Tech Manufacturing: A Disaster Waiting to Happen

By Peter Cochrane  JUN 19, 2012 12:35 PM

The manufacture of technology, along with its essential raw materials, is now concentrated in a single region. This lack of resilience leaves the industry dangerously vulnerable to disruption.

 


Historically, mature markets settle down with three big competing suppliers and a handful of niche players. This rule of three has tended to dominate regions such as North America, Europe, and southeast Asia. But since globalization took hold, geographic diversity has become distorted along with the resilience of supply.

Examples of a growing supply-chain brittleness include manufacturers temporarily denuded of LCD screens, memory chips and batteries by fires, a tsunami, and industrial problems. With only a few plants located in south-east Asia, we are running the gauntlet of man-made and natural disasters.

Underpinning this limited number of suppliers are the producers of vital rare earths and other basic components. So we now have a concatenation of limited sourcing and manufacture in the supply chain concentrated in just one region. These set of circumstances amount to a major disaster just waiting to happen.

The 10 Dominant Contract Manufacturers

So what of our electronics and computing power? Is the situation any better for the PCs, laptops, tablets and smartphones? Today, all these devices are produced by just 10 dominant contract manufacturers. This small group is spearheaded by Foxconn of Taiwan, which manufactures for Apple (AAPL), Dell (DELL), Hewlett-Packard (HPQ), Acer, Sony (SNE), Nokia (NOK), Intel (INTC), Cisco (CSC), Nintendo (NTDOY), and Amazon (AMZN) among others.

This industrial nesting happened before with domestic goods, automobiles, aircraft and boats -- from the production of individual components through to the complete product.

Domestic ovens are a prime example of a product differentiated at the last minute by the installation of a custom control panel, doors and decals. But the carcass and heating elements are the same for many of the big names in the market -- only the external finish and prices vary.

One big difference with this sector is that production facilities remain reasonably distributed across continents with Europe, North America, and south-east Asia all well supported.

However, they all share the same Achilles heel: Their electronic components come from just one region – southeast Asia. And the really worrying bit? Many of the 10 big players in the IT field are not making good profits, and economic pressure could result in the 10 becoming seven.

Next Phase of Industry

Now for the good news. The next phase of industry, production and supply will be nano- and bio-based and looks as though it will be far more distributed and locally based. Provided we can make the transition from our existing circumstances to the new ones, then we should see a far more stable and resilient planet.

Before this change can happen we need to see the reform of one important discipline – and that is economics.

So far we don’t have a single economic theory that has stood the test of time or resisted the changes in the market created by technological and societal change. In short, economic theory and practice isn’t working.

Making judgment calls using simplistic models of supply, demand, price, and profit is far too crude a starting point. We need to include resilience, survivability, sustainability, people, and ecological impact in the equation.

Editor's note: This article originally appeared on TechRepublic.

Twitter: @PeterCochrane
No positions in stocks mentioned.