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Which tech companies could get hit by COVID-19, and what should they watch out for?

Traders on the floor of the New York Stock Exchange on March 10, 2020

Economists told Protocol's Braintrust editor that consumer tech firms should be wary of impacts on manufacturing.

In economic turmoil, what areas of tech are the weakest links? What kinds of companies will suffer fastest and hardest?

Dr. Augustine Faucher

Chief Economist at The PNC Financial Services Group

Tech manufacturing companies, as opposed to tech services companies, face the biggest problems from COVID-19. Many U.S.-based tech manufacturing companies use inputs from abroad in their production processes and will be unable to obtain these supplies in the near term. They can try to reconfigure their supply chains, but that will be difficult to do in the short run. These tech manufacturers may have to reduce output or stop production entirely because of a lack of supplies. These are firms like computer hardware, peripherals and telecommunications equipment manufacturers.

Dr. Abdul Azeez​ Erumban

Assistant Professor at the Faculty of Economics and Business, University of Groningen and Senior Research Fellow at the Conference Board

The coronavirus affects both supply and demand sides of the economy. On the supply side, it disrupts the supply chain by limiting the supply of intermediate inputs, but also by restricting the travel of employees. On the demand side, it directly hits the consumer market. Both have inevitable consequences for the tech industry. For instance, most companies rely on China not only for producing their products but also for an indispensable part of their market. The markets are affected elsewhere in the world too, be it in Europe, Asia or the Americas. Many multinational companies will suffer from factory shutdowns in China, and this supply chain disruption will easily be transferred to other parts of the world. As the epidemic continues to spread, if people are concerned about losing jobs amid fears of production cut, this could further affect consumer sentiments, weakening consumer purchases. This may have an immediate impact on durable and luxury goods, including high-end electronics. Given the fast spreading of the virus and the chaos and panic it creates, it looks like the overall global economic impact could be much larger than the SARS outbreak, which, according to some estimates, caused approximately $50 billion of loss to the global economy.

Major tech companies like Google, Facebook, Apple and Microsoft all have already shown weakening. Also, operations of Uber and Airbnb are to be affected substantially, as people across the world are cutting down travels, be it for work or leisure. Also, several tech-goods producing companies — both big and small — will be affected substantially, due to the disruptions on both supply and demand sides.

Bret Swanson

President at Entropy Economics

The weakest links could be the young, unprofitable consumer tech firms who have been subsidizing growth and low prices with equity. That strategy couldn't last forever, and the market uncertainty could cut short those unsustainable plans.

Dr. Nicholas Economides

Economics Professor at New York University Stern School of Business

I should start by noting that the present turmoil in the financial markets is based 99% on fear rather than a rational quantitative assessment of the impact of the virus.

Most tech companies have moved or are moving to tele-commuting. Given that, among tech companies, the software ones, such as Microsoft, are expected to be only minimally disrupted. Conversely, tech companies that rely on hardware components that could be disrupted in the supply chain, such as Apple, will be hit harder. Additionally, startups may have a hard time securing backers in conditions of uncertainty. Finally, companies like Zoom that produce video-conferencing software will do the best, although we do not know yet if they can scale up to high demand. Amazon will also do better as more consumers switch to remote buying and delivery.

Dr. Andrew Bartels

VP and Principal Analyst at Forrester Research

CIOs have a well-developed playbook of what to do if their firms' business outlook declines and they are asked to cut tech spending. That playbook will get applied in this case as well. First, delay or cancel plans to buy new or replacement computer and communications equipment. Second, scale back or trim the new project portfolio. Third, look to see where contracts with telecomm vendors, outsource providers, and software vendors allow reduced payments, or where those contracts can be re-negotiated to lower costs. Fourth, delay hiring of replacement IT staff when staff retire or leave, and look to reduce staff through outsourcing or other activities. Right now, CIOs are just at stage one, and starting to look at stage 2.

So, that means computer and communications equipment vendors -- who may already be experiencing supply chain disruptions due to COVID-19's impact on Chinese electronic component production -- will see the most immediate slowdown or drop in sales. However, they could also experience a rapid bounceback when and as the COVID-19 fears start to fade away.

Tech consulting and systems integration vendors will start to see some slowing of demand as clients put new projects on hold. Actual declines in revenues are possible if the economic turmoil from COVID-19 worsen or persist beyond a quarter or two.

Other tech categories like software, tech outsourcing, and telecomm services are less vulnerable to declines in sales unless the US and other major economies actually slip into recessions as opposed to a quarter or two of weak growth.

What economic warning signs should tech companies be paying the most attention to? At what point should the sector begin to get nervous?

Dr. Augustine Faucher

Chief Economist at The PNC Financial Services Group

The sector should be nervous now. The impacts on supply chains will start showing up soon in semiconductor billings and purchasing managers' indices, like the Markit indices available in many countries and the ISM manufacturing index for the US. Other indicators to watch are trade measures (exports and imports) and durable goods orders and shipments. Also important to watch are regional manufacturing surveys, from various regional Federal Reserve banks and local ISM surveys.

Dr. Abdul Azeez​ Erumban

Assistant Professor at the Faculty of Economics and Business, University of Groningen and Senior Research Fellow at the Conference Board

In terms of action, the most important thing is to keep a close watch on the developments across the globe. In particular, in markets where companies have their operation and consumers. Follow and process genuine information about the virus, its spread, and impact, while making decisions regarding production, and distribution. Also avoid announcing cynical forecasts, without processing robust data — such a tendency could further hamper the reputation and prospects of the company. More than the real health hazard of the virus, it is the panic that is creating more chaos at the moment. Since it hit the global value chain substantially, companies engaged in tech goods may want to foresee further disruptions in the supply chain, and therefore, try to stabilize it and explore alternative sources.

It is hard to say at what moment the companies should get nervous, but if they foresee massive quarantine and deserting in markets where they have large operations, that should be worrying.

Bret Swanson

President at Entropy Economics

Overall economic weakness would be a challenge for every company, but in a relative sense technology firms could actually be winners. More virtual services, more remote meetings, more bits in place of atoms, more personal and community data to improve health.

Dr. Nicholas Economides

Economics Professor at New York University Stern School of Business

Of course, components supply disruption is a key variable to watch. If there is a recession, and a recession seems very unlikely at present, demand will fall and this will impact all business activity negatively. I would wait 2-3 weeks to see what actual disruptions occur within the United States before evaluating consumer and business sentiment.

Dr. Andrew Bartels

VP and Principal Analyst at Forrester Research

Durable goods order reports (monthly, from the US Bureau of Economic Analysis) will show whether businesses have started to cut back on their purchases of capital goods, which is a sign that they have turned pessimistic about the outlook for their business. A small one-month drop is not too alarming; even a sharp decline in a month may not be too worrisome, if there are signs it was temporary. But declines over several months would be evidence that business investment is going to fall.

Consumer spending and retail sales (monthly, from the US Bureau of Economic Analysis and the US Census Bureau, respectively) will show whether consumers have gotten spooked by coronavirus fears and have cut back on their spending. Exclude energy costs from these measures, because lower oil and gas prices are a positive for consumers (though not of course for oil and gas companies). But if consumer spending and retail sales drop for a couple of months, that would evidence that the US economy is heading for a potential recession, since consumer spending represents about two thirds of GDP.

Housing starts and home sales. Interest rates have dropped, making mortgages much cheaper for consumers. If home sales fall despite lower interest rates, that would be evidence the US consumers are worried about the employment prospects, and provide a signal that future consumer spending will fall.

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