Executive Briefings

Geographic Concentration Risks in the High-Tech Supply Chain

Analyst Insight: It is common for high-tech companies to have established processes to ensure they are not overly dependent on too few suppliers. Far less common are processes or intelligence to ensure they are not overly dependent on a specific geographic region. But recent events have pushed the issue of risks from geographic concentration of the supply base to the forefront. - Bill McBeath, Chief Research Officer, ChainLink Research

Almost all industries tend to become concentrated in specific geographic regions, such as finance in New York or auto manufacturing in Detroit. High-tech is no exception, with concentrations in Silicon Valley, the southeast coast of Japan, central and northern Taiwan, the Philippines, greater Seoul, the southern coast of China, and southern Thailand, for example. There are many advantages to this concentration (referred to by economists as agglomeration) such as the network effect of increased density of human expertise and resources, as well as reduced logistics costs and cycle times.  However, there is a price to pay in increased risks, not unlike the risk created in an investment portfolio when it lacks diversity and is overly concentrated in a sector.

The risks of geographic concentration of high-tech manufacturing were brought into sharp relief in 2011, with the tsunami in Japan impacting both high-tech and automotive production. That same year, floods in Thailand served to punctuate this point. By late 2011,  those floods created a global shortage of HDDs (Hard Disk Drives) that was projected to cause PC growth for Q4 to fall from 7.2 percent to 4.3 percent.

The major centers of high-tech manufacturing each have their own set of natural disaster risks - earthquakes in Silicon Valley, Japan, Taiwan, and the Philippines; tropical storms and/or flooding in China, Thailand, Seoul, and Taiwan. And, unfortunately, extreme weather events are predicted to increase.

The challenge is exacerbated by the multi-tier nature of high-tech supply chains. The source of disruption is often not the immediate suppliers for the OEM. For example, in the aftermath of the tsunami, one of the hardest hit segments was silicon wafer production - two or three tiers back from the OEM. Japan accounts for 60 percent to 70 percent of global silicon wafer production.

When these disruptions occur, there is a scramble to assess the impact and secure supply of those components or materials that will be in shortest supply. There are winners and losers in that scramble.

A key part of the answer to this is understanding where the over-concentration vulnerabilities exist.  The most obvious type of over-concentration is over-reliance on a single supplier.  But increasingly the risk includes having too many suppliers clustered in the same geographic region. To understand risks of geographic concentration, OEMs need visibility not just into whom they are buying from, but where production is happening throughout multiple tiers of their supply chain.  This can be a daunting task.

Thankfully, there are some tools and services emerging from companies that can help with this challenge.  The high-tech OEMs and manufacturers with the most advanced supply chain risk management programs are starting to invest in getting visibility into multiple tiers of the supply chain. This may end up being one of the most critical factors in determining the winners and losers when the next disruption strikes.

                                      The Outlook

2011 will turn out to be the norm, not the exception, in terms of disruptions to the high-tech supply chain. Expect more of the same in 2012. Since dealing with geographic concentration risks is not an easy problem to solve, it will take time for companies to build the capabilities to understand those risks. Those that do it sooner will have an advantage when disruptions strike, as they inevitably will.


Keywords: Supply Chain Security & Risk Mgmt., Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management; Sourcing & Procurement, Supplier Relationship Management, Technology, Agglomeration, Supply Chain Risk Management Systems

Almost all industries tend to become concentrated in specific geographic regions, such as finance in New York or auto manufacturing in Detroit. High-tech is no exception, with concentrations in Silicon Valley, the southeast coast of Japan, central and northern Taiwan, the Philippines, greater Seoul, the southern coast of China, and southern Thailand, for example. There are many advantages to this concentration (referred to by economists as agglomeration) such as the network effect of increased density of human expertise and resources, as well as reduced logistics costs and cycle times.  However, there is a price to pay in increased risks, not unlike the risk created in an investment portfolio when it lacks diversity and is overly concentrated in a sector.

The risks of geographic concentration of high-tech manufacturing were brought into sharp relief in 2011, with the tsunami in Japan impacting both high-tech and automotive production. That same year, floods in Thailand served to punctuate this point. By late 2011,  those floods created a global shortage of HDDs (Hard Disk Drives) that was projected to cause PC growth for Q4 to fall from 7.2 percent to 4.3 percent.

The major centers of high-tech manufacturing each have their own set of natural disaster risks - earthquakes in Silicon Valley, Japan, Taiwan, and the Philippines; tropical storms and/or flooding in China, Thailand, Seoul, and Taiwan. And, unfortunately, extreme weather events are predicted to increase.

The challenge is exacerbated by the multi-tier nature of high-tech supply chains. The source of disruption is often not the immediate suppliers for the OEM. For example, in the aftermath of the tsunami, one of the hardest hit segments was silicon wafer production - two or three tiers back from the OEM. Japan accounts for 60 percent to 70 percent of global silicon wafer production.

When these disruptions occur, there is a scramble to assess the impact and secure supply of those components or materials that will be in shortest supply. There are winners and losers in that scramble.

A key part of the answer to this is understanding where the over-concentration vulnerabilities exist.  The most obvious type of over-concentration is over-reliance on a single supplier.  But increasingly the risk includes having too many suppliers clustered in the same geographic region. To understand risks of geographic concentration, OEMs need visibility not just into whom they are buying from, but where production is happening throughout multiple tiers of their supply chain.  This can be a daunting task.

Thankfully, there are some tools and services emerging from companies that can help with this challenge.  The high-tech OEMs and manufacturers with the most advanced supply chain risk management programs are starting to invest in getting visibility into multiple tiers of the supply chain. This may end up being one of the most critical factors in determining the winners and losers when the next disruption strikes.

                                      The Outlook

2011 will turn out to be the norm, not the exception, in terms of disruptions to the high-tech supply chain. Expect more of the same in 2012. Since dealing with geographic concentration risks is not an easy problem to solve, it will take time for companies to build the capabilities to understand those risks. Those that do it sooner will have an advantage when disruptions strike, as they inevitably will.


Keywords: Supply Chain Security & Risk Mgmt., Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management; Sourcing & Procurement, Supplier Relationship Management, Technology, Agglomeration, Supply Chain Risk Management Systems