NEW YORK — Welcome to Nikkei Asia’s new podcast: Asia Stream.
Every week, Asia Stream tracks and analyzes the Indo-Pacific with a mix of interviews with experts and original reporting by our correspondents from across the globe.
New episodes are recorded weekly and available on Apple Podcasts, Spotify and all other major platforms, and on YouTube.
This week we examine the ongoing supply chain crisis and its implications for holiday season shoppers, as well as leading companies like Apple and Toyota.
Joining the show today are business editor Stephen Foley and chief business correspondent Akito Tanaka.
Asia Stream is hosted by Wajahat Khan, our digital editor, and produced by Monica Hunter-Hart and Jack Stone Truitt.
Our theme music is “What’s the Angle?” by Shane Ivers.
Mentioned in this episode:
—Apple’s nightmare before Christmas: Supply chain crisis delays gift deliveries by Cheng Ting-Fang and Lauly Li
—Chipmakers’ nightmare: Will shortages give way to a supply glut? by Akito Tanaka, Cheng Ting-Fang, and Lauly Li
—Automakers hit limits of ‘just-in-time’ supply chain management by Eri Sugiura and Akito Tanaka
—Intel CEO warns chip shortage to last until 2023 as demand soars by P Prem Kumar
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TRANSCRIPT
(Theme Music)
WAJAHAT KHAN, HOST: Hello and welcome to Asia Stream — where we track, report, and analyze the issues and interests of the world’s largest region. I’m Waj S. Khan. Today’s episode: “The Supply Chain Nightmare Before Christmas,” where we’ll be discussing how phones, cars, and other popular holiday purchases — many of which come from Asia — are having trouble getting to your doorstep. In the age of same-day delivery, how did COVID-19 throw such a big wrench in the global supply chain? You’re listening to the sound of Asia, streaming in your ear. From Nikkei Asia, this is Asia Stream.
It’s the holiday season, and here in midtown Manhattan, where wreaths and trees mingle with the mighty skyscrapers, you can’t walk two feet without hitting a holiday shopper. But there’s an extra element of chaos this year because people are having trouble getting the gifts they want. As it turns out, some of these highly-sought items have their roots in complex global supply chains, many of which run through Asia. Joining me in the studio is our business and markets reporter, Jack Stone Truitt, and Asia Stream correspondent Monica Hunter-Hart. Jack and Monica, thanks for being here, guys.
JACK STONE TRUITT, REPORTER: Hello Waj, thank you for having me.
MONICA HUNTER-HART, CORRESPONDENT: Happy to be here, Waj.
KHAN: Now, Jack. Let’s start with you from the very top. Can you please supply me with some supply chain wisdom. What do I need to know?
TRUITT: Well, I can certainly try. So the economist Milton Friedman loved –
KHAN: No. No, Jack. You’re not going to start the show Milton Friedman.
TRUITT: Just, just bear with me, here, okay? He loved to use the pencil as an example of the miracle of the free market, right?
KHAN: Right.
TRUITT: So for this one pencil, you have rubber for the eraser sourced from one part of the world, say, Brazil, the graphite lead from Indonesia, wood from the United States, and it’s all assembled in China. Basically, it’s the result of combining resources and labor around the world to create Milton’s magical pencil. Apply that same idea to any other product, be it cream cheese or a car, and – just as importantly – figure out the transport logistics, and that’s the global supply chain.
HUNTER-HART: Man, Brazil, Indonesia, the U.S., and China. That is a worldly pencil.
KHAN: Yeah, why am I jealous of this pencil’s travel history and airline miles? Anyways, so why has the supply chain been so disrupted by COVID-19?
TRUITT: Well, when a factory shuts down or has a Covid outbreak, that disruption of course echoes along the supply chain. But it didn’t help that many of the world’s manufacturing hubs were also places that imposed the earliest and most severe Covid restrictions. Like China, South Korea, and Taiwan.
HUNTER-HART: Right, and it’s important to note that those are all places with huge semiconductor chip industries.
TRUITT: Yeah, and in 2021, seemingly everything has a computer chip in it.
KHAN: I understand the disruption of the world shutting down. We were there when it was happening. But these lockdowns in Asia are almost two years old. So what else is going on here?
TRUITT: So, just as crucial as making all this stuff is getting it to where it needs to be. There’s been a shortage of shipping containers because many of them were used to supply critical medical gear like masks to different parts of the world at the start of the pandemic. But they didn’t come back like they normally would on a regular trade route.
