Could SARS epidemic force electronics production to re-locate?

By Keith Gurnett & Tom Adams

In the past few weeks it has become clear that, in addition to its influence on the health of human populations, the Severe Acute Respiratory Syndrome (SARS) epidemic will have consequences for global electronics manufacturing. SEMI has cancelled this year's Semicon Singapore trade show. Motorola closed an office in Beijing after one of its employees was diagnosed with SARS. Other companies are taking various measures to deal with the virus.

Although SARS has become a collection of localized epidemics, it is far from reaching the level of a pandemic, and the rate of new infections does not appear to be heading in that direction. As threatening as the disease is, to date it has only infected slightly more than one person out of every million worldwide. But the perceived threat of the disease is so great that the word has begun spreading that some of the electronics manufacturing that moved to Asia in the past few years may be returning to their origins in the United States, the United Kingdom, and elsewhere.

This possibility is strengthened by the reluctance of managers and supervisors in the U.S. and in Europe to travel to areas where SARS is widespread. Even those brave enough to travel face the likelihood of some type of lengthy quarantine on their return. As a consequence, airlines are reducing the frequency of flights, and hotels in Hong Kong and elsewhere stand practically empty. A great deal of face-to-face business simply is not being conducted.

A well-placed industry source in Sweden, for example, says he thinks some types of manufacturing may find their way back to Europe — especially relatively low-volume, high-cost items such as base stations, where the need for managers to travel to Asia adds significantly to the cost. But he expects the manufacture of cellular telephones, which fled from the Nordic countries in the past few years, to remain in Asia because of the much higher volumes and the lower unit costs.

Despite the gloomy prospects that SARS presents, some types of electronics manufacturing in Asia may be unaffected if video-conferencing could handle the required supervisory details. Along with the upsurge in inquiries to European firms about manufacturing capacity has come a spurt in inquiries to makers of video-conferencing equipment.

Whether video-conferencing could replace actual visits probably depends on the type of communications and control necessary: discussions of overall plans and issues might be discussed successfully, but the fine details of quality assurance or process control are likely to require actual travel. Some managers from Europe and the U.S. are still traveling, but with an innovative twist: they fly to nearby countries such as Thailand (where only eight SARS cases have been reported, and none recently) and invite their partners from Taiwan or China to join them there.

Several industry spokesmen have pointed out that the transfer of manufacturing from Asia to other locations such as Europe or Mexico is almost certain to be limited to new business, and that products already being assembled in Asia are likely to remain there. The amount of Asian travel necessary to sustain deliveries from a current contractor is minimal.

Programs to initiate the manufacture of new products, on the other hand, require on-site visits by key personnel to inspect manufacturing facilities and to negotiate contracts. Starting up a new venture entails a great many critical details that are nearly impossible to iron out by telephone or by video-conferencing.

One company that is already seeing an increase in orders from Asia is board manufacturer GSPK Electronics Ltd. in Knaresborough, England. The increase has been small but steady, and is probably more due to foresightedness on the part of buyers rather than actual disruption of their supply chain, says David Hunter, sales director of GSPK. Company officials also buy some of their supplies from Asia, and have experienced no disruption in obtaining those supplies.

Hunter says he anticipates that SARS-driven orders coming to the United Kingdom will be a temporary phenomenon, and will decline when it is clear that the epidemic is under control everywhere and that risk of infection is minimal. But in some cases, OEMs may find that the speed and flexibility that European plants have fine-tuned in the past few years may produce orders over the longer term, he says.

Les Sainsbury, Senior Vice President at United Kingdom board manufacturer Circatex, points out that the movement of business from Asia back to Europe is not entirely a new phenomenon. "If you go back three or four years, the lead times at assembly plants here were sometimes 36 to 52 weeks. So manufacturers had to go to Asia.

"But with the downturn in the market a few years ago, things began to change. Enough time has passed by now so that assemblers in the United Kingdom and in Europe — as well as the U.S. — have cut their costs and become more competitive." So to some extent, some types of assembly had begun to move out of Asia even before the spread of SARS.

Large manufacturers, Sainsbury observes, must have a degree of security built into their supply chains; they must have second- and third-level sources for key components and services. And many large manufacturers have assembly plants outside of Asia in Eastern Europe or in Mexico. But the SARS epidemic has made the security of the supply chain even more crucial, especially if a manufacturer has selected first-, second-, and third-level sources all of which are in Asia. One result: Circatex has begun to receive inquiries — but no orders yet — from manufacturers about the place it might take in their supply chain.

No one knows today what the long-term influence of SARS on electronics manufacturing will be. If the epidemics diminish to the level where the number of cases causes little concern, then international travel and business activities will likely resume, and the SARS episode, in business terms, will amount to a rather expensive reminder concerning the benefits of geographic diversity in a supply chain. If SARS spreads dramatically, or simply maintains its current level of infection in China and Taiwan, the consequences are likely to be both more severe and of longer duration.

Postscript: At press time, the World Health Organization was reporting a cumulative total of 7,761 SARS cases worldwide, in 28 countries, with one or two cases in countries such as Finland and Brazil. The vast majority of the cases were in Asia, and particularly in China, Hong Kong, and Taiwan. A total of 623 cases have ended in death. Although the disease appeared to be winding down in some areas, mainland China on May 18 reported 28 new cases, and Taiwan reported 36 new cases, the largest one-day in Taiwan to date. The World Health Organization was recommending the postponement of all but essential travel to Hong Kong, Taipei, and to the Beijing, Guangdong, Inner Mongolia, Shanxi, and Tianjin areas of China.


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