Alright, Adam…I’ve been putting this off, but you successfully pushed me over the edge with the Sandy Cortez clip about “inflation" and not having enough “ports and chips.” The lunacy and hyperbole regarding the root causes of the semiconductor supply chain squeeze have gone far enough. Here’s what’s really happening (I apologize in advance for the length):
As everyone knows, when the World Economy switch was flipped off in March 2020, everything ground to a halt. For a brief period of time, nobody was building or buying anything. Airlines were cancelling orders, rental car companies were selling off their fleets, and so on. But shortly thereafter—after everyone took a deep, mask-inhibited breath—factories around the world were classified as “essential” and manufacturing resumed. What happened next is the root cause of the semiconductor squeeze...and a lesson in human psychology.
Let me start with a recent analogy. Back in 2011, a massive monsoon hit Thailand, resulting in widespread flooding that devastated the country. This alone wasn’t enough to crater the global economy, however, zoom in a little further and you’d have noticed the manufacturing operations for Western Digital—one of the world’s largest hard-drive manufacturers—was located there. Now, while this event alone didn’t cause a global hard drive shortage, a certain knee-jerk reaction did:
With a pre-allocated pipeline of millions of dollars in hard drives, Avnet—a massive electronics component distributor—decided to place a one billion dollar (that’s billion with a “b”) “overnight" buy with Western Digital…which of course totally cleared out their inventory. Why? Because they didn’t want anyone to beat them to it. The end result? Hard drive prices went through the roof and if you bought a hard drive any time in the next three years, whoever you bought it from bought it from Avnet.
Now you *could* call this a supply chain issue—after all, a natural disaster *did* ultimately cause disruptions in supply and production—but, in reality, this is simply toilet-paper hoarding at a corporate and global scale. Some VPs in some office somewhere didn’t want to be caught with their pants around their ankles for not having enough safety stock because the financing charges would have taken too big a bite of their margins.
Fast forward to today, and the same exact thing is happening. Ever since the initial supply shock, every massive corporation has been in a race to hoard what they can to get product built…with the added benefit of handcuffing their competitors. We see brokers sucking up any and all available inventory and selling $7 Wi-Fi modules for $70+. I recently had to run to my computer on the 4th of July after getting a stock notification on backordered part. I somehow managed to secure 500 parts we’d been waiting months for and felt like I’d just scored Burning Man tickets. Minutes later they were all gone.
Does anybody really believe that a car built in 2021 has 10x the semiconductors of a 2019 car? Or that everyone in the world suddenly realized they needed an iPad? Or that if we only had enough “ports” that everything would be fine? Yes, this is really advanced technology, and yes, it is incredibly difficult to build, but it is *not* a supply and demand problem in the “traditional" sense everyone (including the media) seems to think it is.
Being the owner of a small business supplying Fortune 500 companies and the US government with critical hardware, I have deep connections and standing in this particular area. If nothing else, I hope this explanation reminds everyone that corporations are made up of individuals, and no matter how experienced or professional one might be, nobody is immune from the natural human instincts of fear and greed.
Yours truly,
An Anonymous Producer (and Eagle Scout)