There is growing concern over the economic damage caused by the spread of the new coronavirus, which began in China in January 2020. the Lunar New Year holiday lasted from the end of January to the beginning of February. The World Health Organization (WHO) declared a "public health emergency of international concern" on January 30.
The clearest immediate impact stems from the Chinese government’s limitations on movement of people and logistics in certain regions in order to prevent the spread of disease. Moreover, the Chinese Lunar New Year holiday is extended by one more week to 9th of Feb. Therefore, reduced production is inevitable due to reduced time and parts supply. The impact on shipments in January is likely to be limited, because of the holiday period and the fact that the first quarter typically records the least shipments in a year. However, weaker smartphone demand in February and March is inevitable. Especially in March, after Chinese Lunar New Year holidays, shipment volume increases, and many OEMs start shipping new product.
There is no timeline for the outbreak to subside or end. A “least negative” scenario is that the situation may end in this month, as the spread stops and the number of cures increases. Even in this case, there would be period of delayed ramp up, as people and material make their way slowly through the backlog created by the existing restrictions on movement.
However, the possibility of this situation being prolonged beyond a month or two cannot be ruled out. In the long term, the recovery of the supply chain will take longer time, which will affect not only China and Asia-Pacific, but also global supply.
Chinese domestic market most heavily affected, but impact felt globally China is the world’s largest smartphone market, accounting for 27% market share in 2019, according to the Mobile Handset Database – country - Q3’19 report by IHS Markit. The number of smartphones shipped to China annually is expected to reach 373.9M units in 2019, a 4% decrease from 390.8M units in 2018.
In the Q3 ’19 forecast update, IHS Markit predicted that the Chinese market would stop declining and rebound in 2020. However, due to the current situation, the Chinese market is likely to contract in units again. Global smartphone shipments are also likely to be lower than previously expected.
The biggest negative impact will be felt in Chinese domestic sales. As the outbreak period grows, weakening demand will extend to other regions. Therefore, we analyzed the impact on the global smartphone market based on two scenarios: short- and medium-term.
Scenario 1: Short term
• The coronavirus outbreak subsides in February
• Supply channel restores in 15 days
• All supply channels return to normal from mid-March
Effect: Impact restricted to Chinese domestic market, Asia Pacific, and Middle East-Africa region. No direct impact on Samsung, but Apple’s supply chain may be affected. Even if the outbreak is contained around the end of February, it is expected to take at least two weeks to restore all operations including supply chain and logistics.
In this case, we expect only China's domestic smartphone sales to drop sharply in February and some minor drops in Asia Pacific region. Demand should gradually improve. But smartphone sales are unlikely to recover to full pace until March.
In addition, some OEM product launches are likely to be delayed due to February / March production shut down or delay. Accordingly, shipments of domestic smartphones in the first quarter are projected to decline by 15% and another 5% in the second quarter from the original prediction. We expect OEMs and distributors to take aggressive marketing measures in the second half the year as an effort to recover from a weakened first half and capture postponed demand. Nevertheless, we expect smartphone shipments in the Chinese market to shrink to 367.7M units, down 8.2M units from the originally forecasted 375.9M units, this year.
Declining smartphone shipments are not limited to the Chinese market. In regions where Chinese brands have a high market share, shipments are expected to decrease due to supply shortages caused by delays in Chinese smartphone production.
The most affected regions are likely to be Asia Pacific and MEA, especially Africa, where Chinese smartphone makers have increased sales, driven by low-cost models. Even if all supply chains are normalized in March, the shipments to these emerging markets are likely to decrease for a longer period as OEMs will prioritize the production of more value-added products over low profit generating models.
Samsung, the world's biggest smartphone OEM, has no production plants in China as of 2019. Samsung now handles most of its production in Vietnam and India. Hence, this scenario is unlikely to have a direct impact on Samsung.
However, Apple's situation is different. Apple's major production partners, Foxconn, Wistron, and Pegatron, operate production plants in China. This could affect Apple's iPhone production if component supply is constrained and the movement of finished products out of China is difficult. Apple’s rumored follow-up to the iPhone SE could be impacted.
Scenario 2: Mid-term
• The outbreak subsides in March
• Supply channel recovery takes more than a month
• All supply channels return to normal from middle of May
Effect: Global smartphone market, supply chain, and shipments impacted
If the spread of the coronavirus lasts for two months, the impact on the industry is expected to be much greater. Unlike scenario 1, where the impact is concentrated on China and the Asia Pacific region, global smartphone makers will also experience a significant impact on their smartphone production because of supply shortage for components.
In this scenario the Chinese domestic market is likely to see a 42M units decline in shipments in the first half of 2020, as shipments decline more than 30% in the first quarter and 15% in the second quarter. Again, aggressive marketing promotion in the second half may not offset the reduction in the first half. In this scenario, overall Chinese shipments in 2020 are expected to shrink to 356.4M units.
Lacking component supply in February and March will impact OEM inventory. Further, they might be unable to ship final products to retailers and distributors due to logistic difficulties. In this case, the impact will be felt in all regions.
The launch of new products from Chinese companies, planned for the first quarter, will be delayed into the second quarter, or beyond.
Moreover, the disruption of the supply chain will cause supply shortage of Apple's existing models and new low-priced models. This is likely to extend to iPhone shipment in North America and Western Europe.
A prolonged emergency will impact Samsung Electronics, even without production facilities in China. Samsung will not be able to source components from anywhere but China. While a short-term disruption might be more manageable for Samsung then for other OEMs, a longer disruption will affect the Korean company in similar fashion to its competitors.
In this case, the overall smartphone market is expected to shrink to 1,391.3 million units this year, up just one million units more from the 1,390.5 million units in 2019. We expect the demand for smartphones in 2021 is likely to decrease compared to the previous forecast.
Among smartphone OEMs, Vivo and Motorola have production plants in Wuhan. Component providers Tianma and CSOT are based in the region. CSOT's LCD and AMOLED panel facilities may not be running full production until the outbreak subsides.