Tech supply chains are still a complete mess

published on July 20, 2020

(grunting) – Sweet, okay, we're recording (claps) So, I'm in New York right now and The Verge offices are basically shut down We're all working from home, because of the coronavirus outbreak

And while we can still publish remotely, a lot of stuff is just shutting down – Indoor shopping malls across the state closed last night, until further notice – 988% of our schools have closed down – 100% of the workforce must stay home

– Right now, the urgent problem is the public health crisis We need to slow the spread of infections, and filled out hospital capacity That's what's most important But behind the public health crisis, there's also a manufacturing gridlock

That's gonna cause huge problems for basically every hardware company It turns out mass producing hardware is really complex, with thousands of moving parts, and almost no stockpile to fall back on, when a disaster like the coronavirus hits

When China went on lockdown in February, it basically stopped electronics manufacturing cold An analyst group called TrendForce estimates that 57 million laptop computers shipped in February, which might sound like a lot, but it's a 48% drop from last year

We're already seeing some of the impact from that If you need to replace a broken MacBook right now, you could be waiting for awhile And some analysts are predicting the next round of iPhones could also be delayed Manufacturing is just a much more brittle system

Than people realize, the result of a hundred years of cutthroat competition But to see how it got that way, you have to look at the big picture Making a computer or a smart phone is really complex

But, the process itself is really just an assembly line This system was pioneered by Henry Ford in the early 20th century – Everyday, as many as 80 boxcars of parts arrive at each plant – Everything has to happen in the exact right order

So, running out of a specific part can stop the whole assembly line in its tracks To make sure that didn't happen, Ford arranged his system in batches Executives would decide at the beginning of the process how many cars to make

But, batch production created other problems It was really hard to guess the right batch size so far in advance And even if the executives hit the right number, they had to manage huge stock piles of inventory Whether it was parts waiting to be assembled,

Or cars waiting to be sold (metal banging) After the second world war, Toyota pioneered a new approach that would fix the inventory problem It was called the Toyota Production System,

Or just-in-time production It looks decades to perfect, but by the 80's, they were making cars more cheaply than anyone in Detroit He became the first manufacturer to make 10 million cars a year,

All thanks to efficiency of the new system Under the Toyota System, production's continuous and inventory is kept to an absolute minimum Components arrive just in time to be assembled, and the finished product arrives just in time to be sold It takes a lot of coordination to make that work

But, if you can do it, you don't need those huge warehouses anymore Which saves a lot of money in the long term Keeping excess inventory down is particularly important for electronics companies Nobody wants last years camera,

Or last years processor in this years phone So, excess components are usually just wasted And the components that change the fastest are often the most expensive ones in the phone When Tim Cook first came to Apple in 1998, his main job was moving the company over

To lean, just-in-time manufacturing, keeping inventory costs as low as possible Fast forward 20 years, and the entire hardware industry works that way But, we know from previous disruptions, that system can be really fragile

– Okay, so remember the March 2011 earthquake and tsunami that knocked out the Fukushima Daiichi Nuclear Power Plant? Right, I promise I have a point As a result of the tsunami, it suddenly became a lot harder to buy cars in certain colors

Here's how that happened There was a plant nearby that made a pigment that makes car paint sparkle It was used by pretty much every car maker At the time of the tsunami, it was the only place in the world that made this pigment

Also, the site of the pigment stockpile Suddenly, it was really hard to buy cars in certain shades of red and black In fact, about 20% of Toyota's inventory was affected by this – Under the just-in-time system,

Inventories are kept so low that manufacturers don't have anything to fall back on if something goes wrong If any one of your suppliers stops shipping, you have to halt manufacturing until you would find a replacement That's hard enough for a car,

But for something as complex as a smartphone, there are thousands of parts and dozens of different suppliers The supply chain is bigger than any one company or any one country Just look at this tear down

IFixit did of the Galaxy S20 Ultra Samsung is a South Korean company, and they make a lot of their own parts But, you also have a ton of Qualcomm chips designed in the US and probably fabbed in China The Bluetooth module is from Murata,

Which is based in Japan The wifi modules built by Qoryo, another US company that's most likely building in China That's a really big supply chain, which is a dangerous thing to have if you're in a global pandemic

Any one of those companies might have to shut down because of the coronavirus Either because the factory closes, or the home offices are so messed up that they can't respond to orders If that happens, Samsung's gonna have

A really hard time making this phone While you might think they have a lot of those chips stashed away, just in case, the logic of lean manufacturing and just-in-time production means they probably have less than you think

(light music) At this point, Chinese factories are starting to open up again But, they're running at half capacity, and it's gonna be a slow process getting them back to full strength

There's also a natural delay built into the product cycle Apple's new iPad Pro seems to be unaffected since those devices went through production two months ago But, anything that was planned for release two months from now is probably running into trouble

Which is why analysts are so nervous about the next round of iPhones So, we don't know what will happen There's still a chance manufacturers will get up to speed in time, but don't be surprised if a lot of

The big hardware releases of 2020 end up getting pushed back – You remember the paint pigment I was telling you about? So, the factory reopened in May, but it took them until September to catch up on their back orders

But the good news is, by 2013, the company that made the pigment, Merck KGaA, had opened a second factory So, now there were two One in Germany and one in Japan It's not as easy to move the iPhone out of China though

I mean, the iPhone relies on skilled labor In 2017, Tim Cook pointed out that there are way more tooling engineers in China than there are in the US The plain fact of the matter is that there aren't a lot of places that Apple can go

Just-in-time manufacturing is very efficient But, it's also very fragile Resilience doesn't show up as clearly on a balance sheet But in times of crisis, it might be exactly what we need – Hey, thanks for watching

Sorry for the shaky camera and the bad sound We're doing our best I know it's a little scary in the world right now, but yeah, take care of yourself Wash your hands, and try not to go outside too much and we'll get through this

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