return to ICG Spaces home    ICG Risk Blog    discussions    newsletters    login    

ICG Risk Blog - [ Collapsing US supply chains preclude independent US action ]

Collapsing US supply chains preclude independent US action

  #

Collapsing US supply chains preclude independent US action: The intersection of loss of supply chain control and emerging, reemerging threats is a recent presentation outlining the hollowing out of US and EU supply chains and the vulnerabilities that ensue. Current reality is defined as:

  • The People's Republic of China can prevent the US from commencing or maintaining the ops tempo of a future Desert Storm or Operation Iraqi Freedom.
  • If the PRC is the adversary, it can preclude our ability to conclude combat operations.
  • PRC has the ability to induce trap-doors into HW and embedded SW assemblies.

Hollowing of the supply base nationally has mimicked effects in the automotive sector between OEMs and their tier base: 

  • US and Europe have lost control of their defense and commercial industrial supply chains.
  • Exporting capability rather than capacity, the US has increasingly retained only a top tier or integrator role while exporting its tier 2-tier n base.
  • US cannot realistically define discrete and net risk as supply chains are too opaque for identification.
  • Decreasing ability to direct sourcing to less risky tiers.
  • Loss has not come without warning

The full presentation principally draws upon the monograph, Foreign vulnerability inherent in US globalization of its commercial and defense supply chains, 5/6/2008. Readers are directed to Foreign vulnerability for detail and supporting sources that "reasonably constitute a four decade record on globalization." Readers may also consult, Israel was planting malicious chips in US assets before China, 5/20/2008.

When the USSR was the bipolar peer nation state to the US, it could, and did, press Japan over its commercial and military partnership with the US, but unlike China, the USSR never had control of US supply chains. The rare Russian exception besides energy stocks has been US manned access to earth orbit.

 

Legacy constraints in supply chain inertia

 

Wayne Hall, former head of the space shuttle program, now NASA's deputy associate administrator for strategic partnerships, penned a small masterpiece on the importance and the inertia of supply chains in attempting to resuscitate the shuttle. It must be noted that Hall's comments apply generally to many defense systems in current inventory:

One of the first lessons I learned in program and project management is that attention to the details of supplies, vendors, and parts manufacturers will determine success or failure more than anything else that management does... [L]ogistics and supply chain are the unsung pillars on which every major project rests.

 

It is nice to have eloquent oratory and high flown philosophical statements, but the real way that real programs are really controlled is through the money.  When the logistics and supply budget is stopped, the program is over.  Momentum and warehoused supplies can carry on for a short period, but when those are exhausted, its time for the museum.

 

Starting four years ago, the shuttle program in its various projects made "lifetime buys".  That is, we bought enough piece parts to fly all the flights on the manifest plus a prudent margin of reserves.  Then we started sending out termination letters.  About two years ago, we terminated 95% of the vendors for parts for the external tank project, for example.  Smaller, but still significant, percentages of vendors for SSME, Orbiter, and RSRB have also been terminated.

 

A lot of things that go into the shuttle build up are specialty items.  Electronics parts that nobody makes any more (1970's vintage stuff).  Hey, if it works, why invest money in certifying new parts?  Certifying new ones would be even more costly!  Specialty alloys to meet the extraordinary demands of space flight, parts that are made by Mom and Pop shops mostly in the LA basin are norm rather than the exception.  You might think that simple things like bolts and screws, wire, filters, and gaskets could be bought off the shelf some where, but that thinking would merely prove how little you know about the shuttle.  The huge majority of supplies, consumable items, maintenance items, they are all specially made with unique and stringent processes and standards.

 

Our shuttle history tells us that when we try to cut corners, trouble results.  Small, even apparently insignificant changes have caused big problems... There is a long and arduous process to certify a vendor to produce the logistical parts for the shuttle.  Not many companies do this work... A lot of them have been there from the beginnings in the middle 1970s.  So when a Mom and Pop specialty shop gets a termination letter from the shuttle program after 35 years of production and they have other customers, guess what happens?...

 

Where does the money come from?  Where do the people -- who should be working on the moon rocket -- where do they come from? We started shutting down the shuttle four years ago.  That horse has left the barn.

It appears that neither of the current US presidential candidates has read Hale, but to be charitable, one or both may have wisely decided now is not the time to educate voters on logistics and the fact that a nominal five year gap till Orion/Constellation makes the US dependent on Russian Soyuz systems to put men in orbit.

