The global crisis of the supply chain is questioning the progress of digitization, when until a few years ago its positive effects were considered unstoppable and accelerated. First was the awakening of the United States from the great challenge posed by the economic development of China, then the pandemic that persists, followed by the invasion of Ukraine by Russia and now the sharp rise in inflation and the economic slowdown, which is causing the panic of the capital markets and the collapse of the value of bitcoin.
Some experts and consultants, as Omdia explained at the 5G Forum in Seville last week, consider that despite everything there will be strong progress in 5G connections in the coming years. It should go from 500 million 5G connections at the end of last year to the expected 1.3 billion by the end of this year, to reach 4.8 billion by the end of 2026, out of a total of 12 billion mobile subscriptions on the same date.
If this high growth of mobile connections is achieved in the next four and a half years, the 12,000 million mobile subscriptions would represent about one and a half times the world population. 40% of this total mobile connections would be 5G and another 50% 4G in 2026, some 6,000 million, while 2G and 3G connections would represent only the remaining 10%, 1,200 million, said María Rúa Aguete, director of research at the consultancy Omdia, as seen in the following graph.
It is possible that these forecasts will be fulfilled, because there are more than four years to go before the end of 2026 and the grim situation of the current panorama can turn around in a couple of years. In the last twelve months, however, the economic, political and, above all, social situation has become dramatically complicated worldwide, not to mention climate change. The remainder of 2022 and for part of 2023 could be dramatic if the various indicators and global imbalances continue to worsen and there is no strong rebound a year from now at the latest.
It is true that we are in the most acute phase of the economic and social crisis, with a multitude of problems that are happening and piling up, without resolving or remedying them; just park them or ignore them. An example is the different strategy that various countries follow to deal with the current variant of the pandemic, less deadly but much more contagious.
One million deaths from Covid in the United States
Last Sunday’s New York Times dedicated the entire front page with large characters to highlight the figure of one million of the total deaths for now by Covid in the United States, more than in two decades of road accidents or on the battlefields of all the wars combined in the country, as the newspaper highlighted on the same front page. The figure of one million deaths in the United States attributable to Covid has been certified by the CDCP, the country’s Center for Disease Control and Prevention, and all the major media are echoing these days.
In many European countries, the pandemic seems like a thing of the past. In Spain, the use of masks is testimonial on the streets and indoors and is only used on public transport by obligation of the authorities. In China, however, a strict zero Covid policy is maintained, with populations of several million inhabitants, such as Shanghai and its surroundings, Shenzhen or entire neighborhoods of the capital, Beijing, totally confined.
A policy as strict as that of China would be difficult to maintain for so many months in the West. It is also reasonable to combine health with the economy, without forgetting the mental health of the population, because one cannot be permanently cloistered. But several experts point out that restrictions have been lifted with great joy in Western countries, as if Covid were a thing of the past.
Taiwan, which three months ago decided to relax its highly praised strict Covid-zero policy, is now seeing an exponential increase in contacts and gives a certain reason to China’s policy
A month ago, various reports published in the West suggested that China would soon relax its zero Covid policy. An official statement last week indicated that this opening would not take place immediately and last Monday it was confirmed that China would continue with a strict zero Covid policy in the affected areas. And this, despite the fact that this measure is having a very negative impact on the entire Chinese and world economy and affects logistics and the supply of manufactured products, both in China’s domestic market and in its exports.
Retail sales in China have fallen 11.1% in April from a year earlier, after a 3.5% reduction in March, according to official data released on Monday. Industrial production contracted 2.9% in April, compared to a 5% recovery in March. Car sales have fallen 48% to 1.18 million vehicles as many factories are idle and dealers have no cars to sell. Analysts, meanwhile, expect the recovery to be faster than it was in 2020 when the Covid zero policy is terminated.
