Insight: The coronavirus domino effect: S.Korean tech firms reel as Vietnam links curbed

LG Innotek Co

05/03/2020 22:00

* S. Korean tech giants and suppliers heavily invested in
Vietnam
    * Firms hit by China sourcing woes, Vietnam travel
restrictions
    * Explosion of virus cases at home now threatens factory
output 

    By Hyunjoo Jin and Heekyong Yang
    SEOUL, March 6 (Reuters) - For one South Korean
multinational company that makes smartphone components used by
Apple Inc  AAPL.O  and LG Electronics Inc  066570.KS , the
coronavirus epidemic is dealing blow after blow.
    First, the initial outbreak forced its China factory to shut
down for almost three weeks and caused supplies from China for
its Vietnam plant to begin to dry up. Then when the virus spread
to South Korea, travel restrictions prevented its workers from
keeping an expansion at the plant, located in the port city of
Hai Phong, on track.
    Now the company, which declined to be named to protect
business relationships, is looking at disruptions in its factory
in the industrial hub of Gumi, less than an hour's drive from
Daegu, the epicentre of South Korea's coronavirus cases.
    In addition to continued difficulties with sourcing from
China, the supplier of smartphone screen parts and camera
modules to LG firms has been hit by some worker quarantines and
is fretting about the prospect of even more - problems likely to
ripple through to end customers including Apple.
    "The virus has a domino effect on suppliers," a senior
executive at the firm told Reuters. "I just look up to the sky
and sigh." 
    Its woes illustrate how the coronavirus crisis has shaken an
Asian electronics supply chain still smarting from the
U.S.-China trade war and the integral role played by China's
ecosystem of factories. The problems also expose how Korea Inc's
strategy of investing heavily in Vietnam has not proven to be a
fully successful hedge against risks in China.
    Led by national champions LG and Samsung, Korean companies
have been building their presence in Vietnam for years as the
costs of manufacturing in China rose along with political risks
and concerns about intellectual property theft.
    While China remains the best source for many parts and
materials and is the base for major Chinese tech companies and
big customers like Apple, Vietnam's proximity made it an obvious
choice for offsetting risk.
    Korean firms are the biggest foreign investors in Vietnam,
with over 4,000 operating in the country. Interdependence runs
deep: Samsung alone accounts for one-fourth of Vietnam's exports
and the Southeast Asian nation is South Korea's No. 3 export
market as well as the fifth-biggest source of Korean imports. 
    
    Business is facilitated by a huge amount of travel. There
were some 3.5 million arrivals from Korea in Vietnam in 2018, a
44% jump from a year earlier. South Korean and Vietnamese
airlines flew routes between the two countries 538 times a week
last year.
    So when Vietnam began curtailing travel links, business
plans went awry. Most flights between the two nations are
currently suspended and starting 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. 
    The company, which makes automation equipment for car
navigation systems used by Honda Motor Co  7267.T , BMW
 BMWG.DE  and Hyundai Motor Co  005380.KS  and is also based in
Gumi, is worried it will have to delay the installation of gear
because it can't send engineers to Vietnam.
    "Should the crisis last two and three months, that will
cause serious problems," the CEO said.
    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.
   
    APPLE TAKES NOTICE
    Two weeks ago, the biggest virus-related concern for Korean
tech firms was keeping their Vietnam factories running. While
Vietnam has reported very few COVID-19 cases, it moved quickly
to close its border with China, blocking key supplies.
    Samsung, for one, quickly scrambled to address logistics
problems, including using air freight for urgent cargo instead
of land routes, several people familiar with the operations told
Reuters.
    Those problems eased, but the virus explosion in South
Korea, which now has more than 6,000 cases, poses an even bigger
threat if swathes of workers are quarantined and factories are
put on hiatus. 
    In recent weeks, Samsung Electronics Co Ltd  005930.KS 
temporarily suspended production at its smartphone factory in
Gumi, while LG Display and LG Innotek also halted work for a few
days.
    Such is Samsung's concern, it has advised workers to refrain
from weekend outings with family and friends, asked them to wear
masks and maintain a distance of more than 2 metres when talking
to each other.
    "We are making our best effort to minimise the impact on our
operations," Samsung said in a statement.
    Apple, which buys displays from LG Display, camera modules
from LG Innotek and products including memory chips and displays
from 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," Apple CEO Tim Cook said 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."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Vietnam's top 10 foreign investors    https://tmsnrt.rs/2TCc9gA
S.Korea's investment in Vietnam     https://tmsnrt.rs/3cw7DIU
FOCUS-S.Korean e-commerce firm Coupang stretched by order surge
as virus cases jump     urn:newsml:reuters.com:*:nL4N2AW153 
FOCUS-Coronavirus clouds Apple's timeline for new iPhones    
 urn:newsml:reuters.com:*:nL2N2AR03K 
INSIGHT-Manufacturers entangled in logistical nightmare as
virus-hit China limps back to work      urn:newsml:reuters.com:*:nL8N2AI06H 
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 (Reporting by Hyunjoo Jin and Heekyong Yang; Editing by
Jonathan Weber and Edwina Gibbs)
 ((hyunjoo.jin@thomsonreuters.com; 82-2-3704-5685; Reuters
Messaging: hyunjoo.jin.thomsonreuters.com@reuters.net))