Aftershock: COVID-19’s permanent impact on tech supply chains

The last time the world suffered a deep recession, producers of information technology devices tightened and shortened their supply chains, diversified where they could, and scaled-down both product quality and expectations to ensure their own financial survival. The results were largely seen as successful. Prior to the onset of tablets in the consumer IT market, PC and device manufacturers produced a new, small form factor called “netbooks,” and Intel produced Atom and Celeron processors to accommodate them (rival AMD chose against a similar route and suffered for it).

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Netbooks were thin, plasticky, hot (in terms of temperature), and distinguished for being forgettable. As my Betanews colleague Carmi Levy wrote in 2009, the typical netbook “looks like a laptop that spent a little too much time in the dryer.” Carmi continued:

They’re also ridiculously underpowered for anything beyond basic workflow like editing documents, managing e-mail, and accessing the Web. Their tiny, often laughably laid out keyboards make touch typing a fond memory. The small, low-resolution screens turn scrolling into a national sport — which you’ll probably want to avoid given the ergonomically frightening trackpads that are typically crammed wherever there’s space. Battery capacity is lousy, too, often barely stretching beyond a couple of hours, if that much.

“Netbooks are here to stay,” declared ZDNet that same year, demonstrating why at that time, I tended to avoid prognostication in print. The netbook is the icon of recession-era production. It is emblematic of the world that made it.

The business plan for any new tech device, or a new technology or infrastructure for supporting that device, directly depends on a strong and growing economy. The ecosystem of premium smartphones and tablets and all those new Internet-of-things devices rely upon robust employment levels and the abundance of disposable income. The systems and networks required to support those devices — most notably 5G Wireless and Wi-Fi 6 — need regular cash infusions from enthusiastic customers to justify the manual labor required to prop up their infrastructure. That labor includes digging up the planet Earth by city blocks, laying down thousands of miles of fiber optic cable, and supplementing the endcaps of millions of traffic poles and stoplights. Consider whether the space program would have come to fruition had it all been kept secret from the public.

As we were told two years ago, 5G won’t happen until consumers have a reason to want it. If the 5G world ends up looking like the netbook world, such a reason will not just fall to Earth from space.

We don’t have to look far to see what happens when economic uncertainty shakes information technology supply chains to their roots. Just over a decade ago, we witnessed how disposable income became constrained by the crashes in world securities markets, and how the sudden downturn in the US housing market made economic activity plunged. In response, manufacturers reverted to producing cheaper, arguably disposable, devices with low price points, including netbooks.

IT devices are the by-products of the supply chains upon which they depend. From their inception, they are designed around the availability and the accessibility of their parts. In the cases of smartphones and tablets, their architectures are formed around the collection of parts and services that their suppliers make available to their manufacturers. Devices are the culmination of the economy that gave rise to them. Like the exposed strata in stone, the quality and functionality of the devices produced in any given period speak directly to the health and stability of the economy and society at that time.

Supply chains, like one’s own intestines, aren’t usually a topic of discussion unless something’s wrong with them.

The coronavirus pandemic is publicly, and quite gruesomely, exposing the embarrassingly poor ways we’re taking care of our world, its economy being just one example. During this unprecedented time, where the people we can ask about how the last pandemic was endured are no longer with us, we still don’t really know what the general strategy for enduring and surviving this recession — if, indeed, it’s just that — will be.

If the last recession brought us netbooks, will the current one bring back punch cards?

Built-in redundancy

Netbooks were a direct result of supply chain reconstruction — a response to the housing market recession. Before the turn of the century, Intel began conceiving a production methodology it would call “Copy EXACTLY!” Its objective was to build each of its fabrication facilities to exact specifications so that a component built-in one location would be built the same way in another. Any change implemented in one place would simultaneously roll out everyplace.

In the mid-2000s, when business advisors began stressing the virtues of supply chain diversification, Intel used this methodology to produce a platform for assembling small, “ultra-mobile” PCs (UMPC) called Centrino. It was intentionally designed so that assemblers building devices around Centrino could rely upon a simplified, scaled-down, supply chain, whose suppliers could be inspired by “Copy EXACTLY!” to implement production methods that were essentially standardized. To make it all work, for the first time, in 2008, Intel started intentionally producing freshly designed economy-class processors just to fit the Centrino agenda, rather than mature older designs down into the economy class.

