Overbooking and fierce price competition would pose a major risk to the smartphone supply chain once a COVID-19 outbreak in China is under control, Yuanta Securities Investment Consulting Co (元大投顧) said in a report on Friday.
The forecast comes as smartphone makers adjust their supply chain to resolve logistics problems and labor shortages from the outbreak, and the fixes are not just aimed at the first quarter, but the whole year, Yuanta said.
The adjustments might also be related to the already high inventory levels built up before the Lunar New Year break, it said.
Chinese factories have been slow to restart after the holiday was extended in an attempt to contain the COVID-19 outbreak, and there has been concern about supply disruptions caused by the disease, it said.
Market researcher TrendForce Corp (集邦科技) has slashed its forecast for global smartphone production this quarter, predicting a 12 percent year-on-year decrease in production to 275 million units — a five-year low — and warned that the outlook for next quarter would depend on the containment of COVID-19, as well as the resumption of work in the supply chain.
If smartphone demand is deferred from this quarter to the next few quarters, the outlook might not be overly pessimistic for the supply chain this year, as all production lines would resume normal operations once the outbreak is under control, Yuanta said.
However, smartphone makers facing logistics issues and labor shortages might seek out qualified tier 3 or 4 suppliers to secure sufficient component shipments, Yuanta added.
“This may benefit smaller suppliers in the short term, but we anticipate the high-inventory issue could arise after all production lines return to normal operations,” Yuanta analyst Nicole Tu (塗景婷) said in the report.
“Price competition may be fiercer among supply chain companies, as all suppliers will aim to win back more orders to compensate for losses during the coronavirus epidemic,” Tu added.
As for 5G infrastructure, the report said its recent supply-chain check suggests that optical communications orders have not yet been affected by the virus outbreak, with 5G base station orders still strong.
The outlook for the entire optical communications sector remains positive for this year, it added.
“We believe that the 5G infrastructure sector is more stable at present versus the smartphone sector, as the smartphone sector may face corrections again on monthly sales performance or inventory issues going forward,” Tu said.
DBS Bank Ltd said the effects of the virus outbreak would lead to capacity loss at smartphone supply chain in China due to issues associated with labor, logistics and raw material supplies, which is crucial to global smartphone market because China accounts for 70 percent of all smartphones sold in the world.
"We now expect a 28 percent quarterly capacity loss in 1Q and 7 percent annual capacity loss in 2020," DBS said in a note on Friday, citing its checks on current production resumption progress within the supply chain in China.
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