Disruption in supply of raw materials from China a major concern for tech

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Although the majority of the Covid-19 laboratory-confirmed cases were in the Hubei province, efforts to contain the spread of the disease in nearby provinces would cause delays in other parts of the supply chain as well such as raw materials sourcing, assembly, test, and shipping, and others. — AFP photo

KUCHING: Since the outbreak of the coronavirus disease 2019 (Covid-19), China’s role in the global supply chain is starting to take its toll on various industries worldwide, including the technology sector.

In a sector update on Malaysia’s technology industry, AmInvestment Bank Bhd’s research team (AmInvestment Bank) said although the majority of the Covid-19 laboratory- confirmed cases were in the Hubei province, efforts to contain the spread of the disease in nearby provinces would cause delays in other parts of the supply chain as well such as raw materials sourcing, assembly, test, and shipping, and others.

“From our channel checks, we have gathered that the companies under our coverage would be impacted by Covid-19 in differing ways such as companies with operations in China as VS Industry Bhd (VS Industry) and Malaysian Pacific Industries Bhd (MPI) have risks of potential delays in production directly impacting earnings.

“Also affected are companies who partially import raw materials from China such as VS Industry and ATA IMS Bhd (ATA IMS) have materials sourcing risk, and indirect impact on demand of products in the telecommunications and automotive industry which impacts the sector as a whole,” it said.

Production sites near Wuhan (Hubei province) were also not spared as Foxconn and Pegatron, which are key suppliers to Apple, were amongst many businesses shut down their plants and delayed resuming operations.

AmInvestment Bank noted that industry sources revealed that Foxconn’s Zhengzhou and Shenzhen plants are critical production sites of the iPhone 11 and upcoming iPhone 9 (or SE 2), and 2020 iPhones respectively while Pegatron’s Shanghai and Kushan plants are in charge of iPhone 11 and new 2020 iPhones, and iPhone 9 production respectively

“As such, we believe that Inari Amertron Bhd (Inari) might face a weaker second half of the financial year 2020 (2HFY20) due to uncertainties related to one of its major end customers (Apple), which is tied to its radio frequency (RF) segment, representing circa 49 per cent of the group’s revenue,” it added.

“If the Covid-19 impact does not extend beyond the second quarter of 2020 (2Q20) and 5G smartphones scheduled for 2H20 release go out according to plan; Apple’s iPhones scheduled for fall release, Inari’s RF demand for FY21F is anticipated to be strong due to the transition to 5G as RF chip content per phone increases with every model produced and as users who held back purchases earlier begin purchasing 5G-enabled phones,” AmInvestment said.

As for the electronics manufacturing services (EMS) sector, AmInvestment is slightly more optimistic on its near-term prospects.

Overall, AmInvestment said most, if not all companies under its coverage are adopting a wait-and-see approach and have not yet guided for any earnings impact, depending on whether the Covid-19 outbreak impact extends beyond March 2020.

“Companies with operations in China and those with a heavier dependency on end customers which have factories in China would be affected the most, while others such as EMS players are indirectly impacted through supply chain risks,” it said.