China, Korea instability may make 2014 the year tech stands still

Summary:A pandemic in Asia, war in the Koreas, or a combination of these would create absolute chaos in the technology industry.

We live in an extremely fragile world. One in which, as consumers of all forms of technology, we have become extremely dependent on the wellbeing of two economic and industrial powerhouses in Asia: China and South Korea.

The People's Republic of China represents the largest contract manufacturer of consumer electronics as well as business and enterprise computer equipment in the world.

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Many of you are familiar with Hon Hai Precision Industry Co, also known as Foxconn. In its 13 factories located in nine Chinese cities, the manufacturing giant performs final assembly of Apple's iPhone and iPad, not to mention a huge pipeline of products from many other OEMs, including IBM and HP, as well as game consoles made by Microsoft, Sony, and Nintendo.

There are many other clients that Foxconn has that are too numerous to mention.

And Foxconn is just one manufacturer based in China. There are quite a few significant others, including TSMC, a Taiwanese firm that is the largest independent manufacturer of computer chips in the world.

TSMC has foundries in Taiwan, China, and Singapore and specializes in the system-on-a-chip semiconductors (SoC) that go into smartphone handsets and many kinds of tablets, and is slated to become the primary manufacturer of A-series SoCs that are used in Apple's iOS devices.

GlobalFoundries, in Singapore, is another prominent semiconductor firm that has AMD, Qualcomm, Broadcom, and STMicroelectronics as major customers.

And there are also those firms that specialize in manufacturing flash memory that is used in SSDs and mobile devices, DRAM, as well as controller ASICs of all sorts used in every consumer and business application imaginable.

Taken as a whole, the three Chinese-speaking nations are a crucial contract manufacturing triad of many, many technology products that are used throughout the world. But it's only part of the story.

Right next door to China is Korea. North Korea, the hermit kingdom, has no technology value whatsoever. But South Korea is home to Samsung, a technology conglomerate that in and of itself has 10 times the GDP of South Korea's neighbor in the north.

Samsung not only produces and brands its own products, like the Galaxy smartphones and tablets, but it is also the largest SoC foundry in the entire world.

In addition to its own SoC line, the Exynos , Samsung also makes chips for Qualcomm and Texas Instruments, which are used in many other smartphones and tablets. And it is also the current volume manufacturer of the A-Series chips used in the Apple iOS products. Among others.

Samsung is also the world's largest producer of DRAM and Flash, as well as the largest manufacturer of LCD displays of all sizes. And a huge manufacturer of lithium-ion batteries.

And we're just talking about Samsung here. There are other gigantic technology companies in South Korea, such as LG and the SK Group, which are important participants in the overall semiconductor supply chain.

If there were to be any disruption in the pace of manufacturing in either China or South Korea, or, in a nightmare scenario, both countries, or extend to nations of influence such as Taiwan, Singapore, Japan, Vietnam, Malaysia, and Indonesia, the technology industry as we know it would effectively come to a screeching halt.

What could cause such a thing?

I am not an economist. I am not a political scientist. I am not a sociologist. But I am a technologist who from time to time dabbles in futurism. I like to ponder, on occasion, what technology may exist 10 or 20 years from now , and how society and our economy may be impacted as a whole .

These are thought exercises that for the most part I find entertaining, and it's good fodder for writing material.

I normally do not think about the near future and what could happen under certain geopolitical and socioeconomic scenarios and what it means for our industry, because there's too much immediate randomness in our world. But recent events in Asia have gotten me thinking, and what I have been thinking about disturbs me greatly.

There's been a lot of saber rattling in North Korea lately. Most political analysts write this off as crazy blusters of a young leader looking to cement his position and appearance of strength with old-guard military installed under his father's reign, and may have no real intention whatsoever of causing a conflict.

There are certainly risks that Kim Jong-Un may try to push the boundaries of what is acceptable and go too far, such as a small demonstration of military capability by attacking a small South Korean island with artillery fire, or testing more missiles that could indicate nuclear delivery capability.

That would prompt a military retaliation by South Korea and the United States, and could escalate into an all-out conflict.

In such a conflict, there is no question that South Korea's technology centers will be targets.

