April 28, 2020 | Written by: Bruce Anderson and Rami Ahola
Categorized: COVID-19 | Electronics
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We’re witnessing Darwinian effects in every industry, and electronics is no exception. Lack of resilience, which had been obvious but not critical, now has severe consequences. The most adaptable companies will emerge as the strongest.
Electronics felt early impacts from COVID-19. The industry’s supply chain is highly dependent on Chinese manufacturers, which account for 90 percent of the world’s computers and 70 percent of mobile phones. Virtually every electronics product contains Chinese-made components.
And yet, when the crisis was largely confined to China, it was viewed as a supply chain disruption much like a flood or an earthquake. During previous disruptions of those sorts, the industry had learned that securing the needed parts required more effort than usual. But businesses still operated relatively normally.
That changed as COVID-19 extended its global reach. Supply-side impacts diminished as China returned to work. But the global impact on the demand side has been profound—for better and worse. Medical devices, networking gear and anything related to working from home is selling like never before. AT&T, for example, saw a 31 percent month-to-month increase in core network traffic in March.
On the flip side, demand for automotive components and larger consumer electronics items has all but ground to a halt. Auto sales in China fell by 80 percent in February. Semiconductor and component manufacturing have not seen much impact, but probably will soon.
What should electronics companies be doing to manage the situation? We recommend keeping two different timelines in mind: What you can do right now to address immediate impacts and how you can adapt for the longer term.
The short-term reaction of electronics companies is the corporate equivalent of shelter-in-place. Do whatever you can to come out healthy at the end of this:
- Co-create and crowdsource products with customers and competitors to meet the immediate needs of the global COVID-19 response, especially around medical devices and communications.
- Shift marketing and sales focus to online, as the physical channel is effectively shut down. Pare down expenditures to a focused product and brand portfolio. And extend features where possible to provide a rich shopping experience—especially around chat and customer contact.
- If your cash position allows, help smaller channel and service partners weather the storm (e.g. extended credit terms), especially in field service for crucial equipment.
- Where possible, secure alternative sources for components and service parts, potentially fast-tracking supplier qualification. Consider the possibility of 3D-printing service parts if necessary. Going forward, we expect geographic diversification of suppliers for risk mitigation will be a much higher priority than it has been in the past, when it was more often done to lower costs. We don’t just need reliability, we need resilience as well.
- Increase your sales and operations planning frequency to address rapid changes in demand. Get more granular, as the earliest stages of the recovery will be geographically uneven.
Adapting for the Longer Term
At some point the immediate crisis will pass. Nobody knows what the recovery curve will be like, nor what the world will look like after the recovery. Companies should build resiliency and flexibility for multiple potential futures, including the next health crisis. Here are some things that are likely to happen, and actions you can take to be prepared:
- Some of your sales will never return to the physical channel. Focus on building flexible omni-channel capability, including a direct-to-consumer channel, that can exist on its own, complement or even support physical channels. Go beyond drop-ship and consider new economic arrangements to support existing retail channels.
- Forecast models based on historical data will be invalid for a long time. Develop advanced demand forecasting capability based on forward-looking data to detect granular changes before they become issues. Consider new data sources and AI to support deeper insights and increased agility to react to the changes you observe.
- COVID-19 won’t be the last emergency. The next disruption may be a natural phenomenon, a geopolitical issue or another health crisis. Design your manufacturing capacity and architecture to reduce your dependency on any single provider or country.
- Volatile demand is the new normal. Start shifting to variable-cost models in all areas of the business to improve your flexibility. Move applications to the cloud where possible. Outsource non-core business processes and automate core functions to operate without intervention, especially in customer service, warranty and claims.
- New acquisition opportunities will emerge. Companies will weather the crisis differently, depending on their cash and credit positions. Making M&A work will be less about target selection and more about due diligence and rapid integration. Desired payback will be less than the industry average of two years. (Please see our recent IBV perspective on mergers and acquisitions here.)
- Your security attack surface has increased. Getting remote employees up and running very quickly in the beginning of the crisis exposed you to new threats and often required some bolt-on security arrangements. Make sure you bring your security posture up to date and that it covers the breadth of your exposure.
COVID-19 will be defeated. The economy will reopen. But life and business must evolve to meet the demands of a changed world. Electronics companies that take prudent short- and long-term actions now will be well positioned to emerge from the current crisis stronger and more resilient.
To support our clients, IBM has developed best practices and recommendations focused around four key priority areas: employees, customers and partners, finance and operations, and community. Click here to access our COVID-19 Action Guide and related resources.