The very next year, as the world was largely exiting the Great Recession period, Intel tossed the Centrino plan aside and resumed its regularly scheduled program of top-down PC and server platform innovation. Say what you will about the mediocre performance and quality of the devices produced during the Housing Bubble Burst, but Intel’s plan got it through the worst recession we’d seen in decades, largely intact.

The advice that organizations are receiving now about how to apply first aid to their coronavirus-afflicted supply chains has a familiar ring to it, as though it were being delivered via VHS tape. Bain & Company suggests they should invest in “control tower visibility” into their supply chain networks. Others such as KPMG are advising their clients to look into further diversification of their supply chains among multiple countries, while firms such as the Brookings Institution are advising US companies to repatriate their suppliers, when possible, back onto American soil. Some have taken the baffling step of advising both simultaneously, like a VHS and a Betamax tape played simultaneously.

“Diversification was a solution that people were bandying around as an easy solution to many supply chain disruption issues,” remarked Anne Petterd, Head of Asia/Pacific International Commercial & Trade Practices for Sydney, Australia-based global business law firm Baker McKenzie. “We certainly have been seeing companies look to make things on a longer-term, slower trajectory.”

The pandemic may not be the only reason for supply chains being geared down. Suddenly there’s more of a focus on geography.

“There’s always been this question about a single point of failure in a supply chain,” remarked Adrian Lawrence, Petterd’s colleague who heads Asia/Pacific technology for Baker McKenzie. “That is the issue that is coming more and more to the fore, as companies are setting up their supply chains for new products. The pandemic is triggering more of a multiple-sourcing view of the world. Now, that may or may not be possible. There may be an economic impact. But. . . where you can get the same component, is a more important part of the analysis as you’re setting up a supply chain in the first place. How much of an impact on cost might you accept, to get that flexibility?”

The supply chain “+1”

The US Dept. of Commerce estimates that as much as 76% of global trade is comprised of supply chain activity — the transactions that make it possible for goods and services to be delivered and presented to consumers. The primary gauge of a country’s or a world’s economic health is a gross domestic product. Yet GDP only accounts for the value of consumed goods and services — the end products of supply chains. GDP sums together what the private and public sectors are spending, along with private investment in producing products, and net export values of products to other countries (after subtracting gross imports from gross exports).

Last month, Baker McKenzie’s Petterd co-authored an assessment of how supply chains could resume a path toward something resembling the health and prosperity levels we’ve come to expect. Entitled “Supply Chains Reimagined: Recovery and Renewal in the Asia Pacific and Beyond,” the report advises organizations to incorporate and integrate greater amounts of data into their supply chain practices, particularly in the areas of risk management and geospatial analytics. “Being able to fully map their supply chain to understand the geographic location of suppliers and feed the maps with alternative data,” the report reads, “can help companies to have in-built defenses against large shocks to their supplier ecosystems.”

Citing an outside source, the report suggests that organizations that make substantive purchases and procurements strongly consider three factors: digitalization (whose meaning for ZDNet readers should be obvious), diversification, and regionalization. The latter refers to the repatriation of manufacturing capabilities, reducing dependencies on foreign countries, and introducing redundancies into the supply chain to ensure stability.

In the data center industry, the term “N+1” refers to a class of redundancy where power systems have at least one redundant backup source, usually from a local UPS system. In international trade, one phrase that is coming to be synonymous with one strategy of supply chain redundancy is “China + 1.” Several countries — for example, Vietnam — have put themselves forward in recent years as the “+1” country of choice. And since the onset of the pandemic, these countries that fared much better than China at containing the virus, have touted the wisdom of this system.

“A lot of European businesses see great benefit in continuing to do business with China, and have things made in China, just because of the immense size of the Chinese economy — their Belt and Road Initiative, for example,” said Petterd, referring to China’s trade program for bolstering infrastructural investments along the old trading routes linking China with the Arabian Peninsula and the Mediterranean.

