States of shock: Recovering our tech economy after COVID-19
The first pandemic-triggered supply shock event was big, but not devastating. Yet it proved to be one of several factors triggering a tremendous worldwide demand shock, the result of which may be a second — probably worse — supply shock.
Growing up in the very median of Oklahoma's "Tornado Alley," I know first-hand the feeling of staring at the back side of a bolted-shut storm shelter door, and worrying the whole world will be gone when the wind dies down. After a considerable period of prayer, the next thing one does to tamp down the rampant anxiety is to mentally prepare to assess the damage — to comb the grass for broken glass, to listen for people shouting, to help neighbors account for their pets. More often than not, one over-prepares, and the damage isn't as bad as one imagined it could be.
When the worst has happened before, though, even if just to someone next door, one's imagination gains a measure of credibility.
Many of us are sheltering in place today. We've said our prayers, and to the extent that we're allowed, we've hugged our children. Now, while the Pause button continues to be held down on our world, let's assess what will have happened to the stuff from which our careers, businesses, and livelihoods were built. Where will the damage have been caused? Who will help us re-establish some sense of normalcy, even if it's not a resumption of what we had? And when we find forward again, will we be able to fast-forward to where we wanted to be? Or are baby steps the only ways ahead?
By now, it's very likely you will have seen the chart that demonstrates the principle of "flattening the curve:" of managing the number of active cases of coronavirus infections so that they fall within the capacity of hospitals and emergency facilities to address them and save lives. At the rate in which the virus has already spread worldwide, experts believe, people would need to maintain extreme social distancing for as long as 18 months, perhaps longer, for that curve to remain manageable.
Here is an optimal model of that curve in a best-case scenario for a three-month pandemic event in Great Britain, as projected by the experts of the UK's COVID-19 Response Team at Imperial College London. The flat, red line at the bottom represents Britain's existing surge critical care bed capacity of 14 beds per 100,000 people. The Response Team projects that a complete social suppression policy, including extreme social distancing for folks 70 years of age and older, could result in critical care bed occupation remaining under 100 per 100,000 people — again, in a best-case, 12-month scenario.
But that's not the likeliest outcome at present. In its guidance to the UK Government, the Response Team took into account the possibility that the pandemic event could last a year or longer. They evidently realized that sheltering in place for well over a year could cripple economic production in every sector — not just technology, but food, manufacturing, textiles, and transportation. With that in mind, the Team published a compromise suggestion for how some form of an economy could be eked out.
Their concept is called adaptive triggering. It creates windows of time in which suppression strategies, such as sheltering in place, could conceivably be relaxed for a given region. The trigger would be a threshold percentage of the number of occupied intensive care unit (ICU) beds in that region.
Under this system, perpetual attention would be paid to the ICU incidence count, shown on the simulated chart above in orange. When that count is high, the region would resume enforcing full suppression measures, and many production facilities, offices, and schools would be shut down. Over time, the incidence count would fall again, and a way of life faintly resembling normalcy could resume for a limited time.
Not even the most dystopic science fiction has considered a society capable of entering an automatically triggered "sleep mode" for two-thirds of the time. For anyone trying to do business locally or operate a school, an imposed lifecycle of adaptive triggering would make it difficult to plan a schedule that looks out as much as four weeks ahead. So consider what such a saw-toothed future would look like for anyone trying to synchronize the itineraries of all the vital parties in a supply chain. It's a concept for which no one to whom we introduced this suggestion, could conjure a response other than shock and awe.
But this suggestion, or something like it, has started to be taken literally. Last weekend, former US administration chief economist Kevin Hassett, now an advisor to the administration on coronavirus policy, asserted that the country may have to curb job losses and resume some production in the near term, in order to avoid an economic depression. "You really can't shut down the global economy for six months," he told CNN, "and expect anything to continue."
As Asian countries continue to see success in containing the novel coronavirus' spread, market analysts are producing relatively optimistic projections. IDC's adjusted guidance, for instance, states the most likely outcome for the global semiconductor market is a year-over-year revenue decline of 6 percent — a hit, certainly, but nothing close to catastrophic.
