We’re witnessing Darwinian times in every industry, and electronics is no exception. The most adaptable companies are expected to be the strongest emerging from this crisis. It exposes gaps in resiliency that have hidden in plain sight for a long time.
The industry experienced early impacts from COVID-19. Early on, the crisis was largely confined to China. While difficult, it was viewed more as a limited supply chain disruption, much like a flood in Thailand or an earthquake in Japan. Not to minimize such events, but the industry learned that at first, it could still secure needed parts by applying more effort than normal. And businesses could still operate in relative normalcy.
That changed as the crisis extended its global reach. Supply side impacts diminished, with factories in China reopening while other parts of the world were shutting down.
As the virus continued its march across countries, companies began revising second-quarter and even 2020 revenue guidance. The impact on both the tech industry and the global supply chain has worsened. In one key category, smartphones, Canalys forecasted that China’s shipments would drop 40 to 50 percent in the first quarter of 2020.
The impact on multiple areas of the demand side is clearly more dramatic. Medical devices, networking gear and seemingly anything related to working from home is selling like never before—for example, AT&T 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 ground to a halt. Auto sales in China fell by 80 percent in February. Semiconductor and component manufacturing see limited impact at this point, but should soon experience a bullwhip effect (increasing swings in inventory responses as one moves up the supply chain).
What should electronics companies be doing to manage the situation? We recommend keeping two different timelines in mind:
- What can you do reactively right now to address immediate impacts?
- What should you adapt for the longer term?
Immediate reactions
The short-term reaction of electronics companies is the corporate equivalent of sheltering in place. Do whatever you can to come out healthy at the end of this, such as:
- 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 be online as the physical channel is effectively shut down. Pare down expenditures to a focused product and brand portfolio. Extend features, where possible, to provide a rich shopping experience—especially to improve chat and customer contact.
- If your cash position allows, help smaller channel and service partners weather the storm (for example, with extended credit terms), especially in field service for mission-critical equipment.
- Where possible, secure alternative sources for components and service parts, potentially fast-tracking supplier qualification. Consider the possibility of 3D printing your service parts, if necessary. You don’t just need reliability; you 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, nor how the world will look after the recovery. Companies should build resiliency and flexibility for multiple potential futures, including the next health crisis. Here are some things that likely will be true, and actions you can take to prepare:
- Some of your sales will never return to the physical channel. Focus on building flexible, omni-channel capability. Include 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 IBM Institute for Business Value perspective on mergers and acquisitions here.)
- Your security attack “surface” has increased. Getting remote employees up and running quickly in the beginning of the crisis exposed you to new threats and often required some bolt-on security arrangements. Make sure you update your security posture to cover 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 positioned to emerge from the current crisis stronger and more resilient.
To support our clients, IBM has developed best practices and recommendations for actions to take now and after the pandemic. Click here to access our COVID-19 Action Guide and related resources.
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