Friday 20 March 2020 ★ FINANCIAL TIMES 7

F T B I G R E A D. ASIAN MANUFACTURING

Across the world, more and more people are stuck at home, working, gaming or watching TV. But much of

this technology is built with South Korean components now exposed to major supply chain disruptions.

ByJuneYoon

Each day of lost production equates to

delays passed along the global supply

chain. Due to the high cost and time

involved in set-up, chip facilities cannot

be relocated like smartphone assembly

plants. Each semiconductor fabrication

line costs as much as $3bn to build.

There are over 20 lines running in

Gyeonggi province, with hundreds of

suppliers located nearby.

These small and medium-sized com-

panies pose yet another risk. They are

especially vulnerable to a disruption in

orders. In a prolonged shutdown, many

suppliers would run out of cash within

months. Their own plants are also at

risk from the impact of coronavirus.

Structural changes that separate pro-

duction, testing and packaging mean

the chips go through many more hands,

adding to the risk of infection.

For the smartphone makers there is

little respite. Demand for OLED smart-

phone screens grew sixfold in the

second half of last year as the market

shifted from traditional LCD screens to

new smartphones. As for TVs, the years

that Olympic Games are held have tradi-

tionally seen bumper sales. Notwith-

standing doubts over whether the

Tokyo games will go ahead, a shortage is

still likely. Any capacity boost from a

new plant in the southern Chinese city

of Guangzhou — which has been delayed

by more than half a year by technical

problems — will not come in time.

Diversifying production geographi-

cally offers little relief. More than 120

countries have placed travel restrictions

on passengers entering from South

Korea.

Following the temporary closure of its

Gumi plant last month, Samsung moved

half its smartphone production, or

150m phones, to Vietnam. But more

than 700 Samsung engineers will be

needed to re-programme plant specifi-

cations to produce its latest models in

the south-east Asian country.

Even then they need parts made in

South Korea such as the OLED panels to

attach them to smartphone circuits, so

quarantines are expected to cause pro-

duction delays.

Adding to the logistical nightmare,

airlines have suspended more than 80

per cent of their flights in and out of

South Korea, having an impact on deliv-

eries to assembly plants and finished

products to customers. Some are being

shipped by sea to avoid additional con-

trols on flights. Raw material imports to

Korea are also subject to delays, further

reducing output and meaning higher

prices and longer delivery times.

As the number of coronavirus cases

worldwide continues to grow, labour

and raw material shortages could

worsen. Supply constraints resulting

from the past two months of disruption

in Asia are only now trickling through to

the rest of the supply chain.

For consumers around the world, that

may mean month-long delays in fixing a

cracked smartphone screen, stalled

shipments of new models and TVs and

later launches of new 5G versions. Price

rises, as manufacturers across the

supply chain deal with shortages,

appear inevitable.

For big tech companies, whether

through a shortage of parts, a lack of

finished products to meet demand or a

rise in component prices, margins will

be squeezed. Smaller companies, lack-

ing volume, stand to lose out in the

scramble for scarce capacity. The bigger

challenge for both will be dealing with

an impending demand shock at the

same time.

As production and supply start to

normalise, a pullback in consumption

and closed businesses — the result of the

global downturn the virus outbreak is

threatening — will weigh on demand.

The US has warned that the impact of

the outbreak might last beyond August.

That could translate into prolonged

travel restrictions, lengthy quarantines

and a plunge in consumption and

demand for consumer tech. Those

effects could last well into next year.

The depth and complexity of the

global tech supply chain mean the full

impact of disruptions will be far deeper

than expected and highly unpredicta-

ble. For now, the best consumers can do

is to be careful not to drop their

smartphones.

A

20-minute drive from the

South Korean city of Daegu

sits the Gumi Industrial

Complex. Home to more

than 2,600 companies and

production plants, it looks like any

manufacturing hub in a small quiet

town. But over the past two decades its

global importance has grown almost

unnoticed as Apple and its rivals in Asia

have concentrated production of vital

components — for everything from

smartphones to TVs, and the drivers of

cloud computing — in the area.