Exponential growth of Covid in Taiwan
In Taiwan, which in March 2020 presented a strict zero Covid policy that was supposed to be temporary but lasted until February 24, when the government decided to live with the virus, the strategy carried out throughout the country had been praised. world. In mid-March, only a hundred new cases were detected, most of them imported, but by mid-April there were already a thousand, at the end of April 10,000, at the beginning of May 30,000 and on May 15, 68,769 new cases were recorded. . Three days ago, there were 768,543 Covid cases on the island and almost none imported.
Mortality in Taiwan due to Covid has so far been very low, since until mid-April only 854 deaths had been recorded. But the boom in recent weeks, coinciding with the lifting of restrictions, jeopardizes all the efforts made since 2020. In Taiwan, moreover, about 20% of people over 75 years of age are not vaccinated, first because they do not there were vaccines and then because many older people do not want to be vaccinated, despite information campaigns and aid.
Continued strict lockdown in many industrial hubs in Shanghai and Shenzhen may lead to further disruption of the supply chain for consumer and industrial products later in the year
A strong rebound in infected people and mortality is feared in the coming weeks. Major local elections are scheduled for the fall, which may affect the outcome depending on the evolution of the pandemic in Taiwan. In any case, what is happening in Taiwan could prove, according to experts, that the maintenance of a strict Covid zero policy in neighboring China, which also has a population genetically similar to that of Taiwan, is not unwise, no matter how much in the West it is not followed and neither is it now in Taiwan. South Korea and Japan also view the issue with great concern, because it is clear that all public measures to deal with Covid have serious drawbacks.
Slowdown in China alarms the West
The pandemic, whatever its incidence in different countries, continues to affect the entire logistics of shipping raw materials, components and finished products, which largely originate in China and are exported all over the world. China’s GDP accounted for 18.1% of the world total in 2021, below the 23.9% of the United States but above the 17.8% of the 27-member European Union, according to IMF data. According to the UN, China’s manufacturing output was a third of the world’s in 2020.
It is not surprising, therefore, that the vast majority of countries, whether in Europe, the United States or Australia, seriously suffer from China’s Covid zero policy and its slowdown. Many factories in the West must go to half throttle due to lack of components of all kinds, as is also the case with factories located in China due to strict confinement. Exports from South Korea and Taiwan to China fell 3.9% in April compared to the previous month, according to Goldman Sacks. As the Wall Street Journal published last week, “For decades, the world has depended on the huge Chinese market and factories; now that China’s economic growth is faltering, the suffering is spreading globally.”
In the more than two years that we have been in the pandemic, the supply of electronic components, especially semiconductors, has been normalizing; in part, or as a consequence, of the drop in demand for end-consumer products, such as smartphones or computers, and cars due to lack of product. The increase in chips and transport costs has also increased the price of finished products and, consequently, has reduced demand.
Chinese electronics customers, no product
Hon Hai Precision Industry, known in the West as Foxconn and for being one of the main assemblers of electronic products and the largest customer of Apple, is also heavily affected by the logistics crisis and its many plants located in China, especially Shenzhen, are experiencing serious supply problems of raw materials and components, which means that they cannot meet many of their orders. “Many of Foxconn’s factories in China have operated as if they were inside a bubble,” said Young Liu, its president, last week in an earnings presentation.
Foxxconn has been able to maintain a high production rate thanks to its excellent logistics system and a very exhaustive and closed control in its factories, but even so last March it had to suspend the operation of several of its factories in Shenzhen. Also its rival Pegatron, the world’s second largest iPhone assembler, after Foxxconn, has had to do the same. As a consequence, Apple has already announced that in this quarter it can invoice up to 8,000 million dollars less due to lack of product. Quanta Computer, which makes most of the Macbooks in a factory near Shanghai, also has the same problems as Foxxconn and Pegatron in supplying the products it makes for Apple. It is just one example of the long list of affected Western companies, and also Chinese.
