Covid-19 impact

The consumer electronics and ICT sector has been shaken by the covid-19 crisis. This crisis is unique because it was not prompted by a drop in demand or in production. There are three issues to tackle at the same time: disruptions in the supply chain, a collapse in demand and disruptions in production.

The supply chain for this industry is dominated by China, which carries out important device assembly operations. Non-assembled products generally come from Japan, South Korea, Taiwan, Singapore or some Chinese provinces. As China was the first country to be hit by the covid-19 pandemic, the global supply chain was disrupted. The pandemic then broke out in other Asian and European countries, prompting governments and companies to take drastic measures, such as border closure, which further disrupted the international supply chain. However, since last June, China achieved a rapid recovery in exports involving mostly computers (besides medical equipment), which suggests that most problems related to supply chains’ disruptions have been solved in China.

The lockdown imposed in European countries has on the one hand prevented many workers from reaching their workplace, thus impacting production, and on the other hand prevented non-essential shops to be open and citizens from moving and making planned purchases. Although at the start of the pandemic, the widespread adoption of remote work and education boosted sales of computer hardware and office equipment, the loss of income of workers combined with uncertainty and with the temporary impossibility of purchasing physically non-essential goods explain why sales of ICT-related goods will eventually contract in 2020. Last but not least, the deterioration of the manufacturing activities – mainly in the automotive sector, which consumes many electronic goods – is also playing an important role in the contraction of sales of ICT goods.

Main risks

For the retail segment, the loss of purchasing power of households following the crisis could encourage the tendency and lead them to replace computer hardware, laptops and other devices by just one smartphone. Moreover, many consumers are likely to continue to buy online as they did during the lockdown. Hence, companies that fail to adapt to the market and switch to online sales should be left behind. Then, the uncertainty around the evolution of the pandemic and of the economic situation should lead to higher precautionary savings and to the postponement (or downsizing) of purchases. Finally, as consumers seek to save money, they may turn to low-cost manufacturers/brands while the reshape of the international supply chain, aimed at resuming production and avoiding future disruptions, could also increase costs for European companies.

Even if it has rebounded, the activity in the manufacturing sector is still subdued. In particular, the automotive sector has been badly hit by the crisis. It should take several years before automotive production and sales come back to their pre-pandemic level, capping the recovery of the ICT sector.

Besides, the Brexit as well as the US-EU and US-China trade tensions are also expected to impact this sector through the imposition of tariffs on imports and of sanctions targeted at some companies. 

Conclusion

As long as neither a vaccine nor a medical treatment for covid-19 is found, the uncertainty weighing on the consumer electronics and ICT sector remains important. Indeed, a significant resurgence of covid-19 infections would threaten the fragile recovery (for countries where economic activity has rebounded) or prolong the ongoing slowdown (for economies that are still under severe pressure). For the ICT sector, such a scenario could lead, on the supply side, to renewed disruptions in the supply chain and in production. On the demand side, it would put additional pressure on consumer demand as well as on the industry, another important consumer of electronics.

Analyst: Matthieu Depreter – m.depreter@credendo.com