The supply chain vulnerability was massively exposed during COVID-19, affecting industries worldwide from car manufacturing to baby formula. This poses a real challenge for incumbents and rising startups that rely on hardware and robust supply chains. Events such as the six day freeze after a cargo ship blocked the Suez Canal in March of 2021 cost the world $9 billion dollars a day, and global trade shunted by 0.2 to 0.4 percent during the period.
The supply chain shortage can be separated into two different deciding factors: goods shortage and transportation factors.
Goods shortage can be impacted by sudden demands for a market that incumbent giants in the industry are unable to keep up with. Take the semiconductor industry for example. The semiconductor shortage has been largely attributed to a large result of the chip-producing factory shutdowns and slowdown of factories due to COVID-19. However, companies such as Taiwan Semiconductor Manufacturing (TSM) have been prioritizing producing cutting-edge chips for the last decade, goods that are way more lucrative than older versions of chips found in “lagging” industries such as automobiles and large-scale machinery. These industries became even more vulnerable to an already less sought-after manufacturing process. Factors such as the pandemic, war in Ukraine, and economic inflation in fiat currencies worldwide only served to widen the gap between goods supply just meeting the demand and supply of less serviced goods.
Transportation factors, in addition, add to the cracks that began to show between the ability to supply goods and our needs as a functioning society. Beyond the brief period of shortage caused by the Suez Canal shipping crisis, border shutdowns, rise in oil prices, and other interrelated factors have slowed down shipping times. With ever growing demand for necessities and raw materials such as plastic, used in everyday life, each delay causes the strain of shelving waiting lists to grow and trickling down to impact our individual existence.
In industries (most) where holding inventory is considered a larger liability than a strategy for contingencies, startups must come up with new ways to handle future events that cause supply chain disruption. With the rising unpredictability of climate and economic fluctuations that cause high demand (and therefore high prices) for goods, the new incoming companies have incentive to come to action plans in order to anticipate and be prepared for these situations. This brings us to a couple points:
- Supply chain needs to be more transparent:
- consumers have tracking for their FedEx or Amazon packages, but companies do not have similar oversight on their bought goods
- Incumbent logistical companies have left a space for newcomers to produce trackable transportation that is in higher demand than ever before
- Vertical integration or producing more inhouse components become more appealing as a long term strategy for two reasons:
- Removing the middleman manufacturer ensures even slower delay. Although goods shortage affects all industries, removing the middleman ensures the delay comes from the goods shortage and not other transportation or contract delays
- Better control over goods supply and manufacturing can allow a startup to be more agile in critical times. Although this may require a larger fixed, upfront investment, if done at the right stage, it may prove to be a more sustainable and profitable strategy where the startup can outcompete competitors who rely on third party manufacturers in times of global unrest
- The logistics and goods transportation space has exploded with many new startups as investors see it as a ripe market for digitization, making it good time for hardware dependent startups to partner or integrate these companies
Hardware startups lean more on the cost-heavy side but staying lean in its growth phase and investing more into their inhouse manufacturing and vertical integration of goods transportation may prove to be a better long term investment as well as robustness in weathering global uncertainties.
Note from Amit Garg: Primary author for this article is Sharon Huang. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.