More than half of Apple’s top 200 suppliers have factories in or around Shanghai (where Pegatron or Quanta are located), such as Suzhou (Panasonic, Japan Display and AAC Techologies) or Kunshan (Pegatron, Compal, Unimicron or Auras), which has been the last epicenter of Covid in China and where drastic confinement measures have been taken. Apple’s heavy reliance on suppliers and assemblers located in industrial hubs in China has many advantages, as Apple had shown up to a year ago, but the drawbacks have been starkly exposed by the pandemic.
Chip price increase
Semiconductor manufacturers, apart from not keeping up with the requested orders, are also facing a sharp increase in the prices of raw materials. TSMC, the Taiwanese manufacturer of custom chips, has already let its customers, including Qualcomm, NVidia, Apple or its compatriot MediaTek, know that at the beginning of 2023 the prices of its chips will be “one digit” more expensive. , because the raw materials used are more expensive. A chip developer has been surprised by TSMC’s second price hike; with the drop in demand, he thought that prices would even fall.
Samsung also wants to increase the price of its chips. According to the Bloomberg agency, Samsung is negotiating a chip price increase of up to 20% with its customers to offset the growth in costs. Older chip designs are the ones that will see the biggest increase in price, when they traditionally go down over time. And it is that the usual until recently is becoming obsolete.
The demand for consumer electronics products, such as televisions, computers or smartphones, is going down a lot but the demand for power chips, such as those used in automobiles, industrial equipment, energy or telecommunications installations, far exceeds the offer, says Helmut Gassel, commercial director and member of the board of directors of the German company Infineon, the main manufacturer of power chips, in an article published by Nikkei Asia.
Infineon, says Gassel, has an order book for the next twelve months that far exceeds its production capacity. The company has semiconductor factories in Europe, the United States and Asia. A year ago, Infineon opened a new plant in Austria and is expanding the one in Malaysia. For Gassel, it is important to relocate semiconductor production and not have as many plants located in Asia.
The semiconductor industry grew more than 25% last year, exceeding 550,000 million dollars, and some estimates suggest that it will exceed one trillion dollars in 2030. This high growth requires a diversification of production, to ensure supply of chips and long-term industry growth. For Gassel, “the turnover of the semiconductor industry has reached a level where the concentration of production on one continent [read Taiwan or China] is much less important than achieving the necessary economies of scale.”
The problem, on the one hand, is that the supply problems of chips, materials and raw materials have worsened with the Covid and now much more with the invasion of Ukraine by Russia, not to mention that the United States maintains its vetoes on many Chinese companies. The next few weeks will be critical, because products must begin to be manufactured and assembled by the end of the year. Although demand drops, it will continue to be high.
Expectations are not good. The European Commission has just revised downwards expectations for growth in the euro zone, from 2.7% this year compared to the 4% forecast before the invasion of Ukraine (in Spain 4% compared to the 5.6% estimated in February ), and 2.3% for 2023. The forecast for inflation in the euro zone stands at 6.1% for this year (6.8% in the European Union of 27) and 2.7 % in 2023, when the Commission’s previous forecast for the euro zone was 3.5%. A complete stoppage of gas shipments to Europe from Russia could greatly increase this projected high inflation.
If Covid cases rise sharply in Taiwan in the coming weeks and if China must maintain its Covid-zero policy to keep infections at bay, supply chains and logistics for manufactured goods may be in dire straits and unable to deal with the demand. Digitization in industrialized countries could be affected by lack of products. The inflationary spiral and the war in Ukraine would strengthen these dark omens, if a de-escalation of the conflict and a compromise solution are not achieved that will allow a return to a certain normality.
Experts have long been warning of the need to completely rethink the prevailing globalization model, not necessarily to deglobalize production and supply chains or slow them down, but to diversify production centers and diversify supply chains, so that are not centralized as they are now in Asia-Pacific.
What does not seem viable is that each region of the world be self-sufficient, neither in manufactured products nor in natural resources. On Monday, the European Union and the United States agreed to further cooperation on various issues, including semiconductor research, design, production and packaging. But the problems are numerous and pressing, which will not be resolved in the short term no matter how much will there be for understanding.