supply chain

Tech outage

With Chinese leader Xi Jinping’s recent announcement that he intends to reunify Taiwan, combined with the ongoing supply chain instability caused by the conflict in Ukraine, is the tech sector at risk of a disruption that could threaten its rapid advance?

Words:

Sophie McCarthy

IN DECEMBER 2022, customs officials arrested a woman for attempting to smuggle hundreds of semiconductor chips into Zhuhai, China – from Macau – under a fake pregnancy bump. This incident alone highlights the extent of China’s chip shortage, which is the result of high domestic demand and an extremely constricted supply.

As a result, a buoyant underground market has emerged, meaning that secondhand or out-of-date chips can fetch 500 times their original cost.

Semiconductors – which are sometimes referred to as integrated circuits (ICs) or microchips – are the brains of modern electrics. Today, there are more than 100 billion in daily use around the world – reported to be equal to the number of stars in our corner of the Milky Way galaxy.

These chips have been in acute shortage in China since 2020, when a global scarcity caused by Covid-19 supply chain disruptions upended every aspect of the Chinese tech industry. This problem is now being felt worldwide, too, owing to the fact that Ukraine is home to half of the world’s neon gas, which is critical for manufacturing semiconductor chips.

Ukraine is also a major supplier of xenon and krypton gases, also critical to chip manufacturing. The recent war, therefore, has had a further detrimental effect on the industry.

“For a long period, we enjoyed no challenges with technology infrastructure supply chain,” says Chris Clark, CEO of Prosperity 24/7. “We were able to procure, purchase and implement with, at worst, a one-month lead time.

“And if you were using cloud computing or on-demand elastic computing, what you needed was available there and then.

“But recently, there have been issues – for obvious reasons – around certain materials, such as neon coming from Ukraine, palladium from Russia and microchips from Taiwan.

“We’ve seen it over the past year or so in industries other than tech, too,” he adds. “The car manufacturing sector has had huge issues when it comes to access to microchips. In fact, because of this, it had to stop producing various cars – lots of Porsche models and some Volkswagens. It is a really pervasive challenge that people are either ignoring – ostrich in the sand approach – or are hoping that it will just go away. But with the current geopolitical climate, it’s actually getting worse.”

THE TAIWAN ELEMENT

In October 2021, China’s president, Xi Jinping, vowed to realise “reunification” with Taiwan by peaceful means. Taiwan responded shortly after by calling on Beijing to abandon its “coercion”, reiterating that only Taiwan’s people could decide their future.

Clark explains that, at present, 90% of the world’s microchips are made in Taiwan. “This means that there is a huge concentration risk,” he says.

“The major manufacturers are trying to mitigate by setting up in locations like the US and other more geopolitically secure environments, but they are a long way off that point of being live.

“This means that we have a lack of availability of the raw materials that go into microchips because of the war between Russia and Ukraine, coupled with the fact that – and hopefully this won’t happen – ▼

We’ve got a problem with what is literally a fundamental component that holds everything together

China could attack Taiwan. We all depend on technology so much today, but we’re being left very exposed.”

Clark adds that the real impact from all of this could be felt by businesses when they hit an unexpected event – such as a serious cyberattack.

“A large-scale company might have 400 devices suddenly destroyed, and it’s not like they can pop to John Lewis and buy 400 more. There’s no availability in supply chains for laptops or devices or desktops or servers, so the results would be absolutely catastrophic,” he explains.

“We’re also at a point in time where we’re much more mindful of sustainability and are trying to avoid excessive consumption, and we’re having to go back to the older approach of having to have cold spares, which is antiquated from a business continuity perspective.

“But it feels like some organisations of scale are certainly going to have to make sure that they’re planning for that worst-case scenario.”

He continues: “We’ve been used to living in a safe world. We’ve had a positive relationship with China for many years. Germany has enjoyed purchasing cheap gas from Russia and selling its materials to China, which has meant a really productive period for its economy.

“But that fuel supply is now being sanctioned and [Germany] is receiving warnings about exporting to China, so it has to change its market.

“When you start unpicking it all from a geopolitical risk perspective, it’s only then that you open your eyes wide and see the real impact. Russia has fuel, Ukraine has grain and China has supply chain.

“Then you’ve got the situation with microchips,” adds Clark. “And while Taiwan is presently on the right side of the fence from a geopolitical standpoint, if China were to take it back then suddenly it goes to the other side.”

financial services loves its physical infrastructure but it will have to transition to cloud computing

MEASURING THE IMPACT

So, what will be the impact of this troubling situation? “If you think of the globalisation of cloud computing and the speed, accessibility and enjoyment we’ve had from elastic computing – that will persist and continue. But the cost of service may suddenly be ratcheted up,” says Clark.

“If the likes of Microsoft, Amazon and Google suddenly can’t purchase what they need, you’re going to start having a finite supply of tech until they can address their supply chain risks. I don’t think consumption-based computing will be in jeopardy, but I think it will be hindered.”

He believes connectedness, however, is a different matter. “If things like microchips and laptops, which are the end-user device, aren’t available, then the situation starts to become far more frustrating.

“And we can’t even pin a Brexit badge on it, which is what most of us – including me – tend to do. We’ve got a problem with what is literally a fundamental component that holds everything together.

“I’m not going to say the fabric of society’s going to unwind, but the accessibility to cost-effective technology is going to be seriously hampered because companies are going to put their prices up to maintain their margins.”

What does this mean for businesses? “For the average company, I think the ability to protect infrastructures is probably more important than ever,” says Clark. “You can’t expect to just swap things out if they go wrong.

“Similarly, from a sustainability point of view, we should all be stressing assets longer anyway.

“The financial services sector still loves its physical infrastructure – such as servers and storage in a cupboard somewhere in a datacentre. It will have to transition to cloud computing and it’s having its hands forced here.

“Similarly, people who think that they can just have a rolling replacement with their desktop devices are going to have to be a bit smarter about when they can procure, when they can purchase and when they can have access to them – because it may be that you go to order kit and it just isn’t there.”

Clark also believes we might see a shift towards nearshoring.

“This was something that came out of Covid-19,” he says. “We saw an initial trend of people producing items closer to home because they knew that supply chains were being disrupted.

“Then we had a very quick flight back in response to traditional geosupply chains being re-established.

“But once again, owing to everything that’s happening at the moment, I think nation states that have put down equipment, so to speak, may need to stand things back up again.” n