HUNTER-HART: Right. So then the cost of shipping things skyrocketed, and when things were able to arrive at a port they often faced delays because there was a shortage of workers available to unload the cargo and truck drivers to bring it to the next destination. Many shipping companies reduced their schedules, expecting a drop in demand as everything shut down.
KHAN: Right and something tells me that didn’t happen?
TRUITT: Correct, it was actually the opposite. Quarantine did decimate service and entertainment industries — you know, things like restaurants or movie theaters — but there was a huge surge in demand for things. People needed a monitor for their remote work set up, or a dough mixer for their new baking hobby. Especially in the U.S., which is the world’s largest consumer market.
KHAN: Right.
TRUITT: And now, with the holiday season, we have another surge in demand on a system that’s recovered somewhat but is still strained.
KHAN: So what does this actually mean for moi, if, say, I want to go out today and grab some holiday gifts for my friends and family and co-workers?
HUNTER-HART: Oo, co-workers. We’re looking forward to it. Well, Waj, please tell me that neither you nor your loved ones are gamers.
KHAN: What? Are you judging my lifestyle, Monica?
HUNTER-HART: No, no, it’s just that it’s tough to buy gaming consoles right now. Especially the super-popular PlayStation 5 and the Xbox Series X. Many people are desperately waiting for stores to announce restocks, and then dashing over as soon as it happens. You’ll need some luck to game on a PS5 this holiday season.
KHAN: Right. So what else am I going to be starved of?
HUNTER-HART: It might be tricky to get the latest iPhone and a lot of other electronics. Also some cars, toys, and even sneakers.
KHAN: Right. Now, Jack, you recently wrote a piece about financial outlooks for next year, and this week the CEO of Intel said the chip shortage will last until 2023. So how does the supply chain factor into Wall Street’s crystal ball?
TRUITT: Well it’s still a little foggy, but analysts think that Asia’s supply chains will get back on their feet sometime in the first half of the year. However, there is one big outlier: China and its strict policy aiming for zero-covid cases. Some thought China could open up slightly after the Olympics in February, but with Omicron it’s unlikely these restrictions will change until much later in the year.
KHAN: Well, it sounds like I ought to go get some holiday shopping done sooner rather than later. This has been very informative. Jack and Monica thanks for coming to the studio.
HUNTER-HART: Thank you.
TRUITT: Thanks Waj.
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KHAN: So those were the basics of the global supply chain problem. But Nikkei Asia has just concluded a three-part deep dive breaking down the supply chain crisis. There’s the shortage of semiconductors, commonly known as the chip crunch. Then there’s the shortage that has affected Apple, the world’s most valuable company, of course. And finally, the disruption of the global auto industry. Joining me to talk about this trio of investigations and more, is our business editor, Stephen Foley. Stephen, welcome to Asia Stream. Good to see you.
STEPHEN FOLEY, EDITOR: It’s a real pleasure. Thanks very much for inviting me.
KHAN: All right. Well, first of all, we’ve been writing about the supply chain almost every day this year. And we’ve published a few in-depth investigations as well. Stephen, is this the biggest story of the year?
FOLEY: I think from a from a business point of view, I would agree with that. I think it’s a a story that reaches across all types of business, across finance, and it’s touching almost every consumer around the, around the globe. I know you’re hunting desperately for a gaming consoles, Waj.
KHAN: That is how I plan on spending the winters. Yes.
FOLEY: Everyone has their story. We’ve we’ve been renovating our apartment. And my goodness, no one could tell us when our dishwasher was going to arrive. It’s been driving me crazy. Where is my dishwasher? So everyone has these stories. And I think it’s it’s been touching all of our lives this year. I think it’s going to carry on touching all of our lives next year, and the business implications are going to reverberate for years.
KHAN: So to focus on one particular story, our cover story last week, “Apple’s Nightmare Before Christmas” — firstly, fantastic title — but secondly, I’m used to looking at the Apple iPhone and getting some sort of geeky breakdown of you know, which part is made where and and what does each part do. That’s those those rip-aparts, those breakdowns do usually well on YouTube. But you’ve really taken that concept and made it an investigative story.
FOLEY: Well, we have a we have a fantastic duo of reporters in our, in our Taipei bureau who know who know the other way around the inside of the iPhone, for sure. And it is the iconic consumer gadget, right? So there is no better way to tell the supply chain story than to dig into this device. It’s got, it’s 2000-plus components inside the thing. And what’s what’s surprising, as you’ll know from reading the story, is that it’s not necessarily the most advanced parts of this device that’s been causing this nightmare for Apple and for others, right? It’s it’s chips that used to cost only a couple of cents. And these are the ones that are in the tightest supply at the at the moment.