But rather than treating such a choice as doing business with the People’s Republic of China as a whole, she went on, organizations are upgrading their visibility into the country, ensuring that they’re making investments and doing business with specific suppliers in specific cities or locales. Especially with IT goods, purchasers are more eager to know the details of how its components and constituent materials are sourced, what kind of labor is used to produce them, and whether that labor is well-compensated. “Those sorts of things help the manufacturers to influence the supply chain,” she continued, “knowing that they won’t get the funds they need to carry on work, or they won’t be able to engage their consumers as they might like to, unless they had these [protections] in place in their supply chain.”

This is diversification on a very granular level, choosing business partners based not just on their price and product quality but also on their public policy. Risk management practices in all industries have always touted the virtues of redundancies. But where they’ve been proven effective, the shock events impacting businesses have been localized. When an economic event as big as the coronavirus impacts everything severely, all at once, isn’t the damage to a diversified supply chain as critical as to a localized one?

“When you talk about risk management in the supply chain, you’re actually talking about a breadth of issues,” responded Lawrence, “that internal and external advisors need to be across. It starts with, ‘Where is the product? Can I get it?’ But it very quickly moves to this whole range of issues that need to be considered — economic, commercial, geopolitical, legal issues. Many jurisdictions have much more of a focus on, is your supply chain ethical, in the right kind of way?”

As organizations make difficult choices about the locations of their suppliers going forward, their resulting supply chain profiles could indeed be, to borrow a phrase, “bimodal:” diversified and exclusionary at the same time.

Odd man out

One of the problems with implementing a “Copy EXACTLY!”-style supply chain strategy in today’s economy, is that not every manufacturing facility can be as automated as Intel. Where automation can be maximized, labor costs impact the operation much less, and a company can afford to produce in the US, where labor costs are higher. But the processes before and after fabrication — raw materials production and product assembly, respectively — are not as susceptible to automation.

So if the beginning and end of your supply chain are both overseas, having the middle of it inside the US might not always make much sense.

“Bringing all those jobs home will end up making us a high-cost producer,” remarked Dr. Sherman Robinson, senior fellow at the Peterson Institute for International Economics. “Once you’re a high-cost producer, you can’t export. So the export jobs start going away. It is a self-defeating goal, in the longer run.”

Dr. Robinson and his colleagues built models to investigate the effects of the US withdrawing from global exports, and only “diversifying” its supply chains on a national scale. With respect to global GDP, he informed us, about one-fourth of that quarterly figure currently is on account of Europe. Another one-fourth is attributable to North America, and one quarter to East and Southeast Asia, plus Australia and New Zealand. By contrast, Europe is presently responsible for about 40% of global trade, with East/Southeast Asia second at 30%. The US (including global trade deals made specifically with California and Texas) places a distant third with just 14% of global trade.

“What happens with the rest of the world?” asked Robinson. “The answer is, they just work around the US. They’ll still sell goods here, but they’ll just divert all their trade around it. We’re not such a big player on the globe any more, that that’s not possible.”

A “Copy EXACTLY!” strategy could work once again, if America’s expertise in automation could be put to use in keeping labor costs low. But if America maintains its backward march toward obscurity, then circumventing it altogether could be a more expedient option, even for American producers. Maybe someone else will build the wall after all.

In a healthy economy, device makers can afford to produce premium smartphones, tablets, laptops, and now IoT networked devices, knowing that these designs can easily “trickle-down” the value scale over a couple of years, or even shorter, to become mid-range. And a tech press whose livelihood depends on a pre-existing abundance of enthusiasm can harvest that positive activity for page views and subscribers.

What will pass for the typical IT device produced in the post-pandemic period, once people are inoculated and the world can, for the most part, right itself again, is for now uncertain. But if the present is anything like history — which it typically is — the machines, systems, and software that emerge from the first half of this decade, will tell the tales of the hardships its people have faced, and hopefully overcome.

Supply chain risk management, stated Baker McKenzie’s Petterd, “is definitely a skill that, if organizations weren’t focused on it before the pandemic, they certainly are now.”

Learn more — From the CBS Interactive Network

Elsewhere

  • Beyond COVID-19: Supply Chain Resilience Holds Key to Recovery [PDF] by Baker McKenzie

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