 

Given the changing political landscape, the problem is so severe that NASA has begun to study flying the shuttle beyond its 2010 retirement despite the April 2008 testimony by NASA Administrator Michael Griffin before the Senate Commerce, Justice, and Science Appropriations Subcommittee:

"Everyone's deeply concerned about the gap," [committee chair] Mikulski told Griffin, referring to the often-discussed five-year gap between the scheduled retirement of the space shuttle in 2010 and NASA's new Orion and Ares system that will fly in 2015... Mikulski asked Griffin if this gap could be reduced with additional funding. Griffin replied it would cost at the rate of a $100 million to shorten the schedule by a single month. It would be impossible to shorten the schedule to be earlier than the late fall of 2013, "given the water over the dam behind us," he said...

 

Mikulski told Griffin: "there are some Members in the House who are raising the concept of extending the life of the shuttle until 2015." Griffin replied, "the shuttle is an inherently risky design," with NASA calculating that if the shuttle was flown twice a year for an additional five years "the risk would be about one in twelve that we would lose another crew. That's a high risk." He added, "To fly the shuttle after the space station is completed for any significant length of time I believe would incur a risk I would not choose to accept on behalf of our astronauts." It would, Griffin said, cost around $3 billion a year keep the shuttle flying. If this $3 billion came out of NASA's budget, it could delay the launch of the Orion and Ares system, at a rate of a month's delay for every $100 million that was redirected. "You extend the [five-year] gap, if you fly the shuttle longer," Griffin told Mikulski.

 

[Mikulski replied] "So what you're saying is there is no silver bullet. There is no magic motion available to close the gap." Griffin agreed.

While there is a gentleman's rule to "not mess with the safety of humans in space" and the Russians have stated that they will honor their launch commitments, rising Russian leverage will weigh on a US president in a second Georgian confrontation as it will on Ukraine (also here) and other former Soviet republics that make up the Near Abroad. I see no change in my 2004 and May 2007 forecast that "the common axis of Putin and energy will see Russia attempt to recover its near abroad, expel the US from the energy Stans of Central Asia and create a rift between the US and Europe."

 

The Richter 15 to 30 event

 

The presentation proceeds to describe what I call the Richter 15 to 30 event - the interruption of Taiwanese Original Design Manufacturers (ODMs), including their plants on the Chinese mainland. Unless readers are embedded in the ODM electronics segment, they are generally unaware of the centrality and magnitude of Taiwan in the global electronics market for computers, telecommunications, and modular components. For background, this 2005 pair remains useful:

Writing of Silent Hands Behind the iPhone in 2007, I noted it was a good "primer to the Taiwanese presence in our electronics backbone. Now reconsider the implications of a major earthquake in Taiwan. Then generalize that to any interruption to, or redirection of, this segment":

"The iPhone is a great example of where Taiwan is still strong: reliable sourcing, leading technology and complex integration."... "It's not a surprise that the iPhone would be made here because the food chains for Apple's notebooks and iPods are already in Taiwan... It's a natural progression."...

 

Taiwan's rise as a communications workhorse is part of a decade-long transformation under way on this Chinese Nationalist-controlled island south of the mainland. Already the world's biggest producers of computer components, Taiwan companies like Compal Electronics, in addition to Hon Hai and Quanta [both of whom make iPhones], have used their expertise to branch out into new markets that use many of the same products.

 

The strategy of repackaging - finding new uses for computer components - has paid dividends... By harnessing the ability to cut costs, churn out products quickly and work flexibly with customers, the Taiwan companies have become top makers of cellphones, smartphones, broadband modems, wireless routers, global positioning devices, networking equipment and other gear. They, like companies elsewhere, have also made deep inroads into China, where many of their factories are...

 

Taiwan's evolution from [boards to telecommunications] has gone largely unnoticed in the [US] because companies here make most of their money as made-to-order manufacturers, not sellers of their own brand products. But Taiwan's industrial makeover has helped its companies remain competitive in a world increasingly dominated by low-cost Chinese assemblers and by Japanese and South Korean companies with strong footholds in high-end components like flash memory chips.

A colleague shared this in 2005:

Quanta (biggest customer is Dell), Mitac (builds notebooks, Sun servers, the iPaq for HP, etc), and Inventec (biggest customer is HP) have been somewhat schizophrenic about stepping out of the "tell us what you want and we will build it" ODM model.  Quanta made a bunch of Silicon Valley investments at the height of the boom, mostly for naught.  Inventec is probably the most conservative, [but with] their booming HP business, they are sounding like they will try to chase more ODM business (essentially OEM as known in the auto business but they invest in reference designs that can be mass produced) rather than the IDM (Integrated design/manufacturing) approach ("We designed this really cool product. It has these features, it is better than these competitors, and we can do some customization to fit your requirements")...