KHAN: So break that down for us. Right? I mean, here’s the iPhone. It costs 1,200 bucks. It’s been on everybody’s wish list for years. It’s been marketed for years as one of the world’s premier tech products. And it’s the biggest revenue driver for the world’s most valuable company. But Apple, mighty Apple’s entire showcase operation is grinding to a halt because of parts which cost a few cents.
FOLEY: These these are the peripherals the peripheral chips that and this is the you were talking in the introduction about the explosion in demand. These are these are chips that are in everything, right, these are these are these are chips that appear in cars, that appear in dishwashers, frankly. So, so these are the ones where as we increasingly connect our devices to the internet as we make more and more complex cars, increasingly electric vehicles, as 5G goes into into devices, there’s more and more and more of these peripheral chips are required. So so the fact that we have this supply crunch at the same time as we have the demand explosion. That’s why these peripherals are are the ones that are in most shortage right now. It’s also not frankly the focus of investment in the industry. Right? The industry is always rolling forward and looking to put on more cutting-edge capacity, whereas the the legacy chips, the peripherals, like these are the ones that have been underinvested in. And that’s something that — we’ll come on to this a bit later, but that’s something that’s being corrected right now.
KHAN: Right. Let’s do a little bit of time traveling. So it’s let’s say it’s summer 2019. And COVID hasn’t struck yet. And Donald Trump, by the way, is still in power. How does the U.S.-China divide perpetuate this crisis?
FOLEY: It’s the tech piece of the trade war, right? It’s the it’s the U.S.’ increasingly vocal description of China as a national security concern and Chinese technology as being a national security concern. And what began to happen was, the U.S. began to put increasing pressure on Chinese technology and to try and squeeze it out of the of the global supply chain. I think the probably the biggest single example, and the most impactful example of that was Huawei. The attempt to squeeze Huawei out of 5G networks. And as the U.S. blacklisted that company, you you very quickly start to see companies in China and companies that dealt with China, very much starting to stockpile chips and and components for fear that the U.S. is going to stop you getting hold of this stuff. And as as as that pressure kept on ratcheting up in the last years of the Donald Trump administration, and frankly, has continued under the under the Biden administration, there is this concern that the decoupling of the supply chain means that you have to be a little more concerned about your access to supplies. And that has increased the stock parts as a great chart in our apple story actually showing that these blacklisted companies have been increasing their inventory. And so that’s another another aspect of the demand increase, frankly.
KHAN: Another term, which has come up in our modern day usage in the modern business dictionary is “supply chain resiliency.” The idea is that, with the shortage, chipmakers are now massively expanding their investments. And these are not just investments, these are mega-investments. And from your story, Stephen, the numbers are quite staggering. Almost half a trillion dollars if you add up what the big players are doing, the TSMCs and the Intels and the Samsungs. These are $100, 150 billion in investments per company. This is not small potatoes. Yet you also mention that there is not enough clarity. In this surge to produce more, in the surge to invest more — even China, by the way is going all in, so this is not just companies, this is also governments — you also point out that nobody really knows what real demand will be in a, in some time from now. How does that work? Why people investing half a trillion dollars with no, I guess, clear goal in sight?
FOLEY: Well, two aspects to that right. The demand piece you’re absolutely right. This has been one of the extraordinary revelations of our reporting actually, is just how expansive the the unusual ordering patterns are right now. We have reporters that have covered this for years, and they’ve never seen anything like this. The – because of this concern about being able to get hold of chips, manufacturers are putting in unusually high orders, they’re putting in orders across multiple suppliers. So we don’t really know whether those orders reflect what those companies expect demand to be. There used to be a very tight correlation between the orders that went in, and the demand that the industry was expecting from consumers and from from customers at the other end. That relationship has broken down. There’s phantom orders all the way throughout the system, to the extent, actually, that the Japanese manufacturer Renesis is not even booking as “revenue” some of these orders because it’s not sure that these “firm” orders really are firm. It’s very, very interesting. But that makes planning very difficult. The second piece, though, which you touched on is, is the government piece here, and the supply chain resiliency piece.
KHAN: Right.
