What’s The Backup Plan?

Over the past dozen years we have witnessed two major breakdowns in the global semiconductor supply chain. The first occurred in 2002, when an outbreak of severe acute respiratory syndrome (SARS) basically closed off Chinese manufacturing for several months. The second major problem occurred in 2011, when the Tohoku earthquake and a devastating tsunami shut down a good portion of Japanese production.

Both of these had interesting, if short-term, repercussions on the semiconductor industry. In the first case, companies began looking for second sources for low-cost contract manufacturing, which was China’s biggest contribution to the semiconductor industry at the time. The Japanese shutdown was more pronounced, because of the advanced components, chips and even complete devices that are created in that country.

Much has changed even since 2011. More third-party IP is being included in mainstream chips as a way of getting to market faster, and that IP is being developed in all parts of the globe. In addition, the differential in labor costs is much less pronounced today than it was 12 years ago, even in developing markets. In fact, the big benefit from offshore manufacturing and design work is being close to markets and creating inroads into those markets, not labor arbitrage. And Japan is no longer the only leading producer of consumer electronics—although arguably it wasn’t even in 2011.

Still, what’s missing around the globe is a systematic development of a redundant supply chain in case things go awry in one country or geographical area. What happens when there are riots in Bangkok and Kiev and a breakdown in China’s Internet service all at the same time? Has the semiconductor industry really built in enough safeguards to avoid these kinds of hiccups?

Given the complexity of interactions, there’s no simple answer. Even where there are redundancies, there may not be sufficient capacity. And where there is capacity, it may not be the same quality as what’s needed.

Nevertheless, companies that rely on partners around the globe should be taking inventory of what they need, where they need it, and what their alternatives are if those goods and services aren’t available. A global supply chain is a good thing for many reasons—cost, expertise, innovation, access to multiple new markets—but it also carries many obvious and some not-so-obvious risks, such as whether capacity will be available and at what cost if one region is suddenly unable to provide goods or services. And while those risks are usually acceptable, there needs to be a backup plan in place in case something does go really wrong for a sustained period due to economic or geopolitical reasons, or natural destruction.

This is risk assessment at its most basic, and it’s surprising how many companies that are key to the supply chain haven’t fully thought this through. And perhaps worse, those that have thought it through often rely heavily on those that haven’t.