Coronavirus Shatters China’s 5G Rollout, Disrupts 5G Base Station Supply in Country

Courtesy: SCMP

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

With the 2019 Novel Coronavirus (2019-nCov) in its third month following the outbreak, the extent of its damage to supply chains of established companies and the Chinese economy is now starting to become painfully clear. Companies including Apple Inc (NASDAQ:AAPL), Qualcomm Incorporated (NASDAQ:QCOM) and NVIDIA Corporation (NASDAQ:NVDA) expect that their business for the first quarter of the calendar year 2020 will be affected by the outbreak. Their estimates, however, pale in comparison to reports of China's banks facing at least $1 trillion worth of non-performing loans, as gross domestic product growth in the country in the Q1 2020 expected to drop 1.5% year-over-year.

Given that China is also the backbone of the global tech supply chain, the coronavirus's impact on the industry as a whole is not too bright either. Smartphone sales in the country are feared to drop by 50% year-over-year by some analysts, and production by 12%.

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Now, as February settles in, a fresh report from research firm Trendforce takes a high-level view of the 2019 Novel Coronavirus' (2019-nCov) impact on the tech industry.

5G In China To Be Pummeled By Coronavirus-related Disruption; Virus Proves Boon In U.S. Fight Against Huawei?

In the tail-end of the calendar year 2019, the United States Government's battle against Chinese telecommunications giant Huawei Technologies picked up its intensity. The U.S. stepped up lobbying efforts to make sure that her European allies did not choose 5G telecommunications networking equipment from the Chinese company, with the efforts based on the country's concerns that not only does this gear come with security loopholes, but that China's National Intelligence law also mandates Huawei to share information or grant control of its facilities to the Chinese government. Huawei enjoys government subsidies and its products are an attractive alternative to carriers operating in Europe over equipment from Swedish Ericsson and Finnish Nokia.

Looking at Trendforce's research, it's clear that Huawei should now have a tough time keeping up with the output and demand of the aforementioned equipment. Today's report mentions the coronavirus's impact on the Chinse 5G consumer and manufacturer environment as follows:

Most Chinese telecommunications bids, including 5G infrastructure construction and application demonstration purchasing agreements, have been postponed. On the other hand, suppliers of key components for 5G base stations, such as PCB and optical fibers, are mostly based in Wuhan and other regions in Hubei; given that Wuhan is the epicenter of COVID-19, the outbreak is expected to negatively affect the 5G supply chain somewhat. The delay in 5G infrastructure build-out, limited smartphone replacement demand, and postponed work resumption at fabs will collectively decrease the shipment of Chinese 5G smartphones.

China became the second country to roll out 5G to its citizens, and following today's report, it's looking as if the country fast approach might now be reduced in pace. This will provide Huawei's competitors globally to capitalize on a drop in the company's 5G networking equipment output. Nokia and Ericsson have been shifting their manufacturing away from China to placate the American government, and the only concern for them at this point should be keeping with market demand in case the coronavirus disruption moves into 2020's second quarter.

Confirmed coronavirus cases peaked last week according to data from John Hopkins' Center for System Science and Engineering

Console supply chain will remain unaffected - with PlayStation 5 and Xbox Series X production set to continue as planned if virus is contained

Previous estimates of a 12% year-over-year drop in smartphone production during this quarter are maintained in today's report, and aside from 5G and smartphones, notebook and television production is also expected to go down in the quarter. However, owing to the end of the console cycle, Sony Interactive and Microsoft Corporation's (NASDAQ:MSFT) PlayStation 4 and Xbox console shipment and sales will not witness significant or serious drops. As Trendforce notes:

The bulk of console assembly happens in China, with only a few processes done abroad. Consequently, domestic labor and material shortages have severely impaired console manufacturing. However, the majority of console sales occurs in 4Q, meaning peak season manufacturing for the console supply chain will take place in 2H20. Thus, 1Q is a weak season for sales. Assuming the overall industrial impact of the COVID-19 outbreak can be fully addressed by the end of March, then losses in the supply chain can be offset in 2Q20, thereby limiting the impact on console supplies.

For those of you who are wondering about the coronavirus' impact on upcoming launches of the Xbox Series X and PlayStation 5, we've got mixed news for you. The research firm believes that the manufacturing of the next-generation video game consoles will kick off in the second quarter of 2020, and therefore, current supply chain disruptions will not affect either of them. However, should this disruption continue in the second calendar quarter, then Sony and Microsoft might have trouble keeping with early period demand.

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The biggest drop due to the coronavirus will be on smartwatch production reports Trendforce. However, given that most big wearable launches take place on 2Q, the impact will not be severe, with local, Chinese companies bearing the brunt of virus-related supply chain disruption.

All-in-all, the tech world continues to reel from the coronavirus, and the bit about 5G shipments taking a hit from supply chain disruptions is the strongest point of today's research report.

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