Tsunamis in the network

Hardware and high finance: The rhetoric of doubt


Andrew Leonard
November 2, 2006 12:53AM (UTC)

Imagine if the tsunami that ravaged Indonesia and Thailand two years ago had instead swamped South Korea. An article in Electronic News, "Is the Electronics Supply Chain in Danger?" quotes Bill Mitchell, CEO of the electronic components distributor Arrow Electronics, as theorizing that "It could have knocked out 95 percent of the memory capacity in the world. All of a sudden the electronics industry shuts down. That's an example of a fragile supply chain."

Such a catastrophe would plug quite neatly into the thesis presented in Barry Lynn's "End of the Line: The Rise and Coming Fall of the Global Corporation," a book I reviewed for Salon a year ago. The rise of the global production chain, in which every possible step of the design and manufacturing process is offshored or subcontracted out to whoever can do it most efficiently, has lowered costs and increased flexibility for the modern corporation. But Lynn warned that such flexibility could, paradoxically, also be considered brittle. Hyper-specialization can go too far. As an example, Lynn cited an earthquake in Taiwan that significantly disrupted supply chains for the global personal computer industry. A theoretical Korean tsunami could pack a much worse wallop.

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Ed Sperling's article in Electronic News doesn't cite any current examples in which the electronics supply chain has been disrupted. Some would even argue that it's never been operating more efficiently or effectively. But he reports that interviews "with more than a dozen key executives on all sides of the global supply chain" indicate there are some real concerns. Among their worries: "Consolidation into regional monopolies, such as glass manufacturing in Korea, silicon on insulator substrates in Taiwan and consumer electronics manufacturing in China mean that natural disaster, political unrest and even breakdowns in local logistics could stall supplies that will have rippling effects across the electronics industry."

Contemplating that sentence, it occurred to me that it echoed similar doubts often expressed in a world that might seem far removed from the nuts and bolts of electronic devices -- the domain of high finance, of hedge funds and derivatives trading. The balloning importance of hedge funds and derivatives in the global economy has led to exactly the same concerns as some executives are now expressing about hardware supply chains. We live in an era of an immense flexibility. Traders can buy and sell risk itself as never before, to the tune of trillions of dollars. Some argue that this increases the overall stability of the financial system, that the downside to every possibile eventuality is hedged, that global financial trading networks are so sophisticated now that catastrophes can be absorbed without more than the slightest ripple disturbing the surface of the pond. But others fret that we've boxed ourselves into a new paradigm where we have become so leveraged in so many different directions that ripple effects transform immediately into falling-domino chains of collapse. The new era has yet to be tested by a major disaster. We may be more vulnerable than before.

The details of what is taking place in the worlds of hardware and high finance are different, but the rhetoric is identical, and the two domains are intimately connected. A tsunami that wipes out South Korea's computer memory industry would cause corporate pain that would spread into financial markets at just shy the speed of light. Is the global economy strong enough to handle that adversity? There's only one way to find out.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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