Granted, the chance of this happening spontaneously in the next few months is probably slim. China, behind the scenes, is almost certainly telling Kim Jong-Un there's only so much mishegas it will tolerate before it severely curtails or cuts off the vital aid and assistance the country needs from a military and economic standpoint.

Without Chinese assistance, North Korea starves to death.

But there's a much bigger problem that could result in a snowball effect, which could force such a conflict.

Over the last few weeks, China has been trying to contain the spread of a strain of avian flu virus, H7N9. It has now been confirmed that two men in Shanghai have recently died from this pathogen, and hospitals in Beijing are stocking up on essentials to contain a full-on pandemic. As I write this, more and more cases are being reported.

Every year, the world holds its breath to see if the next avian flu strain originating in China is capable of jumping to other species through the food chain and affecting the general population through human-to-human transmission. Sixteen thousand pigs have been found dead in a river near Shanghai, and medical authorities there are attempting to determine whether there is a link with H7N9.

This particular outbreak could end up being contained very quickly, there may be no link whatsoever to the food chain in China, and there is no evidence as of yet that people can transmit this strain to each other. But someday, perhaps in the next few years, we could run out of luck, and China could end up in a full-blown pandemic.

In a pandemic situation, China would want to restrict travel between cities, and would impose martial law. Logistically, it would make the manufacturing of electronics difficult, and if a large population of skilled workers were to become ill, it could cause the Chinese supply chain to shut down entirely.

Under this scenario, China would be busy with dealing with any number of internal problems, and Foxconn and other major contract manufacturers could be closed down for months, perhaps as long as a year. This alone would wreak havoc with the technology industry on a number of levels.

But we're just talking about turning the factory off switch in China itself. Any reasonable outbreak would take time to determine all of the vectors, and because of the trade and commerce and heavy transportation of goods, services, and travellers between China, South Korea, Japan, and other countries in Asia, it is extremely likely that such a pandemic would find itself in those countries as well.

And if South Korea gets sick, then we've really got problems.

Ironically, North Korea's isolation from the rest of the world actually puts it at something of an advantage in terms of being shielded from a pandemic situation in Asia.

But if China is occupied by dealing with a pandemic, and Korea also potentially has to deal with a pandemic, and North Korea's economic support from China and other nations becomes disrupted in any way, there's a problem.

With his country under extreme economic duress, Kim Jong-Un and his generals might see a target of opportunity, and then the possibility of that nation going to war with its neighbor to the South increases significantly.

The global economic consequences of such a "perfect storm" in Asia like the kind I describe are massive and would have far-ranging implications on many industries and economies, not just the tech sector. Obviously, no electronics and technology of any kind would be able to be produced for a long period of time, and would cause the channel inventory of all kinds of products to run dry.

People won't be wondering when they can get the next iPad, iPhone, or Galaxy product. Or even thinking about such concepts as fanboyism . They'll be thinking about when they can get technology products, period.

The price of existing products in the channel will skyrocket. Replacement parts for all sorts of things will become scarce. Large secondary markets for used products will open up. The wireless industry will almost certainly have to freeze sales on new phones. PCs of any kind, old stock or new stock, running any flavor of OS, will be in huge demand.

And the companies that have server and datacenter equipment in abundance, like IBM, HP, Dell, EMC, Oracle, Fujitsu, and Cisco will be stockpiling these for their own use as well as for the US and EU governments.

In the absence of being able to buy new equipment and keep datacenters running, many enterprises might look to cloud services providers like Amazon AWS, Microsoft Azure, and hosted offerings by large services firms like IBM GTS and HP EDS that can either acquire such equipment or already own it.

But I suspect that long before that, the US and EU governments will enact controls and emergency legislation that will set quotas on what equipment can be bought and sold, and how these large corporations will control technology resources.

Almost certainly, technology rivals that would normally not want to sit in the same room with each other and that engage in open trash talk in today's environment would be forced to cooperate.

I won't even get to what happens if we can't keep a pandemic from spreading to this country. That's an article for someone else, and a scenario that frightens me too much to even contemplate the consequences.

Would a pandemic in China create a "perfect storm" for disrupting the global technology industry? Talk back and let me know.

Topics: China, Apple, Government, Hardware, Korea, Samsung, Smartphones, Tablets

About

Jason Perlow, Sr. Technology Editor at ZDNet is a technologist with over two decades of experience with integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer... Full Bio

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