“This quarter, and I think we’ll continue to see that a little bit in Q2 and Q3, had some of the most difficult supply chain challenges that we’ve ever experienced in the life of Tesla and same difficulties with supply chain, with parts — over the whole range of parts. Obviously, people have heard about the chip shortage. This is a huge problem.”
I thought it might be helpful to do a quick, not totally complete, overview of the causes of the current supply chain problems. As always, I believe there’s never enough context on most “supply chain problems” articles to truly understand why it’s happening and when it may be resolved.
Key Takeaway: we will be experiencing supply chain problems and associated inflation into 2023.
Let’s jump into this with the most basic reminder: the virus and economic shutdown led to a massive demand shift from services to goods.
Examples:
·     People started driving rather than taking public transportation. This led to increased demand for cars and auto parts. Auto manufacturers, who initially reduced production due to COVID and canceled orders for things like semiconductors, had to reopen and ramp up production to meet demand.
·     People started working from home rather than going to offices. This led to increased demand for furniture, software, lighting, broadband, supplies, toilet paper, and the likes.
·     People started using their homes as gyms instead of going to gyms. This led to an increase in the demand for treadmills, hand weights, online yoga, running, and workout classes. People started making meals at home by going to the grocery store rather than going out to restaurants and bars. This caused an increased demand for stoves, skillets, online recipes and classes, bigger kitchens.
·     Students moved from the classroom and into the kitchen. Virtual learning tech demand soared, and consequently, there was an increase in demand for iPads, tablets, school supplies, WIFI, and cameras.
·     People needed more home office and home classroom space. This led to an increase in demand for improved home space and larger homes. Demand for housing and home improvement and construction soared.
·     Small to medium-sized businesses adapted by going digital, and the demand for tech soared.
We also need to discuss the events that caused the supply chain problem. A series of unfortunate occurrences have played a significant role, chaos, in the supply chain problems.
Examples:
·     China shut down the country in Q1
·     US and EU shutdown in Q2
·     Chinese no warning port closures due to outbreaks
·     Dock workers in LA quarantining due to COVID
·     A ship getting stuck in the Suez Canal for a week
·     Snowmageddon in Texas
·     The emergence of the Delta variant reducing RTO
What we learned is that incredibly lean and interconnected supply chains can’t handle these shifts. It’s the lesson from the 2008-2009 financial crisis. The more complex a system is, the more fragile it is.
A relatively small disruption can cause big delays, and significant disruptions will cause even more significant delays. And unfortunately, we’ve had a massive COVID disruption plus other rolling disruptions to the global supply chains. One can’t simply flip a switch and create a new semiconductor chip factory or furniture foam factory to ease the shortages as it takes time, money, and risk tolerance.
The point is the supply chain problems we’re experiencing aren’t going away any time soon. From shipping containers to semiconductors, prices aren’t going down any time soon, either. Yes, all the headlines screamed, “Elon Musk says the chip shortage is a ‘short-term’ problem.” What they missed was what he said right after it, “I hope.”And hope is not going to get the job done on supply chain problems.
My expectation is it will be 2023 before we fully feel supply chain shortages and the associated price increases abate.