 

But all of these manufacturers are constantly looking at ways to expand their business and cut their dependency on Dell, HP, and IBM.

 

My recollection is that Hi Lin Lee, senior vp and co-founder of Quanta went to MIT. [In 2002 an] Apple iBook and the Mac with the dome base... were in his office. Of the later he said with obvious pride "That is my product." As I have said before the growth in manufacturing capacity fueled by the Chinese investment credits goes on for some time.

 

Quanta is not the only one with senior guys with strong connections in the US. Mitac is run by Mathew Miau.  Matt moved to the US as a young teen, worked for Intel as an engineer.  He designed the USART which was a pretty famous and very successful product.  He negotiated a package to transition out of the company by opening Intel Taiwan and had a big role in launching the Taiwan PC manufacturing  industry. With his Intel option proceeds, and his father (who had made a fortune in raw materials if my memory is right) bought a small PC company (Mitac) and turned it into a powerhouse. Synnex, a major us high tech equipment distributor is under the Mitac group.  Matthew is as comfortable (and as well connected) in Silicon Valley as he is in Taiwan... [email]

 

A year ago my friends at Inventec, who built the iPods [said] they enjoyed the volume, but weren't making anything on them.  The Taiwan ODMs are now operating on 5+% gross margins, which would be more tolerable if they weren't spending some much on engineering of their customers' products gratis in order to win the manufacturing business. In general the margins are so thin that the manufacturers have to provide high quality products because a few warranty returns can wipe out any profits. [email]

On reading of Dell's decision to sell its PC factories, I wrote:

The king is dead. Long live the Taiwanese princes. The top tier chain is collapsing but the great OEM/ODM chains are vibrant. I had friends in DEC Asia who were leaving for these early princes, even before [DEC's acquistion by] Compaq. The topic of conversation was 'Do we stay invisibly in place with no name show through or do we go direct? If yes, how?' The opinions appeared to come down on the side of: 'We have no distribution channel. We are not strong enough to challenge Dell, or HP, etc.' That has changed. [email]

Chinese quest for technology independence

 

The Chinese have ceased to be content to stuff components and fabricate assemblies for Taiwanese ODMs. The CCP has made indigenous chip set production a national priority; they want to create a peer competitor to both Taiwan and Intel:

[The] objective for China is to take control of the design and manufacture of vital technology. "Like America wants to be energy independent, China wants to be technology independent...They don't want to be dependent on outside countries for critical technologies like microprocessors, which are [now] a fundamental commodity." Federal laws also prohibit the export of state-of-the-art microprocessors from the United States to China, meaning that microchips shipped to China are usually a few generations behind the newest ones in the West.

 

Despite its late start [China was slow to support microprocessor R&D], China is making rapid progress. The [Institute of Computing Technology] ICT group began designing a single-core CPU in 2001, and by the following year had developed Godson-1, China's first general-purpose CPU. In 2003, 2004, and 2006, the team introduced ever faster versions of a second chip--Godson-2--based on the original design. [Each] new chip tripled the performance of the previous one... [The Godson-3 chip was unveiled in August 2008.]

The technological imperative is not limited to electronics:

No longer content to be the home of low-skilled, low-cost, low-margin manufacturing for toys, pens, clothes and other goods, Chinese companies are trying to move up the value chain, hoping eventually to challenge the world's biggest corporations for business, customers, power and recognition.

 

The government is backing the drive with a two-pronged approach: using incentives to encourage companies to innovate, but also moving to discourage low-end manufacturers from operating in southern China. That step would reverse one of the crucial engines of this country's spectacular economic rise...

 

Chinese firms are expanding into (or buying companies that work in) software and biotechnology, automobiles, medical devices and supercomputers. This year, a government-backed corporation even introduced its first commercial passenger jet, a move Beijing hopes will allow it to some day compete with Boeing and Airbus...

 

China has "a lot of technology locked up in the military, and now the government is reducing budgets and pressing agencies to privatize... So suddenly, a lot of technology people thought didn't exist has come out from behind the curtain."...

 

There are still plenty of obstacles here, including weak intellectual property rights enforcement and a culture of copying or stealing technology from foreign companies or joint venture partners...

