The high-tech supply chain is being redefined

Start-ups collaborate amongst themselves

The wave of Covid-19 lockdowns combined with the ongoing US-China trade war is hastening a shift in the structure of high-tech supply chains. In the coming years, significant changes to the logistics services which support tier suppliers and OEMs will be needed to track and adapt to deep changes in the geography and complexity of the high-tech supply chain.

In the short-term, a looming shortage of consumer electronics devices will soon to be felt acutely in Western education systems, particularly in the US. With new academic years about to start and the Covid-19 pandemic only partially under control, remote classes and distance learning have become the go-to options for many education institutions. The problem is there simply aren’t enough laptops to go around.

An Axios/Ipsos poll of US parents showed 72% expect their children to be either partially or fully taught by remote means in the coming school year. That meets with some stark warnings from hardware manufacturers. In the US, lower-cost Chromebooks are popular in education settings, however, when asked about the likelihood of meeting demand in the coming months, Gregg Prendergast, Acer America president, responded that a “historic” shortage of inventory meant the supply of Chromebooks was “not even close” to the levels needed for virtual learning. Prendergast went on to add that government departments in California and Nevada alone had submitted orders for “hundreds of thousands” of devices in recent months.

As research from Ti in March showed,  these challenges could be predicted. Nonetheless, the challenges run deep. Firstly, it’s not only finished products that are in short supply. Throughout the supply networks that create hardware, makers of other components at various tiers have experienced their own challenges and makers of screens, batteries, chips and semiconductors are all facing shortages. In addition, transportation and infrastructure are still some way from operating at capacity with assets underutilised and backlogs yet to be cleared at ports.

The outcomes for students are potentially huge with the World Bank estimating the five-month shutdown of schools so far this year, which has affected 1.6bn students globally, could cost them as much as $10 trillion in lost lifetime earnings. It’s also clear that the high-tech industry needs significant support from logistics providers over the next 12 months as manufacturing capacity comes back online.

For logistics providers active in the high-tech supply chain, though, there are also long-term challenges to contend with. The battle lines between Trump’s White House and Chinese authorities have been drawn and look set to become ever more deeply entrenched. The exclusion of Huawei from US 5G networks has certainly taken attention despite mixed results. There are huge gains for any economy able to install, operate and secure 5G networks but the confrontational game between the US and China has already started to spill over into the wider high tech market.

The US has slowly ratcheted up sanctions against Huawei over the last 18 months, and in May 2020, it banned any vendors from using US technology to produce components for Huawei. Barring any major changes to the situation, Huawei will have to stop production of its Kirin chips as its contract manufacturers partners require US technology to make Huawei’s own chips. As one of the world’s largest producers of smartphones and network equipment, the implications of Huawei stopping production of certain product lines are significant for the high-tech logistics market. Reports suggest the manufacture of the chips comes with a four-month lead time, meaning any resolution will take time to sink into the market.

In reality, though, any optimism for a resolution in the short-term is misplaced – the US increased and tightened sanction just this week (August 17). Indeed, looking deeper into the high-tech supply chain reveals that structural change is already underway. China has responded to US pressure by introducing wide-ranging and long-lasting tax incentives for chip design, packaging, testing and other relevant equipment, materials and software enterprises that in part aim to solve Huawei’s problems while boosting domestic capability and the attractiveness of Chinese products in the global market.

Perhaps the most salient sign for the future of high tech supply chains, though, comes from Hoi Han Precision Manufacturing (also known as Foxconn) which has stated a plan to actively create separate supply chains to serve Chinese and US markets. For Foxconn, Trump’s trade war has brought China’s days as the factory of the world to an end. The company has increased the proportion of its manufacturing capacity that sits outside of China to 30% (from 25% in 2019) and it can now make the iPhone entirely outside of China if needed. It will push further into Southeast Asian markets as well as increase its manufacturing base in India.

In sum, the high tech supply chain is changing rapidly and 2020 looks set to be an inflexion point, with the dual challenges of meeting surging demand for products and navigating the ongoing US-China trade war all but certain to only intensify in the second half of the year and beyond.

Source: Transport Intelligence, August 18, 2020

Author: Nick Bailey

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