Digital value chains face enormous challenges. Why continue digitization anyway?
From bad to worse, when a pandemic becomes a global supply chain crisis
In August, I had a phone conversation with a global technology company the Executive DirectorIn which we talked about revenue and in which he expressed concern about the lack of semiconductors around the world: “This is the worst I have ever encountered,” said the CEO. “Everything from copper deficiency to semiconductor substrates is starting to affect people, logistics, transportation and personnel. Problems have arisen in almost all of these areas.”
Indeed, 2020 has had an indelible impact on business rules, creating the so-called ‘new normality’, which includes rapidly changing demand, radically different working conditions and supply uncertainty. There are constant disruptions to ‘physical’ processes, such as factories and supply chains, which have a significant impact on the ability to generate revenue. The lack of important components such as chips poses particular difficulties even for companies with excellent organization.
A good example here is the automotive industry. Car factories came to a standstill in the worst of 2020, and high-profit orders also went to technology companies (such as data centers, bitcoin mining and laptop manufacturing companies), pushing aside the automotive industry. Due to the lack of key components to complete the assembly process, many OEMs were unable to make deliveries and generate revenue. However, the industry is changing rapidly. Daimler has decided to incorporate more expensive chips into its cars (providing more profit for chip makers), but companies such as Hyundai and Bosch plan to leverage their production capacity to produce chips internally.
Cause 1: supply shake
The lack of production and supply capacity in the semiconductor industry is a major cause of disruption. Over the last few years, semiconductor manufacturers have chosen not to increase their operating capacity, as the main focus has been on reducing and optimizing their operating structure in line with global demand. When the pandemic caused a forced reduction in capacity of 30-50%, the semiconductor industry’s ability to meet global demand declined significantly. The industry is also facing very rapid cost increases for various commodities and raw materials such as copper, steel, gold, aluminum and rare earths. As a result, many chip manufacturers have not built up large stocks, which further prolongs delivery times.
Chip manufacturers such as TSMC, Intel, Samsung and GlobalFoundries have announced a 20-100% increase in production capacity, but the results of this decision will only be felt in a few years, as such an increase is a costly and complex process.
However, the problem is not just in production capacity. There is also a lack of distribution capacity. The restructuring of the labor market caused by the pandemic has led to labor shortages in factories and distribution and logistics centers. Higher energy prices also affect costs and create additional constraints on international freight logistics. As a result of increased trade between China and Europe, container traffic almost tripled between January and September 2021, although freight capacity increased by only 2.5%. The rate of early arrival of ships fell to only 23%, compared to 70% at the end of 2019, although, according to the Shanghai Shipping Exchange, total transport costs have increased as much as 10 times in the last year.
Cause 2: Demand turmoil
In addition to supply problems, positive growth prospects for the global economy are exacerbating the gap between supply and demand. In its October 2021 Global Economic Outlook, the IMF estimated that world GDP could grow by 5.9% in 2021, and Advanced Economies forecasts are incredibly high (5.2%).
This recovery is characterized by a stronger demand for high-tech products and digital infrastructure equipment, as lifestyle changes and consumer choice outweigh high-tech products and home entertainment streaming services. As a result, the technology industry has to cope with unprecedented demand. GPU prices have risen three to four times, but demand for near-zero latency in the home and real-time streaming video gaming has made these components rarely available on the market. At the same time, millions of workers and students in the municipal, education, financial, banking (mostly desktop) industries started working from home, which increased the demand for laptops incredibly. At the broader enterprise level, the need to build and manage advanced cloud and network infrastructure has significantly increased rates for manufacturers of infrastructure equipment and components (such as routers, switches, and storage) to maximize customer service.
Overall, we are experiencing a transformation of global value chains, relying more on technology elements as products (from cars to consumer electronics, appliances and equipment) and becoming more interconnected and better through digital services. The price of semiconductors is 4% of premium quality car material prices, and this figure is projected to rise to 12% by 2025 and even 20% by 2030. In other words, semiconductors have now become an essential cornerstone of the modern digital economy.
When there is a mismatch between such demand and supply, companies in different sectors often decide to reduce operational risk by simply accumulating key components. This means we are moving from a linear and highly optimized model, where delivery takes place on time, to maximizing speed and delivery quality and reducing overall costs, to a new approach. Many companies rely on the worst case scenario to build up inventories and supply chain surpluses and place orders ahead to make sure operations don’t stop and customer orders are met despite supply chain disruptions.
Invest in digital, but also try to build long-term relationships with trusted technology partners
It is very important to emphasize that, even taking into account all these challenges in securing the supply of digital products and building modern infrastructure, companies must continue to invest in digital technologies. Digital businesses may be affected by supply disruptions, but the benefits of digital technologies and digitally capable business models outweigh these challenges.
IDC’s global performance indicator shows that companies that have digitally transformed and implemented digital technologies have historically outperformed their non-digital competitors in terms of revenue and profit margins. Therefore, it is very important for leading companies to ensure that they do not lag behind in this process and do not fall victim to the “digital divide”. From industry leaders to start-ups, companies need to find a new way to survive and stay relevant in the wider context of industry transformation. Business investment should not be an excuse to delay investment in technology, even if software shortens the technological life cycle of products and exposes companies to ongoing operational risks. In order to realize this vision, it is essential to build a secure and scalable digital infrastructure that enables processes to be sustainable and inheritable.
A reliable technology provider on this journey is truly invaluable. Organizations that want to succeed in difficult and uncertain market conditions need to work closely with suppliers to ensure the long-term heritability of digital projects and ensure that the supplier operates worldwide, thus reducing the risk of sudden supply disruptions due to technology acquisition problems.
In such a complex situation, the ideal technology partner needs to have a good understanding of industry and market fundamentals, trends and challenges. It is important for companies to rely not only on short-term customer forecasts, but also to take proactive action to address key issues. In particular, the service provider must have a long-term business plan as well as an effective mechanism for its implementation. A sound financial basis is a prerequisite for achieving this, as money and time are needed to prepare and implement the plan. It also needs a resilient and resilient supply network to deal with black swan incidents and to ensure that there are no disruptions and that there is a rapid recovery in the event of major problems.
Huawei Technologies
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