Predicting the Second Chinese Exclusion Act

 

What I have come to call the Second Chinese Exclusion Act will exact great commercial hardship on Western firms as China moves to expel foreign firms. The Chinese Exclusion Treaty (1880) and the Chinese Exclusion Act (1882) were racist low points in US history, exacting great hardship on Chinese already in the US and those attempting to enter. The Second Act will be no more palatable to its recipients.

 

Senior Chinese have, in small groups, stated an intent to: 

  • Absorb Western technology through joint venture (JV) and partnering strategies.
  • Slowly make JVs less attractive by progressive tariff and currency policies.
  • Force Western partners from Chinese market.

Multinational offshoring has had two purposes, the second not as well discussed as the first: 

  • Cost reduction, short to medium term.
  • Access to markets, long term.

I am not alone in believing that the Chinese will contain multinational access to its domestic markets, especially in its "pillar" and "heavyweight" industries. See Confluence of thinking on Chinese outsourcing and supply chain risks from DSB and USCC, 11/17/2007.

 

Given Chinese performance to date, multinational access will be limited, perhaps to a third on the market and then decline as China reclaims the then maturing market. The mechanism for expulsion is elegant: standards and administrative edicts. The strategic use of standards, notably indigenous standards, will: 

  • Free China of foreign royalties.
  • Create standards which Chinese products can meet but foreign products cannot.
  • Reverse the royalty stream.
  • Create price/volume advantage for global Chinese goods that overwhelm offshore local production.

Targeted Richter effects on US/EU supply chains

 

I often hear that the Chinese would not interrupt the trans-straits ODM traffic, but we know from experience that events that threaten the CCP or the state are dealt with immediately and firmly regardless of collateral impact or personal distress.

 

If the PRC is presented with conditions it finds intolerable and can degrade a key adversary by non-military means and thereby escape or reduce damage to the mainland, they will do so. Supply chains under Chinese control can be slowed or terminated to prevent the US from commencing or maintaining the ops tempo of a future Desert Storm against any adversary. Many of these interruptions can be cloaked as commercial actions, thereby offering China plausible deniability. In other words, China has become a governor on US actions.

 

One Way Up: U.S. Space Plan Relies on Russia

By JOHN SCHWARTZ

New York Times

October 6, 2008

 

Dangerous Fakes

How counterfeit, defective computer components from China are getting into U.S. warplanes and ships

by Brian Grow, Chi-Chu Tschang, Cliff Edwards and Brian Burnsed

Business Week/In Depth

October 2, 2008, 5:00PM EST

 

Why the ranks of chip makers are thinning out

Dean Takahash

Venture Beat

September 24, 2008

 

Dell Plans to Sell Factories In Effort to Cut Costs

By JUSTIN SCHECK

WSJ

September 5, 2008

 

A Chinese Challenge to Intel

Researchers have revealed details of China's latest homegrown microprocessor.

By Kate Greene

Technology Review

September 02, 2008

 

Nasa 'reviews shuttle shelf-life'

By Paul Rincon

BBC News

Page last updated at 10:59 GMT, 31 August 2008 11:59 UK

 

NASA chief asks: Can shuttle fly after 2010?

Robert Block and Mark K. Matthews | Sentinel Staff Writers

Orlando Sentinel

August 30, 2008

 

NASA is Making Preliminary Plans to Extend Shuttle Launches Beyond 2010

Written by Ian O'Neill

Universe Today

August 29th, 2008

 

Shutting down the shuttle

Wayne Hale

Wayne Hale's Blog

Posted on Aug 28, 2008 10:15:05 AM

 

Russian Actions Reignite Tensions Over Strategic Port in Ukraine

By DAVID L. STERN

New York Times

August 25, 2008

 

After Pullout, Russia Envisions Long-Term Shift

By CLIFFORD J. LEVY

New York Times

August 23, 2008

 

U.S. Sees Much to Fear in a Hostile Russia

By PETER BAKER

New York Times

August 22, 2008

 

In Ukraine, Fear of Being a Resurgent Russia's Next Target

By NICHOLAS KULISH and SARA RHODIN

New York Times

August 17, 2008

Correction Appended

 

As Russian Tanks Roll, Europe Reassesses

By JUDY DEMPSEY

New York Times

August 16, 2008

 

Space shuttle replacement delayed until 2014

This is why a former astronaut should run for president

By Scott Snowden

Register

Published 12 August 2008 10:32 GMT

 

