Covid… it’s complicated
The Past: an anecdote with a happy ending
Today we’re going to start with something that happened to me many years ago and that will serve to illustrate several of the ideas we’ll touch on later.
I was going to meet some friends at a terrace in Madrid’s Almagro Street and, as I arrived in my old Opel Kadett I saw them sitting at a table, right next to an empty parking spot. What wonderful luck! 😄
I set the indicator to the right, stopped a bit further on from the space and then as I looked backwards to start reversing I saw that my car was leaving behind it a huge white cloud. What rotten luck! 😩
I manoeuvred and parked quickly and once I turned off the engine I realised that the car was letting off steam and hissing like a kettle. Since it was evident that nothing could be done until everything had cooled down, I started by being cool myself. I got out of the car and, as everyone in the terrace and the rest of the street stared in surprise/amusement/pity at the poor bastard whose car was about to explode, I sat down with my friends nonchalantly and drank from one of the beers ´cos they were cool too…
After a couple hours I started the engine again and saw that the problem was that the fan wasn’t working, so the water in the cooling circuit was boiling as it got heated up. That meant I had about 15 minutes before it happened again, just the time it took me to get home.
By pure coincidence, at the time my mother was in the process of getting a new car, so we gave mine to get the car renewal discount and I kept her old one. What wonderful luck again! 😄
By now you’re probably wondering what the Covid has this got to do with the pandemic. Well, we’re getting there.
If instead of many moons ago, this situation had taken place last summer, things might not have followed the same Disney-esque arc (happiness — tension — happiness) and had such a happy ending, since perhaps my Mum wouldn’t have been able to buy a new car so easily. Why is that? Well, that is precisely what this article is about.
The Present: we live in a complex world
If, like me, you don’t work in an industry that deals with tangible products, then perhaps you aren’t very aware of one of the main long-term effects of Covid. One that even today, in September 2021, after over a year and a half of pandemic, has the world tits up and with no signs of improving until late 2022. At least.
We are talking about the chaos in the production of physical goods.
Car production has fallen off a cliff. In the UK, the month of June saw a total of 69k new cars being manufactured, the lowest figure in almost 70 years, with the sole exception of last year. Globally, it is estimated that 2021 will end with a 10–12% shortfall in the already conservative forecasts (7–9 million units), after Toyota, Ford, Jaguar Land Rover, Renault, Volkswagen, Nissan and Volvo have all had to either slow or temporarily halt production at their factories.
Things are the same or worse in retail. Nowadays it’s nearly impossible to buy a Sony PS5 gaming console, Samsung has delayed the launch of several new handsets and Apple has warned of shortages of new iPhones and MacBooks.
More anecdotal evidence:
- In the area where I live, petrol prices have gone up by 50% since the beginning of the pandemic, from less than $2 to over $3.
- This weekend I was at Ikea and it reminded me of something that I had only seen in the grocery stores of Havana; half-empty shelves and people taking the sample models.
- My friend who is a facility manager just told me that he’s been trying to find a supplier to replace lamps in an auditorium (a five-figure purchase) and they all say the same: no problem at all, but delivery will be in August 2022.
- Bicycle shops can’t manage to get new stock. Yesterday I sold for $500 a bike I had bought in 2013 for $400 and which had one of the gear shifters completely ruined.
Causes: the echoes of lockdown
But WTF is going on? Politicians and media have been telling us for months that we finally have a vaccine and the worst is now over…!
The explanation (unlike the problem and even less the solution) is relatively simple; we are now getting the echo of the initial effects of Covid.
Allow me to explain; what happens when we have a highly complex system, is that when any of its components suffers a problem, the effects don’t manifest for some time, partly because the other components can continue to work relatively normally for a while, even if that makes things worse in the long run. But the key is that the final outcome of a process depends on every element working perfectly. As we saw before, even if the fan fails, a car can still run for a while before the engine overheats so much that it blows up.
But a car is quite a simple system. The more complex the process, the longer it will take to feel the effects of a problem in any of its components.
And in this case, the complex process we are dealing with is nothing less than global trade, the problem has been Covid and the elements that have failed have been mainly two, which are closely intertwined and which are very complex processes in and of themselves: production of raw materials and shipping.
In order to sell something, the first step is to manufacture it and any product we wish to manufacture will require raw materials. But Covid has completely stopped the production of all raw materials throughout the world because those raw materials not only have to be extracted, but also processed and refined. And operations of that calibre are not stopped and started instantly, like a car’s engine, not even from one day to the next. In some cases, starting up a plant can take months, from the moment of the initial go-ahead until the finished material rolls off the production belt.
- Metal: The price of steel has risen by 100%, from around $400 per tonne in mid-2020 to currently over $700. This is because steel’s two main components, iron ore and scrap metal, were both negatively affected by the pandemic. Iron ore mining in South America, a top supplier, came to a standstill due to Covid lockdowns. At the same time, the current collapse in car production has interrupted fleet renewals and caused less cars to be scrapped, which is one of the main sources of scrap metal (I’d love to know what products nowadays have some part of my old car in them). And of course, those South American mines also produce other essential metals for manufacturing processes, including copper and zinc.
- Plastics: The prices of plastics have risen by more than 80%. Even before this winter’s freeze which decimated the power grid in the US, the world’s top supplier, keeping plastics factories offline for over a month, the industry still hadn’t managed to rebound from back-to-back hurricanes last year.