FOLEY: Governments around the world want as many chips to be made locally as possible, because they’re scared that they won’t be able to buy them through the usual global supply chain means, whether that’s just the simple lesson that it can get screwed up by a pandemic, or maybe something scarier happening between China and Taiwan, for example. Taiwan is absolutely pivotal to the chip industry. And its its its its future is obviously a matter of concern to people who think strategically about the long term. So every government around the world, almost every government around the world, seems to be looking to subsidize the onshoring of parts of the supply chain. Onshoring chip manufacturing. So there is this supply chain resiliency question and that’s slightly separate from demand, right?
KHAN: Right.
FOLEY: Supply chain resiliency implies having factories locally, it implies having a little bit more give in the system than we used to have in the “just in time” days of the supply chain working smoothly and being able to get whatever you want, wherever you want it at the last minute.
KHAN: Right, and then there’s the geopolitical aspect to all this as well, right? I mean, supply chain resiliency language is now a key part of international security agreements, it’s inducted in the language. We’re also seeing these spy novel moments like China recruiting retired Taiwanese engineers to bolster the semiconductor industry on the mainland. But moving on, Stephen, to the bigger picture. It’s been quite a year in terms of business stories. There has been the unemployment story, which is now a not-enough-job-seekers story There has been the not enough vaccine story, which is now not-enough-people-wanting-to-be-vaccinated story. And then, of course, the story of our times these days, the inflation story. So as Nikkei Asia’s business editor, looking forward, what is the big story your desk is watching in 2022?
FOLEY: Waj, you mentioned, you mentioned three stories as if they’re separate stories. They’re all they’re all part of the same network of interconnected business and economic stories. The inflation story, for example, which is absolutely front and center at the moment, has its roots in in the supply chain disruptions, you know, as as the logistics costs, as the shortages have fed through that’s that’s really that’s dramatically increased prices. The question now is whether, as these things ease in the new year, whether or not inflation itself will come down or whether we’ve gone and got hooked on rising prices? Whether wages are going to have are going to keep going up and whether there’s now this self-reinforcing spiral upwards in prices? That’s a big question for central bankers around the world. But of course it’s linked to the supply chain, the supply chain question, and and the employment question too, about whether or not we’re going to be able to fill these factory jobs. Whether the whether the workers in in Vietnam who after their lockdown went back to their families that they hadn’t seen for a long time, whether they, will they be back in in factories in the same numbers in the new year? So these interconnected stories are going to remain front and center for Nikkei Asia next year.
KHAN: Stephen Foley. Thank you and I hope with, while wishing you happy holidays, I also wish you good luck in finding that dishwasher.
FOLEY: Thank you very much, and good luck with your console hunt as well.
KHAN: Thank you.
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KHAN: Now, it seems like every time I turn on the TV these days, I’m assaulted with a blitz of ads for a car I’m supposed to buy for the holidays.
TV ADVERTISEMENT: (Jingle bells and holiday music) For the gifts you won’t forget. The Mercedes-Benz Winter Event.
KHAN: But of course, buying a car right now is anything but easy. Depending on what I want, it could be impossible. Here to talk to us about the supply chain issues affecting the automotive industry is Akito Tanaka, Nikkei Asia’s chief business news correspondent. He’s speaking to us now from Singapore. Akito, thanks for being with us.
AKITO TANAKA, CORRESPONDENT: Thanks for having me, Waj.
KHAN: Alright, so before we get into it, I just want to contextualize for listeners here the Asia-ness of it all. So how much does, tell us, is car manufacturing, worldwide car manufacturing, how much of it happens in or through Asia?
TANAKA: Alright, so um, car manufacturing is basically done where the cars are sold. And the biggest car market in the world right now is China. So that’s pretty significant. And then the second largest is U.S. So most of the cars that are sold in the U.S. or made in the U.S. or in Mexico. Some are exported from Japan elsewhere. And then the third is Japan, and China, in 2019, I think they produced about 25 million. And the world car market, it went down quite dramatically this year, because of COVID. But it’s usually, it’s about 90 million mark. So quite a lot happens in Asia and quite a lot are sold in Asia as well.
KHAN: Right. The question then is, from a consumer standpoint, let me explain how things happen from this end. And so, here in New York, let’s say, if I want to walk over to the local Toyota dealership and I put down a big sweaty wad of cash for my new favorite Toyota truck, which is all true, by the way, which is the Tacoma. I won’t be able to get one, because it’s not available. Not in the color I need. Not in the specs, I need. Even if I give them the cash, sticker price. How is it over there, because over here, you have to get in line for one. How’s it over on your end, in your neck of the woods?
