The global economy’s absorption of the Taiwanese earthquake

Barry Lynn’s controversial view of the global supply chain:

“The hyperspecialized and hyper-rigid production system that is emerging is, if we are honest, the natural outcome of what happens when globalization and outsourcing are combined with an entire lack of regulation by governments,” writes Lynn. “When the borders of the nation and the borders of the firm are both simultaneously ripped open, the result, in industry after industry, is a chain reaction that results very quickly in a single highly networked and highly specialized system of production.”

In Lynn’s view, being highly networked and specialized creates dangerous new vulnerabilities. As an example of what can go wrong, Lynn cites an earthquake that occurred in Taiwan in September 1999. Taiwan is the world’s No. 1 source of made-to-order advanced semiconductors — the microchips that are the brains of iPods, DVD players, computer graphics cards, cellphones and countless other electronic devices. Although the handful of factories that manufacture such chips were not seriously damaged by the quake, power and transportation systems in Taiwan were severely disrupted for a week. The ripple effect of that turned out to be an economic tsunami of sorts for the global high-tech economy.

Shortly after the Taiwan earthquake, some observers feared a global economic crash was beginning. That didn’t happen. But a key lesson should have been learned. There was no backup plan. There were no other factories that could produce those chips, in the short term. A bigger earthquake, one that might reduce to rubble the science park where Taiwan’s top chip plants are located, could have had devastating consequences.

Tuesday’s test of his theory:

An earthquake in southern Taiwan on Tuesday night damaged an undersea optic cable, causing serious disruptions to international phone lines and Internet connections in Korea, Taiwan, China, Japan and Southeast Asia…

Taiwan was the worst affected. Chunghwa Telecom said 60 percent of the phone lines to the U.S. were cut off and 98 percent of communication linking Taiwan with Malaysia and Singapore suffered disruptions. The company forecast it will take two to three weeks for the nation to completely repair the damaged cables. The earthquake also disrupted 1,400 phone lines and 84 international phone lines of Japanese telecom firm NTT, making it impossible to call Southeast Asia from Japan.

The outcome in India:

India’s software and BPO industries recovered some of their connectivity to the US and Europe after undersea fibre optic providers offered an alternative to the Pacific route, which was disrupted due to a quake on Tuesday… Several IT and BPO companies faced a disruption in operations. However, they did not experience a breakdown since they have roped in multiple bandwidth providers and built up a redundancy in operations for such an eventuality. TCS could not confirm that it faced any downtime for any of its operations.

China:

Telecommunications disruptions caused by Tuesday’s earthquake in south Taiwan have stopped foreign trade companies along coastal areas in the Chinese mainland in their tracks. Though the Ministry of Information Industry have taken measures and tried to repair the broken-down, the international access on the internet are still jammed.

Elsewhere:

Companies in the region for the most part said they found ways to work around Tuesday’s earthquake. Among the best off were companies that buy service from telecom carriers with redundant cables or backup satellite systems for these types of disasters. Stock markets were unfazed: In Tokyo, the Nikkei 225 Stock Average closed up 0.31% at 17,223.15 points, while Hong Kong’s Hang Seng Index rose 2.1% to 19,725.73, a record high…

[S]ome businesses found themselves out of touch with critical operations and customers. For example, Hong Kong-based Kingstar Shipping, which manages 10 ships around the region, was unable to reach clients in Japan or Korea and some in Singapore, according to KL Tam, managing director. “We have been trying other ways to communicate — but nothing much works,” he said. Most of Kingstar’s ships today have cargo now, but “if this continued for several days, our operations overseas would essentially stop,” he said…

Executives at some telecom companies say yesterday’s problems indicated they may need to beef up their backup systems even more. “Our plan had been in place for a long time,” said Maki Sato, a KDDI spokeswoman. “But we are now studying whether it should be strengthened.”

The global economy has the ability to absorb mild-sized hiccups to such a degree that the costly creation of global redundancy may not be necessary [a position analogous to this book’s case against overreaction in the security arena]. That’s Chunghwa Telecom Co’s position. But a truly devastating scenario may be reasonably imagined. I expect to see more cost-benefit analysis on this topic soon.

Update: Two weeks later, how is the recovery?