Now that Apple has opened the floodgates and made it entirely clear that China’s economic collapse will slash revenue guidance on the year and lead to production woes through April, an onslaught of earnings downgrades from other top technology companies with significant operations in China could be imminent.

Evidence grows by the day of supply chains grinding to a halt as the second-largest economy in the world falters (as described here last week).

We’ve described how China’s economic output remains frozen, and even if supply chains were able to restart, companies don’t have enough capital to cover wages, or have delayed or stopped paying workers, suggesting that the Covid-19 outbreak has left businesses on the brink of disaster.

Worse, workers can’t freely move around the country, and many are subjected to travel restrictions and quarantines, which has forced a massive labor shortage.

This is creating a perfect storm that could lead to an extended period of depressed factory output, triggering future shortages of products destined for Eastern and Western markets, and even more ripples across global supply chains.

As we’ve routinely noted in the last several weeks, the most exposed sector to the continued crunch across Chinese factories is technology.

Putting what we’ve already summarized together, there’s no way that full production can be seen by the end of this month or in early March, which means a massive reduction in shipments and product shortages are imminent.

This will ultimately force many tech companies with exposure to China to revise their full-year earnings on the year.

TrendForce published a report earlier this week that serves as a preview of what’s to come for technology shipments.

The research firm said shipments of smartwatches, smartphones, computers, monitors, TVs, video game consoles, smart speakers, and automobiles, will take a big hit in the first quarter.

Here’s what the firm said about shipments for smartwatches, smart bracelets, and TWS Bluetooth earphones:

“In spite of the projected mid-February work resumption date, work stoppages, labor shortages, and material shortages can bring about a decline in 1Q20 production volume, with deferred releases of new products originally scheduled for 1H20 release.”

“In terms of the Chinese market, Chinese-branded wearables are mainly aimed at domestic sales and therefore expected to suffer more losses in 1H20 compared to international brands. In particular, competitive-priced generic brands and new brands may be even more affected by the outbreak because component suppliers and production capacities are prioritized to fulfill orders from established brands first, and consumers will have reduced willingness to buy in the short term.”

TrendForce said the virus outbreak is having a “high impact on the smartphone industry because the smartphone supply chain is highly labor-intensive. 1Q20 smartphone production is projected to decline by 12% YoY, making it the quarter with the lowest output within the past five years.”

“Parts in the upstream supply chain, including passive components and camera modules, are also showing shortages, which can potentially continue to negatively affect smartphone production in 2Q20, if the outbreak is not contained by the end of February. Should the outbreak intensify, TrendForce considers market need to be the most important consideration in the long-term analysis of the smartphone industry. Because of the interconnectedness of the global economy, the progression of China’s outbreak damages not only China’s GDP, but also the overall global economy, leading to a reduction of consumer purchasing power and subsequently presenting a difficult challenge for the overall smartphone industry. 2020 smartphone production is projected to reach 1.381 billion units, a 1.3% decline YoY and the lowest output since 2016. Still, due to the outbreak’s mercurial nature, it is entirely possible for 2020 smartphone production to fall below this forecast.”

As for notebooks, LCD monitors, and LCD TVs, these supply chains have been “undoubtedly hit the most by the coronavirus outbreak.”

“These companies lost precious working days after work resumption was postponed. After their production is resumed, on a whole, operators’ work resumption rate is low. Besides, all types of materials and components are in shortage. Hence, productivity plummets. For TVs and monitors, their manufacturing processes and demand for materials are similar. Therefore, according to TrendForce, in 1Q20, the TV set shipment is predicted to fall from previous prediction (48.8 million units) to 46.6 million units because of the outbreak. The monitor set shipment is projected to decrease from previous prediction (29 million units) to 27.5 million units. To assemble a NB set requires complicated key components. At the current stage, NB’s batteries, hinge, and PCB already experienced shortage or out of stock. This factor might cause some brands’ shipment quantity to remarkably drop from previous prediction (35 million units) to 30.7 million units in 1Q20.”

“The pandemic not only negatively affected the production’s supply chain, but it also hurts China’s consumer confidence and reduces end-market demand in the short and long run, respectively. Considering the pestilence’s potentially negative impact to China market’s demand, TrendForce moved down the top 3 application categories’ shipment scales for the year 2020. TVs’ shipment scale was reduced from previous prediction (219.6 million units) to 218.0 million units, down by 0.7 percentage point. Monitors’ shipment was reduced from previous prediction (125.8 million units) to 124.5 million units, down by 1.0 percentage point. Notebooks’ shipment was moved down from previous prediction (162.4 million units) to 160.2 million units, down by 1.4 percentage points.”

We expect a waterfall of negative earnings preannouncements to start for many technology companies with modest exposure to Chinese output. Apple’s downgrade on Monday was only the beginning…

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