By Hyunjoo Jin and Heekyong Yang
SEOUL (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 epicenter 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.
(GRAPHIC: Vietnam’s top 10 foreign investors – https://fingfx.thomsonreuters.com/gfx/editorcharts/HEALTH-CORONAVIRUS-VIETNAM-SOUTHKOREA/0H001R8ENC5T/eikon.png)
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.
(GRAPHIC: S.Korea’s investment in Vietnam – https://fingfx.thomsonreuters.com/gfx/editorcharts/HEALTH-CORONAVIRUS-VIETNAM-SOUTHKOREA/0H001R8EHC5C/eikon.png)
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 meters when talking to each other.
“We are making our best effort to minimize 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.”
(Reporting by Hyunjoo Jin and Heekyong Yang; Editing by Jonathan Weber and Edwina Gibbs)