China’s coronavirus is dealing blow after blow to South Korean multinational giant LG Electronics Inc, an Apple Inc supplier.
The initial outbreak forced LG to shutter its China factory for almost three weeks to help contain the spread of the virus. This caused a supply chain issue since supplies from its China plant did not trickle down to its Vietnam plant.
When the virus spread to South Korea, travel restrictions prevented its workers from keeping an expansion at its Hai Phong plant on track.
Now the company is looking at potential disruptions in its factory in the industrial hub of Gumi, less than an hour’s drive from Daegu, the epicenter of South Korea’s coronavirus cases.
Manufacturing in China has become an enormous burden and despite the availability of cheap labor, its no more cost competitive. Tech firms, including ones which make smartphone screen parts and camera modules, continue to be hit by worker quarantines and the onset of potentially more problems, which are likely to ripple through to end customers, including Apple Inc.
“The virus has a domino effect on suppliers,” said a senior executive from LG Electronics, “I just look up to the sky and sigh.”
LG’s woes is just an indicator as to how China’s coronavirus, has ripped apart the Asian electronics supply chain which is still smarting from the U.S.-China trade war. Over reliance on China’s ecosystem is now proving to be more costly than anticipated.
The strategy by South Korean firms of investing heavily in Vietnam has also not proven to be a successful hedge against risks in China.
Since years, South Korean companies led by national champions such as Samsung and LG, have invested heavily in Vietnam since the costs of manufacturing in China have risen steadily along with very real risks of theft of intellectual property.
Vietnam’s proximity to China has played a key role for it being chosen to offset the risk posed by China.
South Korean firms are the biggest foreign investors in Vietnam. There are more than 4,000 south korean firms operating in the country and interdependence runs deep. Samsung alone accounts for one fourth of Vietnam’s exports with Vietnam being South Korea’s top three export market as well as the fifth-biggest source of Korean imports.
Business is also facilitated by a large number of travel. In 2018, there were nearly 3.5 million arrivals from South Korea to Vietnam, a jump of 44% from a year earlier. South Korean and Vietnamese airlines flew routes between the two countries 538 times a week in 2019.
When Vietnam began curtailing travel links between the two countries, to contain the outbreak, business plans started go go south. Most flights between the two countries are currently suspended and starting from Sunday, South Koreans entering Vietnam will have to undergo 14 days quarantine.
“We are having a tough time, because we can’t work there,” said the chief executive of a different supplier to LG, which also declined to be named.
A South Korean company which makes automation equipment for car navigation systems used by BMW, Honda Motor Co and Hyundai Motor Co, which is based out of Gumi and prefers to remain anonymous, is worried that delays in travel to Vietnam will impact the installation of gear.
“Should the crisis last two and three months, that will cause serious problems,” said the company’s CEO.
The personal presence of engineers to guide technology improvement and manage quality control can be crucial.
“Managers can do video conferences, but production engineers have to go there for problem solving,” said Park Ho-hwan, a business school professor at Ajou University who has studied Samsung’s operations in Korea and Vietnam.
The coronavirus outbreak in Vietnam has been limited due to Vietnamese authorities quickly moving to close its borders with China.
Samsung was quick to address logistical problems, and used air freights to send urgent cargo rather than use the longer more rsiky land routes, said several sources familiar with the operations. While it was able to contain these problems, the explosion of the coronavirus in its home country, which now has more than 6,000 cases, poses a potentially bigger challenge since a large number of workers are quarantined which has placed its factories on hiatus.
Samsung has advised its workers to refrain from weekend outings with family and friends, and has asked them to wear masks and maintain a distance of more than 2 meters when talking to each other.
“We are making our best effort to minimize the impact on our operations,” said Samsung in a statement.
Apple Inc, which buys tech components from both LG and Samsung has taken notice.
“I think the focus in the last few days has (turned) off of China on to Korea and Italy, so I think it’s very important to see what happens there and whether something new comes out of that,” said Apple’s CEO Tim Cook in an interview with Fox News last week.
“Our supply chain is relatively more important in China, but we have great businesses in Korea and we have suppliers in Korea as well and suppliers in Italy and great business there as well. We need to see as that unfolds.”