Phil Stoten interviews Charlie Barnhart at APEX 2012 in San Diego:
Charlie interviews Sparton CEO, Cary Wood
Eric Miscoll interviews Vario Systems’ Alicia Hamby at APEX 2012 in San Diego:
Charlie interviews Promex President Richard Otte
Charlie interviews Hunter Technology’s Joe O’Neill
Eric interviews MC Assembly’s Michael Cox
Eric interviews ATS Corporation’s Steve Canzano
By Charlie Barnhart
In the closing paragraph of article number 6 of this Risk Series I mentioned that “Risk is not always a noun (i.e. a probability) as it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements tend to pile one on top of another.” When I wrote these words, in my mind’s eye, I saw a stack of irregularly shaped blocks struggling to remain vertical. The vision of a Jenga game where no one wins as each bock is so interdependently connected that if even one was removed the entire pile would topple.
Not a pretty picture but here’s what it looked like…
At the top of the stack was the destabilizing influence of price reductions during periods of increasing cost being wobbled by the reduction of internal resources at OEMS just below it, then in the middle a shrinking demand cycle struggling to counterbalance the ever increasing velocity of change in business, and on the bottom, the process of geographic concentration slowing crushing the principle of institutional continuity out of shape.
But it wasn’t this image that worried me the most, as we spend a great deal of time at CBA thinking about how these individual pieces interact AND how their shapes evolve over time.
What worried me was the platform they were sitting on, a three legged stool of:
Why are these three elements so worrisome? Because, in spite of what you might see or hear from your favorite news source, geopolitical and geo-economics outcomes are simply beyond anyone’s ability to forecast.
Meteorological analysis is a good comparable, as even after centuries of study and the development of very sophisticated modeling software running on the world’s best supercomputers the farther you go out in time with weather forecasts the broader the range of error becomes. Same-day forecasts are usually pretty good, five to seven day projections are a crap-shoot and beyond that it literally becomes a “guess”. The reason is simple; there are just too many variables. A butterfly flaps its wings in Singapore and three weeks later a hurricane begins to form over the Atlantic Ocean.
So given this reality how do you deal with unmanageable risks?
Our recommendation is “change the game.” Playing Jenga in business is a bad idea to start with but then doing it on an unstable, unpredictable platform makes it even worst. A better game would be one that eliminates the “vertical stacking” of risk variables so that when the platform does begin to shake (which it inevitably will even if we can’t predict when) the blocks might move around a bit but hopefully won’t all fall off the stool.
What’s better than Jenga?
How about going back to the basics, like the fundamental tenets of business that we all learned and have practiced for many years? I know you know them…
Obviously each of these objectives can be fulfilled in countless ways, which is exactly as it should be. Business is all about creativity and competition; no one deserves or is given a free-pass. Success is only granted to those who are the most creative and diligent and then only until they are replaced by someone who can play the game even better.
This means that winning isn’t easy and unfortunately, perhaps because of human nature – perhaps because we’ve lost our moral compass, it has become far too easy to drift off the highroad into a swampland composed of…
Which I believe is the poisoned well from which excessive risk springs.
In this series we have reviewed each of the nine elements of risk that have more than doubled our Composite Business Index over the past four years.
Including:
Wherever possible we have offered suggestions and alternatives. Where options were few we have provided insights gained from watching this situation develop. We have tried to be direct and unambiguous in our presentation of the facts.
We have already notified our Outsourcing Navigator Council membership that we have raised our risk advice to “LIKELY” meaning that on an industry average basis it is now likely that an OEM will experience a serious disruption in their supply-solution in CY2012.
Yes, the current situation is that bad.
Bottom-line, do yourself and your stakeholders a favor and do something – TODAY – to start mitigating risk. Looking over your shoulder is a waste time you can’t afford; the risk is directly in front of you!
By Charlie Barnhart
What if these stories were in today’s news?
Widespread Destruction
The morning after China was struck by the most powerful earthquake to hit the nation in recorded history the disaster’s massive impact is only beginning to be revealed. Rescue efforts began with first light as military helicopters plucked survivors from roofs and carried them to safety. The 8.9-magnitude temblor, centered near the east coast of China, killed hundreds of thousands of people, caused the formation of 30-foot walls of water that swept across rice fields, engulfed entire towns, dragged houses onto highways, and tossed cars like toys.
“The earth shook with such ferocity,” said a US visitor “I thought things were coming to an end … it was simply terrifying.” Buildings shook, heaved and collapsed by the score, and numerous fires ignited. Chinese media reported, hundreds of thousands of people were missing and millions were displaced. Countless households are without electricity, said China’s ambassador to the United States.
Nuclear Meltdown
A nuclear reactor near Qinshan, south of Shanghai, may be starting to melt down after China’s biggest earthquake on record hit the area yesterday. Fuel rods at the No. 1 reactor at the plant run by China Electric may be melting, Nuclear and Industrial Safety Agency, spokesman said by phone today. “If the fuel rods are melting and this continues, a reactor meltdown is possible,” an inspector said. A meltdown refers to a heat buildup in the core of such intensity it melts the floor of the reactor containment housing. Luckily winds in the area of Qinshan plant are blowing at less than 18 kilometers per hour mostly in an offshore direction, according to a 4 p.m. update from the China Meteorological Association.
Supply-chain Impact
Companies both in China and around the world have already begun feeling the sting of supply chain disruptions resulting from the catastrophic earthquake and its aftermath. In addition to the damage done to factories in northeastern China by the quake itself, companies must contend with ruined roads, fuel shortages, and rolling power blackouts. Many companies are not sure when some of their facilities will be able to resume production, creating uncertainty for companies further up and down the supply chain.
