PC Manufacturing Is Surviving SARS-Induced Market Fears in China

Transcription

1 Research Brief PC Manufacturing Is Surviving SARS-Induced Market Fears in China Abstract: The PC manufacturing market in China has grown significantly in the past decade. The driving momentum will continue, but the recent severe acute respiratory syndrome outbreak could slow the country s PC production growth. By Ben Lee Recommendations Local Chinese PC manufacturers should adopt the World Health Organization's recommended hygiene and quarantine measures to protect workforces and avoid a production slowdown if there are additional SARS outbreaks. If best practice disease control measures fail during a continued crisis, manufacturers should look to shift manufacturing to uninfected regions of China to avoid any critical impact on their business. PC manufacturers in China and other affected countries need to reassure customers that they have contingency plans in place to ensure supply disruption is kept to a minimum. Publication Date: 20 June 2003

2 2 PC Manufacturing Is Surviving SARS-Induced Market Fears in China The SARS Outbreak Is Waning, but Manufacturers Still Need to Reduce Risk Severe acute respiratory syndrome (SARS) has spread rapidly across the Asia/Pacific region since it emerged in southern China in November To date, 799 people have been killed by SARS worldwide, with more than 8,000 people suspected of being or confirmed to have been infected. In the Asia/Pacific region, China has been the hardest hit, followed by Hong Kong, Taiwan and Singapore. The infectious wave now appears to have peaked, with many countries reporting few new cases, thus enabling the World Health Organization (WHO) to lift restrictions. Even so, there is no room for complacency. Little is still known about SARS, and we would be naive to assume that no additional outbreaks will occur, as happened in Canada. Manufacturers in those countries that were hardest hit during the initial outbreak particularly high-tech companies such as PC manufacturers have an opportunity to learn from the crisis scenarios that were brought to the forefront by SARS and position themselves to respond to future issues. Although the global economy remains depressed, SARS has hurt the economies of infected markets more than uninfected ones. China is the largest manufacturer of data processing products in the world. Table 1 shows China's market-leading production percentages and a forecast through 2007 as of 1Q03, while Table 2 shows Gartner Dataquest's 2Q03, post SARS outbreak, update. The shift of production lines from Taiwan to China in the past decade has facilitated China's current market-leading position, but the SARS outbreak will result in a temporary deceleration of this shift. Taiwanese companies dominate the global production of data processing equipment through their production lines on both sides of Taiwan Strait. The trend of overseas production from these Taiwanese companies will continue in the following years, and we predict that the production from China will play a more important role in data processing products than it does today. This cooperation will ensure that Taiwanese companies can expand their production share of global data processing products. In 2002, China and Taiwan produced more than 70.8 percent of the worldwide motherboard supply and 61.5 percent of notebook PC subsystems supply. Gartner Dataquest estimates that Taiwan and China will continue to dominate the production of data processing products during the next five years (see Asia/Pacific Data Processing Electronics and Semiconductor Market Forecast, SCSI-AP-MS-0128) Gartner, Inc. and/or its Affiliates. All Rights Reserved. 20 June 2003

3 3 Table 1 China's 1Q03 Data Processing Products Production Forecast (Percentage of Worldwide Market) Notebook PC Subsystems Printer Desktop Motherboard Monitor, CRT Graphics/Audio Cards Monitor, Flat Panel Note: CRT is abbreviation for cathode ray tube Source: Gartner Dataquest (June 2003) Table 2 China's 2Q03 (Post SARS Outbreak) Data Processing Products Production Forecast (Percentage of Worldwide Market) Notebook PC Subsystems Printer Desktop Motherboard Monitor, CRT Graphics/Audio Cards Monitor, Flat Panel Note: CRT is abbreviation for cathode ray tube Source: Gartner Dataquest (June 2003) However, SARS has inhibited demand growth in infected regions and helped to slow the shift of production lines from Taiwan to China this year especially for notebook PC subsystems, which are expected to shift from Taiwan to China in Gartner Dataquest expects that this slowdown will be short-lived and a rebound could occur in the second half of Manufacturers need to monitor returning business and consumer sentiment carefully and ensure they can meet any increase in demand. SARS spread rapidly in Guangdong province, but this has not had an adverse affect on the Shanghai region. These two regions house many high-tech data processing manufacturers that are funded by Taiwanese and other offshore investors. At the height of the SARS outbreak, the Chinese government took extraordinary measures amid the worldwide uproar over its initial lowkey reaction, including canceling the Golden Week holidays and setting up enforceable travel restrictions to prevent the spread of the virus Gartner, Inc. and/or its Affiliates. All Rights Reserved. 20 June 2003

