Living On The Edge

Looking around the globe at the big foundries these days, many of them are in danger zones—geopolitical, seismological, or areas that have been the incubators for public health disasters in recent years.

This is one of the risks of a global supply chain, and it’s one that should cause ulcers for any supply chain management executive. South Korea’s Samsung is within a short missile launch of a despot who claims the Korean war isn’t over. In Taiwan, between 1990 and 2013—a period of 23 years—there were 18 earthquakes with a magnitude greater than 6, and 3 above 7. The biggest of those occurred in September 1999, registering 7.3 on the Richter scale.

In China, a SARS outbreak in 2003 shut down commerce inside the country for several months, which basically wiped out business for an entire quarter. That was before China had become an integral part of the global electronics supply chain. It’s no coincidence that Flextronics decided to spread its operations around the globe following the SARS scare.

Flextronics isn’t alone, of course. Many large companies have set up shop on multiple continents as a hedge against disaster. The United States, Ireland, Germany, Brazil and India are safer in many respects, and the labor arbitrage that dominated the past two decades is largely over, and manufacturing is returning to all of these places.

But this is happening primarily among the largest companies. The problem is that midsize companies haven’t followed suit, and no one has done enough accounting to figure out where the pinch points will be in the supply chain if one part of it snaps. It’s unlikely that a disaster of any sort will impact the operations of the largest companies, but it could very well disrupt the operations of small and midsize companies that don’t have the resources to set up shop in multiple locations.

Looking at these challenges on a global scale is enough to make a financial manager run for cover. It looks like a portfolio filled with high-risk investments, which is concerning because it’s a $300-plus billion industry staffed by some of the smartest people on the planet. And worse, they now make products that are vital to the daily lives of billions of people—in some cases, literally.

Just as companies have well defined disaster recovery plans for data, the semiconductor industry needs to start thinking about disaster recovery for an ecosystem. This has never been done, primarily because the chip industry evolved as a bunch of small companies competing for sockets largely for non-essential consumer electronics. Those electronics are now an integral part of vehicles, medical devices, security systems and core communications equipment.

What would happen if key components of those devices were suddenly unavailable?
Are there second sources of those components? What would that do to pricing, time to market, and the competitive landscape of large companies that depend on those components? And what would it mean to users of those components?

These are all important questions that need to be addressed and thought through in great detail. The electronics industry is no longer just a global success story. It’s a vital part of everything, and there are a lot of people dependent on a complex ecosystem’s ability to keep functioning smoothly—no matter what happens in any particular geographical region. It’s time to establish a plan to ensure that continues.