TANAKA: So it’s pretty much same all over the world. I would tell you an example of Japan, of course, most of the cars are made in Japan, so this, they should usually have a good supply chain over there. However, at the end of October, for example, if you wanted to buy a Honda Vezel, so that’s their sort of, you know, most-sold SUV, small-size SUV in Japan, you have to wait for one year. Toyota’s brand new Harrier, that’s sort of premium end of SUV, you have to wait for five months to get a new car. And usually you can get a new car for about one or two months. So that’s that’s a pretty, pretty long delay here. So yeah, consumer have to wait a lot. And then one of the dealers in in Japan told us that they’ve never seen such delay in past 50 years. So this is pretty significant.
KHAN: Wow. Yeah, that is pretty significant considering Japan only started mass-exporting their cars about 50 years ago anyways. So, everybody’s been talking about how a lack of semiconductor chips has been bottleneck-ing the entire supply chain, including cars. Why did that happen, now?
TANAKA: During the pandemic, as we all know, everybody started buying computers and smartphones and tablets, because everybody has to work remotely or study remotely. And then the, the demand of these IT gadgets and computers and whatnot, exploded, basically. So the chipmakers, they allocated all their production capacity into these these gadgets. And most recently, or quite recently, Malaysia and Vietnam, they had a sort of second or third wave of COVID. And Malaysia is where all the chips are tested and assembled. So those factories were affected by the lockdown. So you know, there was a chain reaction of supply chain glitches in the, in the region, and that worsened the the production schedule of the of the car manufacturers.
KHAN: So it’s clearly more complicated than running out of parts. Got it. But if I were to really boil it down, Akito, these are companies which are decades old, these are these are not startups, this is not you and me working out of a garage. This is this is Toyota. Did they not see this coming?
TANAKA: So we would have to, I mean, conclude is a bit early. But you know, what we’re seeing right now, apparently, they didn’t see this coming. Because if they saw this coming, the production delay wouldn’t be this bad. I think one of the differentiator, if you compare from other industry, for the car company, is that they use a production system called “just in time” system, “just in time” production system. And that’s like one of the most advanced production system that you can find in the manufacturing world.
KHAN: I know that the “just in time” system, basically is premised on very little overheads, no stockpiling, make it according to whatever order, whatever demand is coming in. That’s something which is efficient, and that’s something which adds to the bottom line. But how are they manufacturing now? Are they just sitting there? Is a guy with a with a mainframe or a windshield or a door just waiting there for the guy to, with a tire? Or the main CPU of the car to arrive? Is, is that how it’s happening on the ground? What are these factories looking like?
TANAKA: I think in a sense, that’s pretty true. Although, although places, or the parts where supply chain has no issue, they still do the “just in time.” So as long as the chip is not arriving, I’m sure they’re not going to order windshield or tires and whatnot. However, because of this pandemic, automakers are learning and they’re they’re sort of readjusting or adjusting little by little their “just in time” system. And they are sort of stockpiling, have started to stockpile the inventory of chips that they hold within their supply chain.
KHAN: Right. You’ve written about how many countries right now are coming out with grand plans to build their own semiconductor fabrication plants, usually nicknamed “fabs.” Which, by the way, I thought was something we say at brunch on Sundays on the Lower East Side. But anyway, Akito, what’s happening with these “fabs”?
TANAKA: In order to sort of add resilience, suddenly, governments around the world including U.S., Japan, Korea, and Europe, countries in Europe, they are investing a lot in building fabs in their own territory, basically. And this is partly due to the, because with the COVID, they noticed a too much dependency in Taiwan. And of course, Taiwan is very geopolitically sensitive place. So when world was connected, and everybody was really trading, we wouldn’t have to build double or triple fab in order to “just in case,” right, […] but now everybody thinking about “just in case.” […] So that that’s what’s happening.
KHAN: “Just in time” to “just in case.” That’s fab. Well, this has been very illuminating. Akito, thank you.
TANAKA: Thank you.
KHAN: Akito Tanaka, from Singapore, Nikkei’s chief business correspondent, talking to us about the supply chain crisis in the global auto manufacturing industry.
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That’s it for Asia Stream today. We hope your holiday shopping is not too disrupted this year. As always, head to Nikkei Asia at asia.nikkei.co for more in-depth coverage on the supply chain and more. Thanks to Stephen Foley and Akito Tanaka for joining our show today. This episode was produced by Monica Hunter-Hart and Jack Stone Truitt. Our theme music is “What’s the Angle,” by Shane Ivers. I’m your host, Waj S. Khan. If you enjoyed this podcast, please share, subscribe, and leave us a 5 star review on Apple Podcasts. Thanks for listening, and talk to you soon.