“This is serious and it’s still difficult to evaluate; you have the earthquake, you have the tsunami, rolling blackouts, and fuel shortages hitting at the same time.” The sectors hardest hit are consumer goods and electronics companies, both well-represented in China. “We still don’t know the full extent of what can be done to substitute for the affected parts,” a spokeswoman said.
Electronics Companies Zapped
Many companies in China have closed their plants and generally aren’t sure when they will resume operations. Typical is XYZ, which said on Tuesday that it would partially restart operations at one facility while six other plants remain idle with no estimate of when they will come back online. Part shortages are a major issue. “If the shortage of parts and materials supplied to these plants continues, we will consider all necessary measures, including a temporary shift of production overseas,” they said on Tuesday.
Another local company managed to get one factory back into production this week, while several others remain closed. Additionally, ABC, one of the world’s largest chipmaker, has only managed to restart four of its 22 facilities. The company said the rolling power outages were disrupting production at many of its plants.
“There are a huge number of little bits of the high-tech food chain which are done nowhere but in China,” Jane Doe, senior investment manager of MMM Equity said. “Nobody else has the capacity, and in some cases the technology, to do it.”
Hopefully by this point you’ve realized that these news articles were actually from the horrible catastrophe that struck Tohoku, Japan on March the 11th, 2011. The only thing we’ve changed in the copy was the geographic location, the scale of impact (i.e. increased the numbers in these stories to reflect the differences in the populations in these two areas) and the names of the entities cited.
But what if it really had happened in China instead of Japan? What would the impact have been on the global electronic industry?
We are not going to argue the proportional concentration of electronics related resources in Japan versus China or quote endless statistics on what percentage of this type of material or that type part are controlled in which geography. Everyone has their favorite source for this data and we encourage the reader to select whichever they feel most comfortable using; we all know what the reality of the situation is.
Over the past decade the global electronics supply-chain has migrated to Asia with the majority of it concentrated in the river delta, industrial hubs of China.
Bottom-line: if a Tohoku type of event occurred in one of these regions of China today it wouldn’t be weeks or months for the industry to recover, it would be years. Global businesses would lose billions if not tens of billions of dollars in revenue, lay-offs would be in epidemic proportions, even enterprises with rock-solid balance-sheet would immediately switch to a survival mode of operation (i.e. meaning there would be widespread failure of any supplier/service provider whose business was related to either discretionary or B to B spend) and some significant percentage of OEMs reliant on a commodity-based business model would simply go out of business.
It’s harder to think of things that wouldn’t be impacted, than to think of those that would.
We have a model for what happens when a critical resource is concentrated in just a few areas, like oil. Supply and demand is artificially managed (to control prices), geopolitics vs. the market dynamic becomes the basis of distribution and strategic interests are protected (read: wars are fought). Not a pretty picture.
Are we overstating the probable outcome? Perhaps, but to be honest we don’t think so. What we do know for certain is that a gentleman named Edward Aloysius Murphy, Jr. once said “Anything that can go wrong will go wrong.” I just hope the term “China Syndrome” doesn’t end-up taking on a whole new meaning.
Closing note: We apologize to anyone we may have offended by using the consequences of the Tohoku tragedy in this article to make a literary point. Our hearts go out to the people of Japan and those around the world who were impacted by this cataclysmic event. We recognize that it was not only a natural disaster but a human one as well.
NEXT ARTICLE: Risk Factor #6: Loss of institutional continuity
Download a free Executive Summary of Eric’s ONC Special Report Mexico vs. China: An Objective Comparison for North American OEMs. The summary includes the study’s rationale, Table of Contents outlining survey findings related to OEM perceptions of the strengths and weaknesses of the two regions, and a discussion of EMS trends, including regionalization and total cost of ownership analysis.
Download Executive Summary here>>
Contact Eric@CharlieBarnhart.com to find out how to get a copy of complete report.
I don’t know about you but I keep hearing about “green-shoots”.
Not on the Home & Gardening channel but rather on the nightly news, in the financial press and during day-to-day conversation with electronics industry insiders whom I’m pretty sure have never actually seen a real green-shoot. So what the heck is the deal with this green-shoots thing? My take: A pretty word picture for when you really don’t have anything of substance to contribute but want (feel the need?) to say something …encouraging (I like that word but sometimes substitute Pollyanna). “While the global economy continues to contract we’re now seeing green-shoots… ” Sounds impressive but really doesn’t say much.
Maybe the green-shoots things is a metaphor for the changing of the seasons and the coming of spring? Yes, that must be it… the optimism of new growth and the hope of a future bounty. We only need to be patient and let the green-shoots grow and all things will return to normal. Happy days are here again, just around the corner… I can see the green-shoots!
But what if the green-shoots are a noxious weed about to destroy what little remains of our already seriously distressed garden. How can we know for sure? They’re just shoots and unless we can find a “shootologist” (the last of which I think died of a massive cerebral hemorrhage during the baby-shower celebrating the birth of the credit-default swap) it’s going to be really, really difficult, if not impossible, to tell one shoot from another.
Maybe to be safe we should start killing the green-shoots. What leads us to believe the compromised soil of our garden is going to yield anything but weeds? Have we done anything to improve its growing capacity? Sure there’s those billions of pounds of manure we’ve started plowing under but wasn’t it the uncontrolled application of manure that got us into this predicament in the first place (yes, the manure was from China but we got it on the cheap)?
What’s the alternative? I guess there’s that whole slow, stupid thing about rotating crops and tilling the soil and all that other stuff about hard work, etcetera, etcetera. But everyone knows you can’t produce 10X as much year-on-year by following that type of old-school, antiquated thinking.
Besides, if the green-shoots are a noxious weed we could try smoking them!
