‘Nightmare’ for global tech: Virus fallout is just beginning

As Chinese-based manufacturers begin to restart factories Monday, no one knows for sure when they’ll be back at full-speed—or what sort of chaos may ensue.

Tech producers led by Foxconn, which makes the majority of the world’s iPhones from Zhengzhou a few hundred miles from the coronavirus outbreak’s epicenter, had begun preparing investors for the potential bedlam when hundreds of thousands make their way back to factories.

Apple Inc.’s most important partner warned investors of the daunting task of securing enough workers despite widespread transport blockades, quarantining thousands, and the “nightmare” scenario of an on-campus epidemic that could shut down production altogether. Last week, it took the unprecedented step of warning workers to stay away from its Shenzhen headquarters till further notice as government inspectors vet its containment procedures, Bloomberg News reported. And it’s delayed the return of workers to its main iPhone-making plant in central China, people familiar with the matter said Monday.

“How we can make sure there will be no infection within our campuses will be the first priority, because if you put a lot of people together and one of them gets infected, that will be a nightmare,” Foxconn investor relations chief Alex Yang told investors on a Thursday call, according to a recording obtained by Bloomberg News. “We try very hard to make sure the possibility of any on-site infection will be as low as zero, although it will be challenging.”

The deadly virus has illustrated the increasingly central role China plays in global manufacturing, from clothing and chemicals to automobiles and especially technology. Just about every major piece of consumer electronics is made in China, from iPhones and gaming consoles to half the world’s liquid crystal display or LCD screens. The contagion has already shuttered plants across China for a week longer than anticipated after the Lunar New Year break—a disruption that could get much worse if rolling quarantines and suspended rail and air links prevent the return of the millions of blue-collar laborers at the heart of electronics assembly.

When they do make it back, untold numbers will get funneled into a quarantine of up to two weeks—a sequester of unknown scale. Any disruptions at Chinese plants can, in a worst-case scenario, freeze parts of the supply chain by triggering cascading shortages. Influential supply chain analyst Kuo Ming-chi of TF International estimates Foxconn’s main iPhone-making base will properly resume work only next week—and then at 40% to 60% capacity. Citigroup estimates just 30% of the entire Chinese semiconductor workforce is estimated to return to their workplaces as of Feb 11.

Foxconn said in a statement Saturday it’s working with local governments to prepare for the return of employees, without specifics. Shenzhen’s Longhua district said in a WeChat post it was helping the Taiwanese company fine-tune its plans. “To safeguard everyone’s health and safety and comply with government virus prevention measures, we urge you not to return to Shenzhen,” Foxconn wrote in a Feb. 5 text message to employees based in the southern city. “As for the happy reunion date in Shenzhen, please wait for further notice.”

On last week’s call, Yang spoke in depth about Foxconn’s virus-prevention measures and the need to comply with various regulations in the so-called “iPhone city” of Zhengzhou—just 300 miles from Wuhan, the origin of the outbreak—covering infection-fighting measures from quarantines to face mask and hand sanitizer inventories. “If you are talking about tens of thousands of people in a line, in a building, in a campus and we try to prevent a virus—and in the meantime you are asking for them to do their normal job—that’s very challenging.”

Apple and Foxconn, known also as Hon Hai Precision Industry Co., were among the first corporations to try and quantify the viral epidemic’s impact. Hon Hai slashed its 2020 outlook last week, anticipating disruptions to Apple’s carefully calibrated production chain centered on China, as well as dampening consumer demand and overall economic growth. As China’s largest private employer and a key partner to many of the world’s most recognizable consumer brands, the Taiwanese company has become a high-profile symbol of how the outbreak could disrupt Chinese manufacturing and hence the world’s supply of electronics.

The disruptions extend well beyond electronics or technology. Many auto plants in the world’s largest market remain idled. Toyota Motor Corp., which initially halted its Chinese plants until Feb. 9, said Friday it now plans to resume production as soon as Feb. 17. Honda Motor Co. said it will reopen its factory in Hubei on Feb. 14 with an eye toward restarting output the week of Feb. 17. And Volkswagen AG also delayed the resumption of production at some of its Chinese businesses until Feb. 17.

Expect the “supply chain situation to get worse before getting better,” wrote Jeff Pu of GF Securities.