Component supply is the latest challenge in March, following a production bottleneck in February.

Key Findings

  • ODMs expect the supply of materials to improve after mid-March or early April 2020. However, as logistics become an issue because of the transportation restriction across the region, production costs have increased significantly.
  • The inventory levels of brands' hubs are likely increasing as a result of the decelerated set production. Thus far, notebook brands have yet to revise the shipment forecast for ODMs and panel suppliers. To catch up with the production, the set production in April and May 2020 could be stronger than it typically would be during that period.
  • The build-to-order (BTO) business model could cause the sales force of commercial laptops to be conservative in approaching new business opportunities because forward delivery cannot be ensured during the COVID-19 outbreak. Commercial laptop shipment in the first half of 2020 (H1 2020) is anticipated to be slow.
  • From a yearly perspective, the COVID-19 outbreak is projected to impact the market by -7%. As far as panel purchasing is concerned, Omdia predicts that it will negatively impact short-term demand. But the effect might not be as bad in the long term because the inventories in the production pipelines and retail channels are both decreasing.

COVID-19 could decline notebook production by 30% in Q1 2020 while the 2020 forecast has been revised down to -6%

Labor and logistics issues caused the production bottleneck in February, but component sufficiency is the new challenge in March

The ODM production bottleneck in February 2020 was due to the reduced labor supply, which was estimated to reach only 50–60% in the last week of February 2020. Workforce availability gradually recovered in March 2020 and employees working overtime are anticipated to increase production. The labor supply constraint was estimated to be more severe on the coast of China than in West China, but thanks to big data, the local governments in cities in Suzhou and Nanjing were able to qualify the employees who stayed in the safety zones and approve their return to work.

Currently the supply of key components, such as CPU, DRAM, and SSD, are sufficient as most of them are not made in China and there is still ample safety stock. Instead, the cables, mechanical parts, and packaging, which are materials that have short lead times, now encounter shortage issues. ODMs expect the supply of materials to improve after mid-March or early April 2020. However, as logistics becomes an issue because of the transportation restriction across the region, production costs have increased significantly.

To date, notebook brands have yet to revise the shipment forecast for ODMs and panel suppliers even though brands are aware that the orders cannot be completely delivered. The actual set production gap in February 2020 is estimated to be 30% and it varies by brand. The slowed production could continue into March 2020 because of the accumulation of the shipment gap and because March itself is a peak season. To catch up with the production, the set production in April and May 2020 could be stronger than it typically would be during that period and lead to a healthier panel demand.

Slower set production could accelerate panel accumulation in hubs

The inventory levels of brands' hubs are likely increasing because of the decelerated set production, which means that the panel consumption is lower than usual. It is quite odd that panel makers keep hinting at a possible LCM shortage when in fact, the brands’ hubs are full.

Lenovo is very active currently in pre-stocking key components, which not only include panels but CPUs too. Despite the COVID-19 outbreak, Lenovo has set a very aggressive shipment target for 2020 in order to compete with HP for market share leadership. Besides, it is believed that after this COVID-19 phenomenon, the Chinese government may subsidize enterprises and increase expenditures to maintain GDP, which means that Lenovo may stand to benefit from this.

HP's panel purchases and set production both followed the company’s original plans. However, it is reported that HP's set inventory is high, and the current challenge is to consume inventory rather than prebuild stocks. Therefore, buying too many panels at this moment may be unnecessary. Nowadays, HP is promoting aggressively in its retail channels. For example, in the US market, some laptops with the Ice Lake i7 processor are priced below $500, which could reflect the concerns of increased set inventory. However, brands do not regard increased inventory as a risk, rather it could allow vendors to gain market share while their competitors deal with supply issues.

As Dell’s in-plane switching (IPS) panel proportion is higher than the market average, the tight supply of twisted nematic (TN) panels is not an issue for Dell. However, Dell’s premium models are highly dependent on the panel supply from Sharp. Although Sharp's fab is in Japan, Sharp also claimed to have supply issues as the module assembly is completed in China. Therefore, Dell cannot exclude itself from the impact of the COVID-19 outbreak.

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Production suspension could freeze commercial laptop business more than consumer demand

Commitment to delivery time is a challenge for B2B

Industry players have different perspectives regarding commercial laptop demand. Some expect the Chinese government to maintain the GDP and provide subsidies; IT spending could be one of the sectors, especially since the Chinese government is encouraging enterprises to replace PCs made with local components. However, in the global market, the tendering business is a big part of commercial notebooks and the vendors usually adopt the BTO business model, that is, production starts only after receiving confirmed orders. This BTO model could cause the sales force of commercial laptops to be conservative in approaching new business opportunities. The confirmed orders are no doubt the prioritized production currently. But since forward delivery cannot be ensured during the COVID-19 outbreak in March, April, or even May 2020, the shipment of commercial laptops in H1 2020 is anticipated to be slow. If the global economy is affected further, the budget for PC replacement will likely be used up.

E-commerce in China ignite vendors’ hope during city lockdown

For the consumer segment, the demand for durable goods usually recovers after the economy returns to normal. This means that the demand is merely postponed and has not in fact disappeared. Retailers are expected to take this opportunity to launch clearance promotions, which will motivate consumers to increase their spending after experiencing a long period of difficult times.

The success of e-commerce in China eliminated concerns of consumer market recession. Thus, Omdia expects more promotions to take place this summer. If it goes well, the introduction of the new Tiger Lake platform will become optimistic. The other recent discussions are about the growing PC demand for online learning or remote work. If this new lifestyle becomes a trend, it could inspire people to buy or replace PCs. The only pessimistic scenario is that many people will lose their jobs if the economy enters a recession.

In the first quarter of 2020 (Q1 2020), set production is expected to decline by 28% year-over-year (YoY), and could continue to fall in the second quarter of 2020 (Q2 2020), but with some improvement. Production could recover and come back even stronger in the second half of 2020 (H2 2020). From a yearly perspective, the COVID-19 outbreak is projected to impact the market by -7%. As far as panel purchasing is concerned, Omdia predicts that it will negatively impact short-term demand, but the effect may not be as bad in the long term because inventories in the production pipelines and retail channels are both decreasing.

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