A New Way of Thinking About Growth Beyond Scale

Published in December 2021
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Global Semiconductor Supply Chain in 2021. Shows how traditional automakers are getting their chipsets from only a few suppliers (who are, in the order of market capitalization size, TSMC, Samsung, S.M.I.C and U.M.C)
How traditional automakers are getting their chipsets. Compiled by the authors.

Here is the big problem: TSMC alone commands about 50% of the market share of all semiconductors in the world. But semiconductor production is not something you can ramp up quickly. Setting up a semiconductor factory requires an upfront investment of as much as $12 billion. And the factory takes three years to become production ready.

Just like in a famine, everyone is now ordering even more since supply becomes scarce. Every company is trying to stockpile chips to last them through the crisis. Even highly experienced tech companies such as Nvidia, Microsoft and Apple are struggling to receive a steady supply. That only triggers further panic buying. The only winners are, predictably, TSMC and Samsung, who have seen their share prices rise by 190% and 61%, respectively, in the past 12 months.

 

How Smart Companies Will Escape The Boom-Bust Cycle

 

How companies respond to a crisis is just as telling as how the crisis occurs. Auto-parts maker Bosch, with its chairman, came out to admit the supply chain for auto chipsets is broken. But not much we know how to the industry should be fixed. Tesla, on the other hand, found its own solutions. Elon Musk doesn’t expect much from his industry partners. He is rewriting the car firmware himself, so that he can source new type of chipsets all together.

Here is the big problem: TSMC alone commands about 50% of the market share of all semiconductors in the world. But semiconductor production is not something you can ramp up quickly. Setting up a semiconductor factory requires an upfront investment of as much as $12 billion. And the factory takes three years to become production ready.

More specifically, he works directly with TSMC and Samsung, thereby pushing out the old middlemen of all kinds within Tesla’s supply chain. In other words, Tesla is using its software muscle to take over more functionalities that used to be located in the more purpose-built hardware. That hardware historically been put together by Bosch, Infineon, and many more in a long chain. Tesla is shortening the supply chain on its own.

That’s an approach that obviously requires some deep understanding of software programming. And among carmakers, despite everyone talking about autonomous driving and connectivity, only Tesla has the real capability to make it work.

But what Tesla going for is not just shortening its supply chain in the near term. What it does will result in a new arrangement on how a car is built. When that happens, the company can then solicit more suppliers around the world to meet its chipset requirements in the long run. Tesla’s statement reads, “Our electrical and firmware engineering teams remain hard at work designing, developing and validating 19 new variants of controllers in response to ongoing semiconductor shortages.” Nineteen variants is exactly the creation of redundancy.

Sure, redundancy would be more expensive to maintain. Working with two versions is always easier than working with 19 variants. Maintaining a list of 25 suppliers, for instance, is always more time-consuming than working with just five, with each new supplier requiring additional handholding. But having a deep relationship with only a handful of trusted suppliers can yield a system too vulnerable to withstand external shocks.

This conclusion should not be surprising. If everything is optimized to the extreme and running close to 100% utilization rate, it’ll surely be very cost effective, but also on the verge of implosion. This is why Google and Amazon have redundancies in their computer servers around the world. This is why their customer data are duplicated and stored in multiple locations. It’s a more expensive approach, but this is how tech giants avoid catastrophic outcomes. Executives will never yield to Wall Street analysts’ pressure to eliminate redundancy in order to save those tens of million in expenses.

What’s interesting here is when it comes to semiconductors, traditional carmakers have no clue. They’ve been closing their eyes to activities that lie outside their own companies. As long as there’s a contract in place, they thought, they would be safe. Except of course, there are times when perfect drawn contracts are not even enforceable no matter how loud you scream.

 
What Growth You Should Pursue
 

There are two types of growth. There is growth that scales a company in size but turn its increasingly vulnerable. In this case, executives rely on scenario planning and forecasting to talk themselves into believing any uncertainty is managed and controlled. Then there are companies that choose to grow while at the same time building buffers. Their buffers increase in the same proportion as the enterprise scales. Why? Like legendary investor Ray Dalio once said, “Make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil.”

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