Coronavirus is now exposing how

risky that strategy was and how

vulnerable the smartphone supply

chain is: Daegu is at the centre of the

South Korean outbreak of the pan-

demic, with 85 per cent of the country’s

8,565 cases.

Samsung Electronics and L G Elec-

tronics, central to South Korea’s postwar

economic miracle, are the world’s larg-

est suppliers of memory chips, organic

light emitting diode (OLED) displays

and camera modules. Production of

these essential components is concen-

trated in a handful of locations around

Gumi and the Seoul suburbs.

For consumers, tightening supply of

iPhone and iPads is already a problem,

as the outbreak disrupted production in

China. Retailers and mobile operators in

the US and Europe are running low for

some models. iPads are selling out as

schools turn to e-learning. Apple has

closed all its stores outside China and

cut quarterly revenue forecasts. Back-

logs in delivery of Samsung and Huawei

smartphones have lengthened. Yet

some in the industry are already pre-

dicting a demand shock as the expected

global downturn hits sales.

China, where the bulk of the world’s

consumer electronics are assembled,

has experienced a decline in infections

since the first outbreak in the city of

Wuhan in December and factories are

slowly returning to work. Yet, even after

those operations get back to normal,

tech shortages may worsen. China is

highly reliant for critical parts on South

Korea and the outbreak there is more

recent, which means disruption could

drag on for longer.

“If supply chain outages persist, this

could disrupt Samsung and LG Elec-

tronics’ overseas plants, including the

ones in Vietnam,” says S&P Global. A

shortage of raw materials, tighter trans-

port restrictions and production line

closures could all add further delays for

manufacturers.

Vulnerable phones

Smartphones are especially vulnerable.

Virtually all the screens in high-end ver-

sions are produced by Samsung and LG.

Apple relies on the two companies to

supply all its OLED smartphone panels

used in the iPhone X and the iPhone 11

Pro models.

The two electronics groups use the

same displays in their own smart-

phones. Huawei’s high-end models use

Samsung panels. Google Pixel phones,

iPhone camera modules and Apple

Watch screens are made by LG.

Between them Samsung and LG pro-

duced over 94 per cent of smartphone

OLED displays in the last quarter to the

end of December, according to IHS

Markit data.

The companies’ presence in the living

room is no less dominant, Sony, Bang &

Olufsen, Panasonic and P hilips’ OLED

TVs incorporate LG panels. It is the only

significant producer of these displays

globally, producing almost 3m a year.

And in the office, Dell and A mazon, the

world’s largest cloud services busi-

nesses, rely on Samsung chips for their

computers and servers.

Almost three-quarters of the world’s

Dram memory chips — without which

consumers would not have smart-

phones, computers or internet servers

— are made by Samsung and local rival

SK Hynix.

The impact of a shortage that ripples

downstream would be extensive,

including supply constraints and price

increases. Plants across the country had

been running at full capacity at the start

of this year.

The combination of just-in-time sup-

ply chains and a complex chipmaking

process that takes up to six months

makes any swift ramp-up difficult. Ana-

lysts expect demand for the companies’

server chips, OLED screens and TV pan-

els and wireless earphones to exceed

supply by an average of 30 per cent in

March.

“Whether it is due to the supply or

demand shocks, manufacturers will see

tiny chips, are made daily in this area,

which saw a sharp rise in infections last

week. Thousands of employees at the

companies have been quarantined.

Chips are at the centre of the global tech

supply chain and 80 per cent of Korean

memory chip exports were shipped to

assembly plants in China last year. Tai-

wan, Japan and Vietnam also rely on

Korea. Any break in production would

stall work at thousands of plants across

the region.

Choking supply

Complicating the situation is a growth in

the use of technology dependent on

Korean components, even as it threat-

ens to choke off supply. Across the

world, coronavirus has meant more and

more people are stuck at home, work-

ing, gaming, shopping or watching TV

online. Data centres are struggling to

cope with surging traffic. The price of

server chips rose 10 per cent in Febru-

ary, the biggest increase in three years.

