Opinion: Two words that will strike fear into gadget makers this Christmas

The Apple iPhone 12 Pro Max at the Apple flagship store in Sydney, Australia, on Nov 13. The iPhone experienced its latest annual launch in history because the pandemic hit both development and production. — Bloomberg

Global electronics companies hoping to enjoy a spike in sales during a pandemic-inflicted Christmas need to avoid the one thing that stands in the way of a bonanza: shortages.

The shuttering of factories, a reduction in flights, and rolling lockdowns mean that the robustness of a company’s supply chain will end up being of critical strategic advantage. The list of tech giants looking to mitigate, or leverage, challenges in procuring and delivering products during this shopping season reads like a Who’s Who of global brands.

Sony Corp, Nintendo Co, Microsoft Corp, HP Inc, Dell Technologies Inc, Xiaomi Corp and Apple Inc are among those facing possible lost sales simply because the companies that supply components, assemble devices, or transport their products across the globe are coping with unprecedented difficulties due to Covid-19.

Two words pinned to the product listing of Sony’s new PlayStation 5 on the Best Buy Co website on an early December evening reveal the one thing executives must fear: "Sold Out”.

On Amazon.com Inc’s US site, it was "Currently Unavailable”. A similar story is playing out for Microsoft’s Xbox X/S consoles and Nintendo’s Switch.

Such shortages are particularly galling for Sony and Microsoft, because they come as both companies launch their newest games machines in four years, just in time for the seasonal rush.(1)

A big worry is that shoppers unable to purchase their preferred console may opt for an alternative, and the pain of that lost opportunity may be suffered for years to come through follow-on revenue from games and services. The impact is already being felt, according to research firm SuperData, with sales of digital titles over the Thanksgiving weekend dropping 10% from 2019, despite a captive market of consumers stuck indoors.

Apple isn’t immune, either. The iPhone experienced its latest annual launch in history because the pandemic hit both development and production. That had an immediate impact on the fiscal fourth quarter, which ended Sept 26, with no guarantee that consumers will end up buying the new model with so many competing toys now vying for their attention.

Rather than merely favouring big suppliers who have more resources, production shortages are offering opportunities to smaller players. Nintendo awarded a coveted contract to Sharp Corp, traditionally a maker of screens, to assemble Switch consoles at a factory in Malaysia, Bloomberg News reported, after months of struggling to make enough units at facilities in China and Vietnam. Sony committed to providing more inventory to retailers ahead of the Christmas rush, without saying where it would get the new machines. It’s likely considering adding another assembler or two to shore up supply amid ongoing shortages that have seen after-market prices climb to almost double the retail value.

As the pandemic drags on, even with vaccines set to roll out in coming months, the costs from this global bottleneck could climb into the billions of dollars. Throughout the most recent earnings season, executives outlined the lost revenue and higher expenses from continued supply congestion. The increased outlays include the need to ship by more expensive air routes instead of by sea to make up lost time, a problem exacerbated by a reduced aviation fleet as passenger flights slow to a trickle.

HP, which gets two-thirds of its revenue from personal computers and the rest from printers, just closed out its fiscal 2020 with a 3.6% drop in revenue, the worst in four years. President Enrique Lores told investors that "performance this quarter was more driven by supply chain than by demand.” British chip designer Dialog Semiconductor Plc is expected to post a 15% decline in sales this year, saying last month that it could have shipped 5% to 10% more if not for shortages of chip supplies and testing services.

Dell has also been hit, with a lack of components including chips and displays causing congestion and driving up expenses. But the Round Rock, Texas-based company is hoping to spin that into a win, with Chief Operating Officer Jeff Clarke telling investors that its "industry-leading global supply chain” gives it a "significant competitive advantages to be the partner of choice.”

The notion that their supply chains provide an edge over rivals has been a common boast in recent months for other companies, including chipmaker STMicroelectronics NV, electronics assembler Flex Ltd, and even Best Buy.

If they’re right, they’ll get through Christmas fine. If not, it’ll be a bleak new year.

(1) There have been minor upgrades in the interim, but these devices can be considered new consoles.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News. — Bloomberg

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