The Fragile Supply Chain

The recent outbreak of the coronavirus reminded us how fragile the supply chain is for telecom. As it turns out, the Hubei province of China is where much of the world’s optics and lasers are built that are the key component in every device that is used to communicate in a fiber network. Within days after the reality of the virus become apparent, the stocks of tech companies that rely on lasers took a hit.

The supply chain for electronics manufacturing stretches worldwide. The lasers are made in one place. The chips in devices are made somewhere else. Other electronic components come from a third geographic source. Components like cellphone screens and other non-electric components come from yet a different place. And the raw materials to make all of these devices come from markets all over the world.

The virus scare made the world wake up to the fragility of the supply chain. Without lasers, there would be no fiber-to-the-home devices manufactured. There would be no new servers in data centers. There would be no new small cell sites built or activated. Major industries could be brought to their knees within weeks.

It’s not hard to understand why I say the supply chain is fragile. Consider smartphones. There are probably a dozen components in a smartphone that must be delivered on time to a smartphone factory to keep the manufacturing process going. If any one of those components can’t be delivered, smartphone manufacturing comes to a halt. The manufacturing floor can be crippled by a lack of screens just as much as it can suffer if the chips, antennas, or other key electronic components become unavailable.

It’s impossible to know if the coronavirus will cause any major disruption in the supply chain for fiber optics – but the point is that it could. If it’s not a virus today, disruptions could come from a wide range of natural disasters and manmade problems. I remember a fire that destroyed a fiber optic cable factory a few decades ago that created a major shortfall of optic cables for a year. Floods, fires, earthquakes, and other disasters can knock out key manufacturing sites.

Manmade disruptions to the supply chain are even easier to imagine. We saw the price of electronics components shoot up over the last year due to tariff battles between the US and China. The supply chain can be quickly cut if the country making devices goes to war, or even undergoes an ugly regime change. It’s also now possible to weaponize the supply chain and threaten to cut off key components when negotiating other issues.

I’m sure that very few Americans realized that the Wuhan region has a near-monopoly on the manufacture of lasers. A worldwide economy rewards the creation of monopolies because components are cheapest when an industry takes the most advantage of the economy of scale. The companies in the Wuhan region can likely manufacture lasers cheaper than anybody else.

From a strategic position, countries like the US should foster their own industries to manufacture vital components. But that’s not easy or practical to achieve. A new US company trying to compete on the world stage by making lasers is likely to be more expensive and unable to compete when the supply chain is humming at normal capacity. It’s hard to picture creating a competitor to the Wuhan region that can manufacture lasers in the quantities, and at a price the market is willing to pay.

In the long run, the world always finds alternate solutions to any permanent changes in the supply chain. For example, if China is ever unable to export lasers, within a few years other countries would pick up the slack. But the fiber industry would be devastated during the lull needed to find a new source of components. Bank of America reported last year that 3,000 major manufacturing companies were already reconsidering their supply chain due to tariff and other concerns. Some of these companies, particularly electronics companies have been considering bringing production back to the US now that factories can be heavily robotized. I’m sure the coronavirus has accelerated these decisions.