Industry Voices — Baker: Forecasting smartphone supply and demand in the plague year

Industry Voices Simon Baker

For the smartphone business in China, the coronavirus crisis has been quite easy to forecast, at least from a supply-side perspective. Our IDC colleagues there have not had much need to change their early analysis of a probable short period of disruption to phone supply from the initial Wuhan lockdown. If anything, Chinese phone supplies have come back onstream more quickly than the first estimates.

After the extensions to the Chinese New Year at many Chinese factories, production resumed, and the initial first quarter results for phone shipments are currently looking pretty strong in many countries with few reports of serious delays in deliveries.

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Demand is another matter. We forecasters, whatever the industry, have all had since then to become experts on the spread of coronavirus, and on GDP forecasting too, as figures have failed to keep pace with events, and we are always dealing with some time-lag in the usual forms of meaningful economic data. The last few weeks have been one round of increases followed by another in estimates of the economic severity of the slump the crisis is bringing about. 

In the last couple of weeks some things have been getting clearer. The overall timeline of how long lockdowns will remain is emerging as the daily tally of new infections has slowed in the developed countries, which were hit earliest after the virus moved out of China.

An economists’ consensus has been forming on a hit to annual GDP of around 3% or so per month of lockdown in many developed countries. The global total of cases is growing at a fairly steady rate, with the second and third millions racked up in only 12 to 13 days each.

But there is still much that is unclear. The impact of the virus has largely been in more developed countries to date; if it spreads fast later in emerging markets and remains there at high levels of infection, with health services overwhelmed, that could have implications on the opening up of the countries that seemed to have rounded the corner.

There could yet be renewed disruption to phone supply, from new waves of infection in China or South Korea, or in Vietnam, largely spared so far. Big impacts in emerging markets could hit the sourcing of some of the around 30 elements, including copper, gold and silver, which go into smartphones, or cobalt, which comes mainly from DR Congo.

How much do previous downturns teach us? The phone industry is not very old, and the hardest hit it has been to date was during the 2008-2009 crisis, which happened when the smartphone boom was gaining momentum. Here, differences notwithstanding, are some indicators.

How big an impact for each percent of GDP lost? After Lehman Brothers went bankrupt in September 2008, the U.S. went into a recession that lasted four quarters and amounted to around 4% of GDP. The number of phones shipped into the U.S. fell by 17.4% year-on-year that quarter, but the market recovered quickly in 2009. 

The impact may take a while to work through. While U.S. phone sales recovered quickly in the first quarter of 2009, those in Europe were in the doldrums for most of the following year. In Western Europe, which saw a drop in GDP of a similar amount to the U.S., the pause in the phone market was steeper, at near a quarter of the value of the market in the last quarter of 2008.

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The economic impact has other effects. A drop in global demand hits commodities. The oil price has dropped severely as demand drops way below output. Some countries are affected immediately, for instance Russia and Kazakhstan, whose currencies are normally allowed to respond to market forces.

The impact of lower oil prices on the other hand tends to take quite a while to be felt in some other producers, including Saudi Arabia and the Gulf countries, as their currencies are pegged to the dollar, while others tend to adjust by steps, such as Nigeria.

A new frugality may emerge. A crisis also tends to affect emerging market currencies in general, as money goes to ‘safe havens.’ In many phone markets, except the richest, a drop in the currency will soon be reflected in consumers opting for cheaper models – typically they stick to the same sort of price range in local currency as they would have gone for before.

Sales of top-end Android models have fallen in many markets in the first quarter, and while Apple did well in general, those sales include older models as well as the latest. 

A year is lost in the marketing of 5G phones. Although 5G rollouts are continuing, their pace is slowing, and allocation of spectrum has in some instances been delayed. In many places it will be a lost year or at least half-year for marketing 5G devices, the main exceptions being places where 5G is already established, that is South Korea and China, where momentum is picking up again as the economy recovers. 

But at least 5G does not spread coronavirus, an item of fake news, which got a lot of distribution. 

This time round of course a lot is different. A lot of retail is currently shut down. The crisis will hit many economies harder than did the 2008 financial crash, and the pattern of unemployment will be very different from the 2008 crisis.

So there could be a long tail. Governments are issuing massive sums of money to stave off the worst economic impacts of lockdowns. This money will need to be paid back, and new rounds of austerity may be forced on public finances. The recovery will be hesitant and patchy. Unemployment levels will be high, and companies will be indebted too. It does not augur well for a rapid rebound. 

The phone business has never had a prolonged downturn – the 2008/9 downturn in sales was foreshortened by the boost of the 4G cycle. Phones are now an industry facing middle age, and this will be the industry’s path across the desert. 

Simon Baker is program director for mobile phones and consumer devices at IDC EMEA and a coordinator of IDC global forecasting for the 5G smartphone market. He is a long-time analyst in the mobile phone arena. Please contact him at [email protected]

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceWireless staff. They do not represent the opinions of FierceWireless.