Chips, Business And The Coronavirus

In the spring of 2003, the SARS (severe acute respiratory syndrome) hit China and Hong Kong, creating such panic that no one would touch crates on shipping docks. Ultimately, it erased an estimated $40 billion from the global economy and effectively shut down the Chinese semiconductor industry for several months.

It could have been much worse, though, and this is what is particularly troubling. A 2004 study by the U.S. National Academy of Sciences ran several models based upon the persistence of a SARS-like coronavirus, and concluded that the longer it persisted, the more widespread the economic damage would be.

Fig. 1: Coronavirus. Source U.S. Food & Drug Administration

To put this in perspective, the semiconductor industry in 2004 looked a lot different than it does today. At that time, the indigenous China’s semiconductor business was in its infancy. It was seen as a source of cheap labor for manufacturing, and many of the factories operating in China were owned by multi-nationals. Following the SARS outbreak, many of the companies that were impacted set up facilities in other countries to prevent that problem from recurring.

In 2020, China is a technology hub in its own right, and a growing market for everything from Chinese-made smartphones to AI, electric cars, 5G infrastructure. It is home to some of the most advanced manufacturing facilities in the world, and China is determined to reduce its reliance on outside technology. The stated goal for Made In China 2025 is to produce 70% of the semiconductors sold to the Chinese market by 2025. The ongoing trade war with the United States (despite the limited phase one truce) is likely to accelerate that schedule because the Chinese government does not want to be held hostage to critical supplies of chips, materials and IP.

At the same time, China’s One Belt, One Road has established China as a key source of technology for 152 countries, connecting them with infrastructure of roads and shipping to ensure a steady flow of goods. As these countries become more intertwined in the high-tech trade, the impact of any slowdown in China will ripple out in unexpected ways. And a protracted, stubborn virus that spreads along trade routes will have much broader implications for global trade well beyond what is essentially the new Silk Road for trade.

And this is where the pandemic models begin to look much more insidious. While China reacted more quickly to this coronavirus than in 2003, no one knows how long it will last. Nevertheless, the underlying problem is similar. Just as a single point of failure can bring down any structure, such as a bridge or a building, it also can bring down an economic infrastructure. And the more diverse and integrated that infrastructure, the greater the collateral damage.

This is not just about China. A disruption in any part of a global supply chain can cause damage, which is what happened with SARS in 2003. But a disruption in China today, which is both a major consumer as well as a producer of chips and electronics, can cause much worse and more widespread damage. The fact that it is occurring during the major holiday buying season in Asia only makes things worse.

How companies ultimately react to this problem, and whether or where they set up alternative manufacturing and redundant operations, isn’t clear at this point. But just as the U.S. banning shipments to Huawei was a wake-up call for China, a stubborn virus could be a wakeup call for companies that rely on China for parts and manufacturing. For years, the focus has been on squeezing every penny out of the global supply chain. The longer the coronavirus lingers and the greater its impact, the more companies will rethink that strategy.