If you had the chance to read my first story about Family Voraus X, you would have read the uncertainty they and everyone of us live nowadays. Their story will inspire business executives to use uncertainty as a driver for opportunity and build a resilient enterprise, a set of lessons and topics which will be covered in the next parts of this story series.
Today, Family Voraus X decided to visit a retail shop in Munich, Germany, imagine you did the same, a cashmere shirt catches your eye. The fabric would ship from suppliers in China or Mongolia. Chinese or Mongolian suppliers will supply threads from Vietnam or Poland. This thread is made from cashmere grown in Indian farms. This is just a simple example, imagine complex products like semiconductors with multi-tier suppliers across the globe, and companies now find it almost impossible to track all these suppliers. When the pandemic started, many companies were caught in surprise when they discovered that one of their products relies on a supplier in Wuhan. This is just merely one example of why we are facing a supply chain crisis.
Germany is one of the countries affected by the current supply chain disruptions. Indeed, German industrial output has been dropping in the past 3 months, according to VDMA, while 81% of mechanical engineering companies in Germany are facing disruptions in the supply chain and facing transport and logistics issues. Production in June was 6.8 percent lower than the pre-pandemic levels and automotive manufacturing has been facing a shortage in semiconductors thus dragging its output.
The semiconductor shortage hit Germany’s automotive industry and placed more than 10,000 Audi employees on short-time work time. A shortage that is not limited to semiconductors but also spans products like metal paper, wood, and plastics. 74.4 percent of building materials dealers in Germany reported bottlenecks in wood supply. Bundesbank, Germany’s central bank, predicted that with the continued uncertainty in supply, economic growth will be 3.7% less than the forecast in June. 3000 surveyed German companies believe that supply chain issues will continue to last at least until next year. It might be even a long-term issue though while the effects are currently throttling durable enterprises like Siemens, Daimer, and BMW.
Semiconductors became a cornerstone to many industries and it comprises a highly specialized, capital intensive concentrated value chain. The semiconductor production process is characterized by 3 steps: Design, Fabrication, and Assembly. Market entry strategies towards fabrication where countries like Taiwan and South Korea have almost 79% of market share are often faced by deadlocks including but not limited to the high levels of expertise needed for Fabrication and the billions needed in capital expenditures.
Innovation in semiconductors is now focused on miniaturization, and back in October 2019, in K-19 Plastics Exhibition in Dusseldorf, I delivered a keynote and discussed Tokyo Institute of Technology Research’s work in single-molecule electronic devices. Indeed, polymers will play a key role in single-molecule electronic devices and will stage for Miniaturized AI. The consistent efforts of miniaturization put pressure on upgrading an already sophisticated machinery, making it costly to start an new fabrication plant in terms of bringing investing in new technologies and attracting skilled workforce. Given the latter, it might be a good option for countries trying to capture the semiconductors value chain to focus on research and development in chip design and software instead of fabrication.
The US President, Joe Biden, met semiconductor producers last September to pitch a program that urges companies to submit information about their supply chains. Earlier in the year, he also placed a $50 billion fund for the US semiconductor industry.
It is not of less importance for Germany and the EU Commission. European Commission President Ursula von der Leyen announced a “European Semiconductor Act” to create a high-class European chip ecosystem that includes production which is expressed as “securing technological sovereignty”.
Furthermore, semiconductors clearly play a key role in the future of cars. As Şahin Albayrak, Head of AI Lab at the Technical University of Berlin likes to frame it: The car of the future is basically a tablet on wheels with a very large battery. So, algorithms and electronics will cost not less than half of the car value in the next couple of years. Semiconductors will be the key to prolonging the battery life of these vehicles. And the heart of these cars will be algorithms and not mechanical engines anymore. We are talking here about 100 million lines of software code in comparison to 8 million lines of code for a 787 Boeing super-jumbo.
We have already seen the alliances between automotive companies and data companies, for example, Volkswagen is connecting data from all machines, plants, and systems across 124 factory sites gathered from sensors on the shop floor–and AWS Outposts. In addition, BMW’s car as a sensor or Carasso brings a big number of sensor data that is sent to AWS cloud in order to deliver more accurate speed limits in a cap map, improved road geometries , fewer map errors, and smarter route guidance. Since batteries are dangerous to transport, microfactories will play a key role in bringing car manufacturing close to battery production sites.
Also, last week, I was invited by AWS to Munich for the Analyst and Press only Digital Builders Showroom as part of AWS Re:Invent summit, however, due to uncertainty and the new variant, it went virtual at the end and from my cocoon, here’s an interesting outlook presented by Martin Schleicher of Contintenal as he showcased the growing value of software in vehicles of the future:
If the innovation cycles for software are six months, compared to up to five years for cars according to Holger Seidel from the Fraunhofer Institute for Factory Research IFF in Magdeburg, then how do you think automotive companies would keep up?
Some questions we are often seeing in news headlines include: Why is there a shortage in semiconductors? How long will Semiconductor shortage last? Is there still a shortage of semiconductors?
However, the above facts are reassuring the need for executives more than ever before to manage uncertainty and change the way they used to plan for their businesses instead of just figuring out why did it all started!
Stay tuned for next part in this series as family Voraus X take us into possible solutions executives can take to become resilient under uncertainty.