One reason for that optimism may be a sense of confidence that suppressed demand, in countries where the virus has become more contained, will spike.
"I do subscribe to the belief that you will see a recovery here," explained Stephanie Segal, Deputy Director of the Center for Strategic & International Studies. "The V-shaped recovery is now very much out of fashion, so we have a U-shaped recovery. But we will have pent-up demand coming out of this. And I think you then end up having a recovery to levels pre-crisis."
Segal says the effects of the current economic downturn may be compounded by crises of confidence throughout the world, and reactions to the uncertain nature of the virus' transmissivity path — particularly in those countries where uncertainty preceded action. But that uncertainty, being a psychological factor, could be remedied in short order, giving her optimism that the global economy, including technology, could resume its previous course by the end of 2020.
"We've certainly had at least a pause," remarked ZDNet contributor Ross Rubin, principal analyst with Reticle Research. He noted Apple's warning of supply chain disruptions for components for iPhone and other devices. As a supplier itself, it first closed its retail outlets inside China, and later as infection cases within China subsided, reopened those stores at roughly the same time it closed its retail outlets outside China.
"The reports that we're getting back now is that the factories are starting to gear up again," Rubin continued. For example, Apple has announced product refreshes for iPad, still on schedule for May. "There seems to be some confidence there that, while those products do not ship in anywhere near the same volumes as iPhones — particularly the iPad Pro, which is a more premium product — they are introducing new, cellular-enabled products."
China's TCL, which has already captured a substantial share of the US HDTV market, appears to be continuing its plan to introduce handsets to North America this year, including a foldable model. Lenovo appears to be continuing its plans to build out the Motorola Razr brand in coming months. "So clearly there had been disruption," said Rubin, "and it appears to be that the capacity is now coming back online for major, high-volume manufacturers. If you're a smaller brand, a startup, you may need to wait in line for a little bit while the big birds dip their beaks."
"We're on the cusp of transitioning from 4G to 5G phones. We've had a supply disruption, and we've had a demand disruption," noted Kevin Anderson, senior semiconductor analyst at Omdia (formerly IHS). In some cases, he recounted, China-based manufacturers were allowed to produce goods for shipment, but were unable to ship due to export shutdowns. "So there are some companies that have a stockpile now of 4G mobile devices that are not sold, that they were able to actually build, but they weren't able to ship and people weren't able to buy because they were locked up in their homes.
"Well, they're also planning on releasing their 5G models. But they know if they do that," Anderson continued, "then they're going to have this stockpile of 4G models that they'll either have to discount to sell, or find something else to do with. In some cases, they're delaying the new model launches for a few months, in order to burn off that inventory in the sales channel."
More reasons for optimism, according to our experts, come from the already demonstrated capability of the modern software development chain to adapt to new conditions and rapidly address emerging needs.
"I don't want to be Pollyanna about this," remarked J. P. Gownder, vice president and principal analyst at Forrester Research. COVID-19, he told ZDNet, "will squelch various forms of innovation and digital progress, and many things will be delayed. But in the great crises, there is also opportunity for people to solve point problems, and I think that will happen here too."
Gownder believes the upside of this pandemic will see organizations of all sizes re-examining their business models, especially with regard to the state of their supply chains.
"If you are doing something like just-in-time manufacturing, and you have a very complex supply chain," he explained, "that is open to different kinds of disruptions, are there ways you can think about making that easier? What are the points of failure? I think companies are going to be very conscious of business continuity efforts."
Diversification of supply chains is a remedy that typically crops up in discussions of supply shock-driven recessions. But in the case of certain critical technologies, there's not much diversification that can be done.
"The electronics supply chain is very tightly displayed around multiple geographies," said Dr. Raul Katz, director of business strategy research at Columbia University's Institute for Tele-information, president of consultancy firm Telecom Advisory Services LLC, and a former lead partner with Booz Allen Hamilton. "That is somewhat integrated with primarily China on one end, but also Taiwan, Korea, and then the advanced economies. The market share of US manufacturers in [5G] modems today is probably 10 percent. Most of it is Asian. We have a better position in the professional modems and access points market, primarily because of Cisco. But let's be clear: Today the United States doesn't have a supplier of equipment comparable to Huawei, because Cisco is not in the league or in the same markets."
