NBN caught in the middle of a geopolitical storm
NBN Co's fragile supply chain reflects rising geopolitical and trade tensions between the US and China. It could also point to a tectonic shift in global tech leadership.
Global supply chains will never be the same thanks to the combination of COVID-19 and the United States’ trade and technology war with China.
Companies using inputs from third parties can no longer rely on the just-in-time supply of manufactured goods. This means holding higher levels of inventory to ensure security of supply to customers.
This clearly means high working capital costs which will have to be borne by the purchasers of the goods.
In electronics and telecommunications, the trade and tech war between the US and China has added a layer of complexity to the sourcing of components and rising levels of paranoia in Western countries of the location of manufacturing plants.
This is causing further disruption to supplies, pushing up costs and leading to new board level assessments of the geopolitical risks inherent in supply chains.
Of longer-term concern to foreign policy and trade experts is the potential for the US fight with China to end the US dominance and leadership in the manufacture of semiconductors.
Trade sanctions and bans on supply of US parts to Chinese companies are driving an acceleration in China's move to self sufficiency, which was already part of central planning through the Made in China 2025 Plan.
In Australia, there is no better place to see these disparate forces at work than in the recent disruptions to the global supply chain of the government-owned wholesale broadband supplier NBN Co.
NBN's response to this problem was well described by NBN's chief financial officer Philip Knox in an interview with Chanticleer at The Australian Financial Review CFO Live conference in October.
"Most of our components come from overseas, particularly China and particularly Wuhan," he said.
"I used to complain about the level of our inventories being way too high but then I went quiet on that recently because we did have a lot of inventory for good reason."
Knox said the pace of the NBN roll-out of its broadband network meant the company was wise to hold high levels of inventory to enable it to modify and resource in other areas, and find solutions quickly.
"But I still remember our head of supply ringing me up saying there's a small component that is made in Wuhan that we cannot get anywhere else and it's specifically made for us," he said
"It cost about $2.50 and it was one of the most important key components in a particular part of the network, which was news to all of us."
Knox said it meant NBN couldn't continue building its network unless it could get supplies of a Chinese part stuck in the supply chain, because COVID-19 had shut down the usual shipping lines.
"Really, the only way I could get it was to have it air-freighted - if you could get it at all," he said.
"And so it was a bit of a white knuckle exercise there for a little while but we found solutions. The other good thing that came out was how creative people get by letting management get on and find solutions. We're very good at managing crisis situations."
The second prominent NBN supply chain problem can be directly attributed to the US government's bungled move to limit Chinese access to US semiconductor chipsets.
Instead of cutting off chipset supplies instantly, the US provided ample warning for the Chinese to build their inventories and have an impact on the global supply chain.
When the US Commerce Department announced in May that from September 14 no US chipset technology could be shipped to Huawei, it was a buy signal for the Chinese telecoms equipment supplier.
That gave Huawei about three or four months to order as many chipsets as possible from its Western suppliers such as Taiwan Semiconductor Manufacturing Company, Mediatek, which is also a Taiwanese company, and South Korea's Samsung.
Chipset demand was already strong as seen by the numerous buy recommendations for semiconductor stocks. But the short window allowed Huawei and others in China to build inventory.
The US ban was designed to stop Huawei from using chipsets which utilise software supplied by US companies. But it resulted in a huge pull forward of production which affected the entire supply chain, right down to the core silicon.
It is believed Huawei is now sourcing new chipsets from Asian and European suppliers that either utilise US software or sourcing solely from the Chinese domestic market. The biggest supplier of chipsets in China is Shanghai-based Semiconductor Manufacturing International Corporation.
SMIC was one of 60 companies blacklisted by the US Commerce Department on Friday for its efforts to allegedly help the Chinese military build leadership in technology.
In one of his last anti-China trade restrictions before the end of the Trump administration, Commerce Secretary Wilbur Ross said on Friday: “We will not allow advanced US technology to help build the military of an increasingly belligerent adversary.
"Between SMIC’s relationships of concern with the military-industrial complex, China’s aggressive application of military-civil fusion mandates and state-directed subsidies, SMIC perfectly illustrates the risks of China’s leverage of US technology to support its military modernisation."
Ross said the Entity List designation would limit SMIC’s ability to acquire certain US technology by requiring US exporters to apply for a licence to sell to the company.
Caught in a geopolitical storm
NBN got caught in the middle of this US-China tech war about a month ago when its US supplier of network termination devices for its hybrid coaxial cable (HFC) said it could not supply products in a timely manner.
NBN Co has advised customers that the average time to connect new customers to the NBN via HFC technology is expected to increase from about 14 days to around 42-48 days from mid-May to mid-June 2021.
The NASDAQ-listed CommScope said the delays were because of a shortage of supply of silicon used in Broadcom semiconductor chips installed in its HFC termination devices, which are installed in households to connect to the external NBN cable.
In a statement issued to Chanticleer, NBN Co said: "NBN Co has been working on continuity plans to manage the impact of reduced HFC modem supplies resulting from a global demand surge for silicon chips during the COVID-19 pandemic.
"We’re working closely with our technology supplier to further reduce impacts."
Chanticleer understands NBN is using the same solution Knox used to solve the Wuhan engineering widget problem - air freight.
As well as boosting imports of CommScope termination devices through air freight, NBN Co is reducing equipment held in-field by technicians and retail service providers, paused self-install connections, is investigating refurbishing of returned devices, and placing large orders to improve priority in supply queues.
There is a larger geopolitical issue that arises from America's aggressive move against Chinese tech companies, and they were elucidated well by Boston Consulting Group in a document produced in March called How Trade Restrictions with China could end US Leadership in Semiconductors.
The passage of time has not diminished the compelling warnings contained in the document. If anything, the escalation of US actions against Chinese tech companies has made it even more likely that the report's grim predictions will become reality.
BCG says that "broad unilateral restrictions on Chinese access to US technology could significantly deepen and accelerate the share erosion for US companies".
In essence, it says that over the next three to five years, "US companies could lose 37 per cent of their revenues if the US completely bans semiconductor companies from selling to Chinese customers, effectively causing a technology decoupling from China."
The decline in revenue "would inevitably lead to severe cuts in R&D and capital expenditures, and the loss of 15,000 to 40,000 highly skilled direct jobs in the US semiconductor industry".
BCG says this would result in South Korea overtaking the US as world semiconductor leader in a few years and China could attain leadership in the long term.
"As experience in communications network equipment and other tech sectors has shown, once the US loses its global leadership position, this dynamic effectively reverses the industry’s virtuous innovation cycle and throws US companies into a downward spiral of rapidly declining competitiveness and shrinking market share and margins," BCG said.
"Lower R&D investment would inhibit the US semiconductor industry’s ability to deliver the breakthroughs that US technology and defence sectors rely on to maintain global leadership, and ultimately could force them to depend on foreign semiconductor suppliers."