That leap in price reflects the market

expectation of supply disruptions as

cases of coronavirus increase in South

Korea. Samsung and SK Hynix have

started redeploying their mobile phone

chip production capacity to churn out

more server microprocessors. Orders

have exceeded supply by more than a

fifth since January. The timing could not

be worse. A costly pile-up of inventory

last year, due in part to oversupply amid

a cyclical downturn in demand and dis-

ruptions caused by the US-China trade

war, pushed chip prices down, but by

December Korea’s semiconductors

inventory-to-shipment ratio was at its

lowest in more than a decade.

The situation left little room for any

disruptions this year. Chip fabrication

plants require 24-hour operations. Any

disruption can cause errors for the day’s

batch of silicon sheet wafers. After a

shutdown caused by coronavirus it

would take days for production to get

back up to speed. A stoppage equivalent

to a week’s output could reduce operat-

ing profits by more than $400m within

three divisions of Samsung that produce

the chips or depend on them, S&P Glo-

bal data suggest.

Memory chip prices will rise

after S Korea's supply chain

problems ...

Annual  change in average selling price











Server

DRAM

Solid state

memory

Overall

DRAM

Flash

memory

Q  Forecast

Source: Trendforce

... while smartphone and

laptop production will be

down on 2019

Annual  change

-

-

-

-

-

-



Notebook

computers

Smartphones

Q  forecast

the effects of the outbreak well through

the rest of this year,” says Hyun Bae at

Samsung Securities.

Digital dependence

The world’s digital economy has

become dependent on the Gumi Indus-

trial Complex, a place few in the west

h a v e h e a r d o f b u t w h i c h i s

critical to 21st century supply chains.

The only time it made international

headlines was in 1995, when Samsung

chairman Lee Kun-Hee ordered

1 50,000 phones made in Gumi to be

burnt and bulldozed when some were

found to be faulty.

It is here that Samsung makes its pre-

mium line of phones, including the Gal-

axy S20 and Note 10; its smartphone

business accounts for 47 per cent, or

$86.3bn, of total revenues. LG’s display

factories are nearby. A concentrated

production base offers the prospect of

better quality control. The Samsung and

LG factories have benefited from being

close to their suppliers. Most employees

live in corporate housing in the complex

or nearby.

Unfortunately, workers also flock to

Gumi from nearby Daegu — the south-

ern city of 2.4m people which was the

site of the country’s worst coronavirus

outbreak as a result of cases related to a

religious sect. Samsung’s smartphone

plant shut down twice in February, after

four cases of infection. LG subsidiaries

LG Display and LG Innotek also tempo-

rarily closed plants making displays and

camera modules. Samsung has been

forced to temporarily move some pro-

duction to Vietnam.

Display panel plants are designed to

run 24 hours a day, seven days a week. If

external pollutants enter the produc-

tion cleanroom, continuous operations

are halted for up to three days. Getting

back up to full speed, including

re-establishing all production settings,

can take up to a week. Samsung typi-

cally makes more than 400,000 sheets

of OLED display panels a month. Each

sheet is cut to fit about 200 smart-

phones, enough for as many as 110m

handsets. Cutting supply by just one

week translates to a delay in more than

20m devices. That delay is passed down

a supply chain which, in obedience to

the principles of lean manufacturing,

carries little surplus stock.

Other locations such as Gyeonggi

province — the area around the capital,

Seoul — are not exempt. Chip produc-

tion for Samsung and SK Hynix is con-

centrated in this area. Some 5.2m

wafers, which are cut into hundreds of

Few in the west have

heard of Gumi Industrial

Complex, a place critical

to the 21st century digital

supply chain

‘Whether it is due to the

supply or demand shock,

manufacturers will see

the effects of the outbreak

for the rest of the year’

Coronavirus

and your

smartphone

Plants at the Gumi Industrial Complex were temporarily closed this month

after reports of cases of coronavirus among workers— Seung-il Ryu/NurPhoto via Getty Images

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Gumi

Daegu

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S KOREA

N KOREA

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In depth

MARCH 20 2020 Section:Features Time: 19/3/2020 - 18: 25 User: alistair.hayes Page Name: BIG PAGE, Part,Page,Edition: USA, 7, 1