What COVID-19 Means for the Future of the Tech Sector
What started as a seemingly small outbreak of pneumonia in the Chinese city of Wuhan has spiraled into a global health emergency, as a novel coronavirus spreads rapidly across the globe. The coronavirus outbreak has undoubtedly shaken the world, raising not only health concerns but also considerable insecurity in global financial markets as many governments, especially that of China, enact quarantines, travel restrictions, and factory shutdowns. The technology sector has been significantly impacted by these developments, revealing the level of dependence that many technology companies have on China.
The coronavirus has impacted the stock market both domestically and internationally. With no solid solution to the outbreak in sight yet, uncertain investors have pulled a significant amount of money out of global financial markets, resulting in a $5 trillion loss in market capitalization. After rising consistently and closing at a record high of 29,551.42 on February 12th, 2020, the Dow Jones Industrial Average tumbled more than 1,900 points to 23,846.35 on March 9th, the largest point drop in history. On the same day, a 7% drop in the S&P 500 triggered a temporary halt in trading.
More specifically, the coronavirus outbreak has severely disrupted China-based supply chains, hitting the technology industry especially hard. Companies such as Apple, Samsung, Microsoft, and Google reacted to the outbreak by announcing temporary shutdowns of all operations in China in early February, closing stores and factories. Given that China leads the world in manufacturing output, especially in the category of electronics, the various attempts at containing COVID-19 are expected to produce shortages and delays for many technology products. The full extent of the factory shutdowns and travel restrictions remains to be seen. Especially in the case of electronics manufacturing, a highly complicated process that relies on the timely delivery and assembly of parts, any disruptions along the supply chain could easily trickle down and cause delays down the line.
Apple, the multinational technology giant responsible for producing iPhones and other media devices, is one example of a company that has been hit especially hard by the coronavirus outbreak. Because of Apple’s heavy dependence on China as a consistent and low-cost manufacturer, factory shutdowns will significantly impact Apple’s profitability. Foxconn, Apple’s primary manufacturer, closed its factories in cooperation with the Chinese government in January and is currently in the process of slowly opening them back up. Although Foxconn aims to return to normal production in the near future, the shutdown and travel restrictions have led to lingering problems concerning decreased productivity and labor shortages. As a result, Apple has warned investors that its revenues will fall short of projections in the current quarter due to low iPhone supply and Chinese demand, becoming the first major US company to do so. Apple’s announcement is an indicator of the severity of the coronavirus, as the ripple effect of the outbreak causes material changes in Apple’s earnings. Other technology companies like Dell, Microsoft, and Sony also rely on Chinese manufacturers such as Foxconn, and will be similarly impacted.
The coronavirus outbreak is just one of many reminders of technology companies’ dependency on China, on top of the many other economic developments in recent years. Apple in particular has already had many complications arise from this dependence, such as decreasing iPhone sales in China and tariffs from the US-China trade war. The spread of the coronavirus suggests that it would be wise for companies to avoid heavy reliance on a single country, China in particular, but this is easier said than done. Many companies benefit from well-established manufacturing centers, specialized suppliers, and a large supply of both skilled and unskilled labor in China, making it difficult to start investing in manufacturing elsewhere.
As the coronavirus continues to spread unchecked for the foreseeable future and cause economic uncertainty, many companies should assess their current supply chain models to see if they are positioned for sustainable, long term growth. Despite attempts to boost the stock market, such as the Fed’s interest rate cut, the sheer amount of unknown factors concerning the outbreak makes it extremely difficult to predict the true extent of its effect on the economy. No one can discern how long the coronavirus outbreak will last, or how countries will react to it in the future. Given this situation, technology companies with a heavy dependency on China may want to begin moving operations out of the country. Whether the coronavirus becomes the force that pushes technology companies to do so remains to be seen.