Telecoms sector disruption could be more far-reaching than first thought

Simon Woodcock is a Director and Technology, Media & Telecoms sector specialist at Vendigital. He recently shared his insights with Telecoms.com

The financial performance of businesses in the telco sector, from network operators to service and equipment providers, could be impacted for a longer period than they might have initially hoped, due to the ongoing, global shortage of semiconductors. The cumulative effects of Covid, geo-political uncertainty and heightened cross-sector demand for chips is already causing significant disruption to the production of smartphones, routers and IoT devices, and that disruption shows no sign of abating. So, how can businesses in the sector mitigate the associated risks?

In recent months, the telecoms industry has faced a perfect storm of both supply-side and demand-side pressures, with the biggest single impact coming from surging global demand for semiconductors since the Covid pandemic. The Semiconductor Industry Association reported global demand rising 6.5 per cent in 2020, following declines in 2018 and 2019, and growing by 26 per cent in May 2021. This growth is driven by the sudden move toward home working and schooling, and all the electronic kit and servers required to enable that move. This is against the backdrop of the general rise of the Internet of Things (IoT), contributing to increased demand for semiconductors in everything from cars to fridges.

In the UK, demand within the telco sector has also been inflated due to some local drivers, such as the Government’s decision to phase out Huawei from its 5G networks. With a September 2021 deadline for carriers to stop installing the Chinese firm’s technology coming on top of an already ambitious 5G rollout plan for the sector, demand for semiconductor hungry equipment is on the up. The Government’s target of offering gigabit-capable broadband to 85 per cent of the UK by 2025 is putting further pressure on demand within the sector.

These demand-side challenges have been exacerbated by supply-side pressures. Some of these are felt globally, such as the lingering after-effects of the Suez Canal blockage in March 2021, and some are confined to the UK, such as the HGV driver shortage and port blockages caused by a combination of the HGV situation and general Brexit-related process changes.

It is clear that no business is immune to this situation, as evidenced by technology giant Apple’s shares falling 1.2 per cent in after-hours trading after revealing that it would fail to meet its production target of 90 million iPhones in the last quarter of 2021. Significant investments into production capacity currently being made by semiconductor suppliers such as Intel and TSMC will offer some relief but will take years to come online. In the short-term, it will be important for businesses to develop their own mitigation strategies to lessen the impact on their business performance.

Although businesses in the sector may feel powerless in the face of these global market forces, there are some good practices that can be applied. These good practices can also be viewed as demand-side activities and supply-side.

In terms of supply-side considerations, it’s more important than ever to focus on maintaining strong supplier relationships; if suppliers are making decisions on allocating restricted stock to customers, being a ‘good customer’ could become important. This may be as simple as clearly and effectively communicating levels of future demand to suppliers, regularly engaging and nurturing relationships or just paying on time. At times like these it may also be wise to pursue a more risk-averse sourcing strategy, such as supply chain diversification, which may involve multi-sourcing components from several different suppliers and / or countries.

While the supply of semiconductors remains tight and causes challenges for firms in the telco sector, they may also want to look for efficiencies across other areas of their organisation. The current challenge could be the perfect catalyst to review the cost base more generally or look into productivity improvements in areas such as planning and demand forecasting.

By making use of procurement and supply chain good practices such as supplier relationship management and product profitability analysis, and by taking steps to improve their supply chain resilience, the telecoms sector will be better positioned to weather the storm of semiconductor shortages and to face any similar challenges that may lie ahead.