse, and at the end of the day, our concern should be with everyone’s health and safety first and foremost.