China's Ambition Soars to High-Tech Industry

By DAVID BARBOZA

New York Times

August 1, 2008 

Correction Appended

 

China's Shift on Food Was Key to Trade Impasse

By STEPHEN CASTLE and KEITH BRADSHER

New York Times

July 31, 2008

 

After 7 Years, Talks Collapse on World Trade

By STEPHEN CASTLE and MARK LANDLER

New York Times

July 30, 2008

 

Nasa may hitch a ride on Japanese spacecraft

By Simon Burns

iTnews

22 July 2008 08:37AM

 

Tech woes threaten NASA's Moon plan

Leaked report indicates trouble ahead

By Lester Haines

Register

Published 17 July 2008 10:20 GMT

 

NASA Internal Presentation: CxMPR, Orion Project Office, 2 July 2008

STATUS REPORT

Source: Johnson Space Center

SpaceRef

Date Released: Wednesday, July 16, 2008

Excerpts: FY08 Cost Issue, FY09 & FY10, Orion Summary, Top Risk List CEV [Crew Exploration Vehicle], Technical Performance

 

Space shuttle: 10 flights to go before retirement

JR Minkel

Scientific American

Jul 11, 2008 02:57 PM

 

Mikulski on NASA: "There is No Silver Bullet"

Richard M. Jones

American Institute of Physics

FYI: The AIP Bulletin of Science Policy News

Number 45 - April 11, 2008

 

Shuttle Retirement May Bring Loss of 8,600 Jobs, NASA Says

By WARREN E. LEARY

New York Times

Published: April 2, 2008

 

The Offshoring of Engineering: Facts, Unknowns, and Potential Implications

Committee on the Offshoring of Engineering

National Academies Press

ISBN-10: 0-309-11483-7

2008

Executive summary PDF

 

Silent Hands Behind the iPhone

By KEN BELSON

New York Times

July 18, 2007

 

Taiwan, China lead in huge chip-making growth

TSMC and UMC account for over 50 percent of all foundry capacity in Asia

By Dan Nystedt, IDG News Service

April 06, 2006

 

Taiwan Transforms into IC Development Center

Tech Analysis

Nikkei Electronics Asia - February 2006

 

Taiwan Towers as Tech Innovator

FIRMS INCREASING R&D, CREATING OWN BRANDS TO KEEP AHEAD OF CHINA

By John Boudreau

San Jose Mercury News

22 January, 2006

Original scrolled off

Mirror

 

The Silicon Dragon: High-tech Industry in Taiwan

By Terence Tsai, Borshiuan Cheng

Published by Edward Elgar Publishing, 2006

ISBN 1840642408

 

Overview on Taiwan Semiconductor Industry

(2006 Edition)

Taiwan Semiconductor Industry Association

Rm. 1246, Bldg. 51, 195, Sec.4, Chung-Hsing Road

Chutung, Hsinchu, Taiwan 31015

TEL:+886-3-5913560 FAX:+886-3-5820056

 

A look at China's IC design houses

Amanda Liang, International News Center

Rodney Chan, DigiTimes.com

Friday 16 September 2005

 

Taiwan becomes driving force in single-wafer technology

By: David Chen, Hai Benron , Solid State Technology

Date: August, 2004

 

Working with ODMs: Growth, benefits and challenges

by Adam Pick, Analyst, EMS and ODM Services, iSuppli/Stanford Resources

Electronic Manufacturing Asia

1 July 2004

 

Russia and the Near Abroad Under Putin

Michael Rywkin

American Foreign Policy Interests

DOI:10.1080/10803920390187216

Vol 25, Issue 1, pp.3-12, 2003

 

The Chinese Experience

Becoming American

Bill Moyers

PBS

March 2003

 

Taiwan Goes After the World's Chip Business Already tops in supplying "fabless" customers, two companies on the island are betting billions on a new wafer.

(FORTUNE Magazine)

By Philip Siekman

May 14, 2001

 

Documents on Anti-Chinese Immigration Policy

Archives of the West from 1877-1887

THE WEST

September 1996

I. Chinese Exclusion Treaty, 1880

II. Chinese Exclusion Act, 1882

 

Gordon Housworth



InfoT Public  Infrastructure Defense Public  Risk Containment and Pricing Public  Strategic Risk Public  Weapons & Technology Public  

discussion

  discuss this article


<<  |  May 2019  |  >>
SunMonTueWedThuFriSat
2829301234
567891011
12131415161718
19202122232425
2627282930311
2345678
view our rss feed