4 4 PC Manufacturing Is Surviving SARS-Induced Market Fears in China Therefore, Chinese PC manufacturers should take measures to limit the impact of SARS, while also ensuring they have processes in place to protect against further outbreaks. Some of these measures include: Limit all business travel The travel ban has extended to entire factories. All internal employee movement from one plant to another is temporarily prohibited. No visitors are allowed to enter the plant. Most communications depend on phone calls or videoconferences to maintain operations. Boost inventory to reassure the supply chain Because SARS could dampen the flow of the core components that fuel the global computer hardware industry, global vendors such as Dell Computer and Hewlett- Packard have increased their orders to Taiwan and asked suppliers to boost inventory. Slow offshore production plans Taiwanese notebook PC manufacturers need to slow their offshore investment plans into China. The travel restriction from the Chinese government has delayed the supply of human resources that are needed to operate these new factories. Lowering April Estimates Table 3 shows the unit production forecast for China from 2000 through Motherboard production in China dropped 12.3 percent in April 2003 compared to March 2003, because of seasonal slowing of production and the weaker-than-expected shipments to China's domestic market after the SARS outbreak. Among the top four motherboard manufacturers in China, Elitegroup Computer Systems and Gigabyte Technology have a larger exposure to the Chinese market, which accounts for more than 30 percent and 15 percent of their total global shipments, respectively. These vendors suffered from a more serious production drop in April than other vendors in the market. Gigabyte's April China sales were half of its March numbers. Table 3 China Motherboard and Notebook PC Subsystems Unit Production Forecast, (Thousands of Units) CAGR (%) Desktop PCs Motherboard 28,263 33,078 41,034 48,953 56,370 65,741 72,075 75, Notebook PCs Subsystems 1,154 2,715 6,429 10,840 15,004 19,766 23,310 26, Source: Gartner Dataquest (June 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 20 June 2003

5 The unit production of notebook PC subsystems from China grew 25.6 because of the shift of production lines from Taiwan to China. The SARS outbreak did not influence the production of notebook PC subsystems as much as motherboard production because the notebook PC subsystems are exported while PC motherboards mostly are used internally. Since notebook PCs are taking market share from desktop PCs, and China is taking market share from Taiwan, Gartner Dataquest forecasts that the production of notebook PC subsystems from China will grow 68.7 percent in We predicted a growth of 72.4 percent in our previous forecast, before the impact of the SARS outbreak was felt. The SARS impact on the production of notebook PC subsystems in China is reflected in the slowing of the shift of production lines from Taiwan. 5 Gartner Dataquest Perspective The fallout from global fears about SARS appears to be affecting PC consumption in China more than the production supply chain. Gartner Dataquest expects PC consumption in China will remain light until consumers feel confident the SARS outbreak has been contained. This will slightly influence the PC production in China, but the impact will be limited. Demand With the Golden Week celebrations being cancelled and anecdotal evidence of Chinese domestic consumer confidence falling, we have seen a slowdown of Chinese domestic sales in April and May Companies with related high exposure to the changing Chinese local consumer demand include Legend Group, Beijing Fonder Electronic, Elitegroup, Gigabyte and Micro Star International (MSI Computer). These vendors have been hurt by the need to maintain higher inventory levels and the slowing sales in China because of global SARS concerns. Inventory Inventory levels in Asia/Pacific have increased because of the need for a safety inventory from PC vendors and a slowdown in demand from the Chinese market. These issues alone, instead of leading to further declines, could help increase shipment levels as manufacturers and distributors seek to move inventory by dropping prices. Thus, the SARS outbreak may prove to be an unforeseen positive for consumers and businesses significant cost savings that, in turn, will drive growth. Key Issue What is the electronic equipment production forecast for Asia/Pacific? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 20 June 2003

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