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The deep dive: Oh, the supply chain woes!

The deep dive: Oh, the supply chain woes!

Who would have guessed that two of Covid-19’s most stubborn, lingering side effects are nightmares and headaches? We’re talking, of course, about the logistical nightmares caused by pandemic-related supply chain issues and the ensuing headaches felt by CEOs and COOs around the world tasked with unraveling them.

When the world stopped in the spring of 2020, so too did supply chains. Well-trodden paths that had taken decades of planning and relationship building to form suddenly grew weeds and became blocked by unexpected obstacles. International sea ports, airports, and border crossings closed. Manufacturing facilities shut down, factory workers were told to stay home, and travel restrictions were implemented. The impact could even be seen from space. Satellite imagery from NASA showed a dramatic dimming of light and reduction in greenhouse gas emissions from China (aka “the world’s factory”).

But while supply may have been disrupted, demand certainly wasn’t. In fact, demand for certain goods rose higher than ever (we’re looking at you, toilet paper hoarders). Stay-at-home mandates forced many consumers to rely on delivery services like Amazon (AMZN), and work-from-home gave many consumers an excuse to upgrade their electronic gadgets.

Fortunately, the demand and supply shock for toilet paper has worked itself out, but many industries are still struggling. Even the most competent management teams at some of the world’s most impressive companies have been unable to make it through the storm unscathed, and it’s showing in this year’s Q3 earnings reports. Even Biden just outlined a multibillion-dollar master plan to upgrade the ports in the US to help tackle in (as a part of this $1t infrastructure bill). Mind you, though, the chip manufacturers themselves — Nividia (NVDA), for example — are totally killing it, earnings-wise.

In today’s deep dive, we’ll be exploring why “unexpected supply chain issues” has been the most commonly used phrase in this season’s earnings reports.

Apple’s woes

Even a company as large and powerful as Apple (AAPL) can be no match for a supply chain bottleneck. In Apple’s case, the missing ingredient this year has been semiconductor chips. Nearly every electronic device you rely on is itself reliant on semiconductor chips to store and process information. As products have become “smarter”, even things like cars and household appliances need chips.

Now, chips can’t be made by just anyone. Because of the cost and expertise required to make them, companies like Apple choose to outsource the production of chips. Ever heard of Qualcomm (QCOM)? The company has become Apple’s largest supplier since it began supplying chips for the first iPhone back in 2007.

Partnerships like this are a great way to simplify business… well, until the supplier can’t meet demand. This is exactly what we’re seeing with this year’s global chip shortage. As sales of iPhones, iPads, and Macs exploded during the pandemic, Qualcomm (and its suppliers of raw materials) couldn’t keep up. In Apple’s latest earnings report, CEO Tim Cook estimated the chip shortage has cost the company around $6b. Apple is also struggling with Covid-related disruptions in its Southeast Asian manufacturing facilities. While Cook said these manufacturing disruptions have “improved greatly,” the chip shortages “linger on.”

The shortage has forced Apple to redirect the supply it does have to where it’s needed most. Recently, word got out that Apple has cut production of iPads by 50% in order to allocate more chips to the iPhone 13. The decision to prioritize production of the iPhone 13 is due to the fact that Apple is forecasting stronger demand for this product than the iPad — nothing personal to iPad fans out there.

Nintendo’s woes

Japan’s Nintendo (NTDOY) can sympathize with Apple. The video game and console producer is battling its own chip shortage issues. In its recent quarterly earnings report, Nintendo announced it had cut its full-year sales forecast for the Switch by 6% due to the continued shortage of the chips needed to produce the device.

Since the launch of the Switch five years ago, Nintendo has become reliant on sales of the popular video game console. And because video game console sales follow a cyclical pattern, Nintendo president Shuntaro Furukawa was forced to bear the bad news that “we can’t produce enough to meet the demand we are expecting during the upcoming holiday season.” Furukawa went on to add that “there is no sign of improvement, and the situation continues to be severe so I can’t say how long it will continue.”

Back in early October of this year, Nintendo launched the Switch OLED model at a price of $349.99. While the new model release gave sales a bump, the console remains in short supply just like Sony’s (SONY) PlayStation 5 and Microsoft’s (MSFT) Xbox One.

The one factor that could either soften the blow of or compound the issues from Nintendo’s chip shortage is sales of its video game titles. The company has some Pokémon remakes in the pipeline as well as “Pokémon Legends: Arceus” — a new title expected to go on sale in January.

Nike’s woes

Don’t let all these tech companies and their chip shortages convince you they’re the only ones suffering from supply chain issues out here. Retailers like Nike (NKE) are feeling the pain as well. Nike CFO Matthew Friend said it best in his company’s recent earnings call, telling investors that “we are not immune to the global supply chain headwinds that are challenging the manufacturing and movement of product around the world.”

Despite record consumer demand for its stylish shoes and athletic apparel (loving our new Metcon 7s), Nike is grappling with issues at every point in its supply chain. To start, local lockdowns and factory shutdowns in Covid-ravaged countries like Vietnam and Indonesia are limiting the production of Nike’s products. The products that do get made then face their second test: finding a spot aboard a shipping vessel. Increased demand for global shipping services has led to backlogs and soaring prices for shipping containers. According to maritime research firm Drewry, the price to book a 40-foot steel shipping container on a standard route from China to Europe has increased by more than 600%.

The products that manage to get made and land themselves a spot in a shipping container then face their third and final test: finding retail workers to sell them. Many retail workers who were sent home or laid off last year have yet to return to work. And with unemployment benefits and remote work opportunities that pay more than their old employers, can we blame them?

Nike has been forced to increase wages and offer sign-on bonuses to keep its retail stores fully staffed. On top of the increased costs from supply chain disruptions, this is really cutting into margins and hurting profits.

why it matters

There are general takeaways we can all conclude surrounding what’s gone wrong, why it went wrong, and how to prevent it from happening again. It took worldwide border and travel restrictions for corporations to realize how inconvenient and risky it can be to have supply chain bottlenecks on the other side of the world.