For some, the pandemic shines a bright spotlight on a fact of the US economy too often unnoticed on account of the glare from other equally bright spotlights shining on it: We haven't had a self-driven manufacturing economy since the energy crisis of the mid-1970s. But this fact has not actually been to our detriment. Globalization has enabled producers based around the world to develop standards for infrastructure and core services that are typically non-competitive anyway, opening new spaces for competition among companies, not countries.
Now, amid a new generation of humiliated leaders, the technology economy faces the threat of moving away from globalization — away from relying upon parts produced by a company produced in any country targeted by a trade war. The push for such a move is being carefully couched in the euphemism of supply chain diversification.
"There are structural changed under way in our economy," remarked CSIS' Stephanie Segal, "which have to do with a push toward deglobalization.
"It's highlighted vulnerabilities of dependence on outside markets as sources of demand, but also sources of supply, for inputs," she continued, "in a very different way. The vulnerability had been identified in a national security context, prior to the outbreak. Now, I think, it's being highlighted in a totally different context, but the outcome could be the same: to lessen that dependency that we have on third markets."
If what Segal has warned us about has already come to pass, then the system of global technology co-development which led to global wireless telecommunications, common smartphone platforms, semiconductors produced for worldwide markets, Internet-of-Things devices, open source virtualized infrastructure, and worldwide operating systems, may have already collapsed. We won't know this for a fact, if indeed it is a fact, until some months after the COVID-19 siege has subsided, and the incentive for innovating the next wave of products and services fails to ignite a spark.
"It was highest-profile in a national security context — talk of 'decoupling,'" noted Segal. "I also think technology and automation are other forces pushing that direction. And I feel that heightened concern and awareness of environmental and, specifically, climate change concerns, and the cost of transport in carbon [emission] terms, pushes in that direction. All of those things, prior to the outbreak, were pushing in the same direction for structural change that would bring a lot more of our manufacturing back on shore."
"At some point," remarked Katz, "the thing will have to be addressed: recognizing that barriers are not a very effective way of getting us out of these quandaries. We can't go back to mercantilistic types of policies where we say. . . we're going to create a single-country-focused supply chain and manufacturer of equipment, all resident in the United States, based on US factors of production — capital investment, innovation, everything. We can't do that. We don't have the capacity. . . The time is well past for another Nortel or another Lucent."
"Coop-etition," remarked Segal, borrowing a word I use for a purposely staged free market, "is dependent on this idea of a level playing field. True or not — and I tend to think there's some truth in it — the rethink that's taking place, particularly in the United States, about the benefits of that model, is based on the fact that the R&D collaboration piece has happened, but then the ability to sell into markets leveraging the IP [intellectual property] that came out of that process — that second piece, maybe it has worked, but there's a fear that it will work no longer. I think that's an issue that applies now when you talk about US/China, but also US/Europe."
Well before the pandemic, Europe, remarks Segal, found itself well behind on its plans to leverage its IP contributions to the tech economy, to an appreciable level of commercial success. "We talk about bifurcation," she said, "but maybe there's a trifurcation under way. And I think Europe is really a wild card in all of this, because they're conflicted, and kind of ambiguous."
The forces Segal mentioned are apparently pushing towards an outcome that Katz believes is unsustainable. In such an environment, once the pandemic has passed, will our tech economy be able to redefine "normal," before it gets defined for us?
"I am optimistic," he responded, "based on the vast experience of how these things pan out. But right now, so to speak, we're in the middle of the soup. It doesn't look good at all. And my big question is, how long is this going to last?"
The strength of an economy, or any segment of it, is secondary to your health and well-being, and the health of those close to you. Information about countries' and governments' response to coronavirus is available from the World Health Organization. Information about personal safety measures is also available from WHO, as well as from the American Red Cross. Further information about the spread of the novel coronavirus in the United States is available from the Centers for Disease Control. Individuals who believe they may be exhibiting symptoms of the virus are advised first to seek safety and isolation, and then to make contact by phone with emergency services, who can get help to you where you are.