The global component drought
The 1980's were tough years on the sheep farm where I grew up. This was thanks to the El Niño-Southern Oscillation. For several years the Canterbury climate absolutely refused to give us that central component of food production, rain. We had to import large quantities of expensive grain just to keep our livestock above the ground.
It’s safe to assume that not wanting to suffer the continual stress of living with droughts, waking up in the night thinking there was rain on the roof when it was just a leaf, was a major psychological driver for me not following in my grandfather and father’s footsteps into farming, which I love, but instead going into the tech sector.
And yet here I am again, 40 years later, facing another (insert preferred swear word here) drought. This time only in a new form. A component drought.
Starting around the middle of 2021 the supply of the components (semiconductors etc…) that ioSphere, and millions of other tech companies use to make our products, began to dry up. Things have gone from bad to worse as the manufacturers of everything from smart-phones to combine harvesters have panic-bought the components they need to keep their manufacturing operations alive.
The stories we have heard about large manufacturing operations being put completely on ice, for want of just one tiny chip, are extraordinary. Huge, well known brands are reengineering their products almost on a daily basis to navigate these evolving shortages. By all accounts some late model second hand vehicles are now worth much more than their original purchase price simply because buyers are so desperate and vehicle supply is so short.
While this phenomenon is now being covered in the media, their stories generally only cover the problem and its downstream economic consequences. But, if you want to know the underlying causes you have to go deeper and deal with a lot of the messy complexity that comes with a globalized economy.
First up… I don’t think anyone truly understands this whole paradigm to be honest. Let alone me. It is a bit of a box of frogs. Take a peak inside and things get messy pretty quick. But here are a few of the known factors.
The first factor is an actual meteorological drought, in Taiwan. A company there called TSMC is a dominant producer of semiconductor chips. Taiwan has been suffering its worst drought in 50 years. This has left TSMC and other manufacturers struggling to attain adequate quantities of water - which is a crucial element in chip manufacturing.
The second factor is the strangely named ship, the Ever Given. This is a 400m-long 200,000 tonne container ship which ran aground in the Suez Canal on the 23 March 2021. The canal was only blocked for 6 days, but, unluckily for its owners, around 12% of global trade passes through that tight waterway each day. An immediate backlog of over 369 ships built up as Captain Kanthavel steered the world to an estimated US$9.6 billion worth of lost trade.
In addition to the Suez blockage, there are almost unfathomably complex capacity problems playing out in the the world’s largest ports and logistics systems. By all accounts the contributing factors here include a lack of truck drivers, a lack of environmentally compliant trucks, and a lack of sea containers (apparently people aren’t bothering to return their empties).
It’s hard to know where to start with some of this. But we have learned that a good supply of fresh water to semiconductor plants is very important, and, equally important is maintaining a minimal amount of fire inside the plant. There are a very surprising number of fires in the world’s semiconductor and upstream supply factories. Almost one per day. 2021 saw some very disruptive ones. For example, in March 2021, Renesas, one of the biggest automotive chip suppliers, had a major fire at one of its factories in Japan. This had a "massive impact" on its ability to fulfil orders. Worryingly this trend continues. In 2022 we’ve already seen a fire in a factory owned by ASML Holding. They are the world’s largest supplier of photolithography systems and the only supplier of extreme ultraviolet (EUV) lithography machines. These are used to etch the circuits used by Apple, IBM and Samsung.
There are huge contributing factors on the demand side too. These have largely arisen from the pandemic and the global shift toward home working or schooling. All of a sudden millions of workers and students needed a new laptop, a screen, maybe a sit-stand desk and some headphones for working at home. All of those devices consume chips and components. According to the Semiconductor Industry Association, their industry shipped more chips during May 2021 than in any previous month in history.
That is certainly not a comprehensive explanation. I don’t think anyone can accurately tell you all the factors or how they interplay. It does seem that the panic buying and stock-piling has stopped, for now and the noises we hear from the market sound more optimistic for a return to more normal component supply and demand balances in late 2022.
From our perspective, as a start up, we are still very small and adaptable, so we do not have large manufacturing programs that need to be halted while sleep deprived procurement teams scour the globe. If anything this has been a very valuable experience for us. A lesson to design our products and our business to be maximally resilient to component supply shocks. But we should all spare a thought for the millions of people around the world whose livelihoods are being catastrophically affected by this new hi tech drought. I know from experience it is very painful to watch your business crumble because of factors beyond your control. Let’s hope the rains come soon for the world’s manufacturers.
Hamish Hutton, CEO of ioSphere