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Even Virtual Goods From China Are Taking a Hit From Coronavirus

Zheping Huang

(Bloomberg) --

The coronavirus epidemic in China cast the production of the world’s electronics into disarray. What’s less well known is that it also disrupted the global supply of digital goods for games.

Beyond iPhones, laptops and consoles, China is also the largest production base for digital art in mobile, PC and console games. Global developers from Activision Blizzard Inc. to Ubisoft Entertainment rely on third-party studios in the country for a huge chunk of their art, enticed by the same cheap-but-capable labor force that draws manufacturing orders from Apple Inc. and Nike Inc.Art suppliers across gaming hubs in Shanghai and Chengdu are failing to deliver costumes, armor and other digital assets on time, because designers were barred from studios by strict quarantine rules -- a major impedient in a line of work that requires stringent data security and networks of high-powered workstations. That’s forced gaming companies to reduce or cancel orders, according to people inside the industry, and scout for alternatives in Southeast Asia and Europe to take up the slack.

Jefferies analysts led by Ken Rumph estimate that as much as 50% of art creation in Western games is done in China, either by local outposts of major developers like Ubisoft and Electronic Arts Inc. or by outsourcing. “If delays are extensive, we would expect a growing list of game delays,” they wrote in a February note.

Read more: China Has Taken Over From the U.S. as the ‘Gamer Capital of the World’

While the full scale of this disruption is yet to be defined, the games industry is already taking hits from its China reliance. The American developer of popular sci-fi role-playing title The Outer Worlds said in February it had to delay the release of the Nintendo Switch version -- after the China-based studio it hired to adapt the game paused operations during the virus outbreak.

“We redid all the planning for all our projects,” said Philippe Angely, a senior executive with Virtuos Ltd., whose China team is handling The Outer Worlds’ Switch adaptation. With 1,200 developers across the cities of Shanghai, Chengdu and Xi’an, Virtuos estimates an average of a two-week delay on projects, he said, and a halving of February revenue as a result.Virtuos, whose clients include Ubisoft, Square Enix Holdings Co., and Tencent Holdings Ltd.’s Riot Games, has only just gotten back to full capacity in the past few days, but it remains hampered by local restrictions. Its 600 staffers in Chengdu, for instance, have to rotate across two 8-hour shifts to comply with government-imposed limits on the number of people in indoor areas.

Read more: Coronavirus Forces World’s Largest Work-From-Home Experiment

The online games industry has been among the few beneficiaries of the coronavirus outbreak, as time and money spent on games have surged with millions of people confined to their homes. But the tale is different from the supply side.

“Developers and publishers can make revenue as long as they have games running. For outsourcing companies, we have to work every day so clients will send money to our bank accounts,” said Zhang Jian, executive vice president with Chengdu-based Sheer, which has worked with clients including Tencent, NetEase Inc. and Ubisoft.To prevent infection and keep business running at the same time, Sheer has relocated half of its 300 developers to a new office floor the company just rented, Zhang said. Employees are required to sit at every other desk and wear face masks throughout the day. Yet about half a dozen of his company’s projects -- both Chinese and foreign -- have been scaled back or canceled entirely. The studio, which provides services from concept art to 3-D environment creation and character animation, won’t be able to take new orders until the end of March, Zhang said.

“The impact on the cash flow will last for the full year,” he said. “We are not in big danger, but we’ll feel a lot safer if we have money on the books.”

Unlike supply chains for physical goods, migrating a digital one away from China can be done relatively swiftly. Last year, Ubisoft opened a new studio in Vietnam while Sony unveiled plans to build a Malaysia outpost to make games for its PlayStation consoles. Such moves help global companies tap even cheaper local talent and reduce the risk of regional disruptions like the coronavirus, said Darang S. Candra, a Jakarta-based analyst with game researcher Niko Partners.

In Southeast Asia, Vietnam’s Appota, Malaysia’s Streamline Studios and Thailand’s Asiasoft are examples of studios capable of potentially taking orders away from China, he added.

“For games that are targeting the Chinese market, we expect no exodus to happen any time soon,” Candra said. “Nevertheless, some outsourcing work might move outside of China if the situation does not recover soon.”

To contact the reporter on this story: Zheping Huang in Hong Kong at zhuang245@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Vlad Savov

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