- Lumber: The price of lumber has also skyrocketed, from around $130 per m³ before Covid to a peak of $700 in May 2021.
All of this came about in the midst of the pre-Covid trade war between US and China, which had factories all over the world nervously dumping stock and reducing production in anticipation of tariff hikes.
But that is not all, because after producing and refining raw materials, we still need to transport them to their destination, and that is the other problem.
Covid has unleashed an unprecedented tsunami in the shipping sector, because we lived in a world of supply chains that had been extremely optimised, to the smallest detail and with hardly no margin for error.
Currently, the cost of sending a standard shipping container from Asia to Europe is TEN times higher than in January 2020 (from around $1,500 over a year ago to over $15,000 nowadays).
To make matters worse, 2021 has brought another unheard-of event, the blockage of the Suez Canal for over a week. About 12% of the world’s oil and natural gas pass through it, on its way to be used as both raw material to produce plastics and also fuel for factories and the supply chains themselves. According to some estimates, that single “wind gust” (ahem) which caused the blockage may have cost global trade between $6bn and $10bn and reduced annual trade by 0.2–0.4%.
And of course shipping is also busy distributing the finished products into which the raw materials are transformed.
The Future: the million-dollar question
All this leads us to the question we are all asking ourselves: when will things be back to normal?
Before we get to that, we need to understand a very simple concept, the speed of any process is always limited by that of its slowest element.
That means that even if everyone gets vaccinated, more workers are hired at mines, factories and freighters, we will still be at the mercy of the slowest element of the ENTIRE chain of production — supply — manufacturing — distribution.
So, right now, which is that element?
The answer to that question is: another complex process. Perhaps because it never rains but it pours or because misfortunes always come in threes, the lack of raw materials and the interruption of supply chains have come together to have a baby, the antichrist of global trade: a shortage of microchips.
This situation has been brewing for years. Microchip foundries were already struggling and could hardly keep up with an explosion in demand in recent years, as technology has come to permeate all products. At the same time, every country in the world is deploying entirely new communication networks, 5G in the most advanced and 4G or 3G in the rest.
Against this backdrop, Covid has been the straw to break the camel’s back, on the one hand cutting off supply by forcing all foundries to close down and on the other increasing demand as families have had to work and study from home, needing new laptops, tablets, monitors, webcams and speakers.
As if that weren’t enough, once again bad luck has exacerbated the problem with the winter storms in Texas which shut down semiconductor factories, a fire at a plant in Japan and more closures in Malaysia due to a new Covid outbreak.
Chip makers have tried to respond by increasing capacity but unfortunately that is not so simple. In addition to the lack of raw materials, as we have seen, highly complex processes entail startup and operation periods that are proportional to their complexity. And microchips happen to be among the most complex products manufactured nowadays. Building a semiconductor factory costs billions of dollar, takes several years and in addition requires highly skilled workers, so their operations involve an incompressible production time of one to two years.
To top it all off, if we wish to continue manufacturing our products but there is a shortage of the microchips we need, we can’t even resort to simply swapping out our usual chip for a similar one, because we would also have to rewrite all the associated software or else nothing would work. It would be like trying to use a VHS tape in a Betamax player.
And now that we know what the limiting factor of the process is, we can try to see what the future holds in store.
And the answer is…
Nowadays, most products are basically computers with some added parts. So not only PCs, smartphones and consoles, but also everything else that has a chip, including products like TVs, electric bikes and ovens, will be impacted. This is particularly true of cars. In the past, one could lift the bonnet and see that the fan wasn’t working, but today we have to take the car to a garage so they can plug it into a computer and it can tell us itself what the problem is.
And now that we know all this, let’s end by trying to extract some useful conclusions.
- Personal — it’s good fishing in troubled waters
It is an ideal time for anyone who wants to get rid of a car or bike or console. But perhaps it may be even better to wait until Christmas time.
Even in normal times, car leasing is a rip-off (unless a company is paying for it), but for those who have one, now that prices are so high it might be the time to make use of the clause that allows you to buy it cheaply and then resell it.
And another thing, this next Black Friday is looking interesting. I am expecting to see marvellous videos of fights over the little stock available in stores, Roman circus or Thunderdome-style. It is September, there are still a few months left and you have been warned of what is going to happen, don’t be that cretin who leaves it for the last minute.
- General — these are times for essentialism
Instead of profiting like a fisherman, any entity (person, business, nation, economy) that is unable to adapt to changes in its environment will suffer in times of upheaval. And if those changes become extreme, it will end up becoming extinct.
At an individual level, if our ego and self-esteem are attached to material goods, if we are not flexible enough to downgrade our lifestyle, even temporarily, then everything we have amassed, all of those objects we think we own, in reality they are the ones that own us.
At any moment, but particularly during times of change, it is always good to reduce our physical and mental footprint. That doesn’t mean we have to become minimalist ascetics, but that we should practice introspection to determine the things that are truly essential.
That way we’ll be able to change consumerism into consamerism: same clothes, same smartphone, same car…
Seneca put it best in his Letter 18 to his pupil Lucilius, On Festivals and Fasting:
Set aside a certain number of days, during which you shall be content with scant and cheap fare, with coarse and rough dress, saying to yourself the while: “Is this the condition that I feared?”
Originally published at http://pandemicponderings.wordpress.com on September 17, 2021.