- Sweet, okay, we're recording.

(claps)

So, I'm in New York right now

and The Verge offices are basically shut down.

We're all working from home,

because of the coronavirus outbreak.

And while we can still publish remotely,

a lot of stuff is just shutting down.

- Indoor shopping malls across the state

closed last night, until further notice.

- 98.8% of our schools have closed down.

- 100% of the workforce must stay home.

- Right now, the urgent problem is the public health crisis.

We need to slow the spread of infections,

and filled out hospital capacity.

That's what's most important.

But behind the public health crisis,

there's also a manufacturing gridlock

that's gonna cause huge problems

for basically every hardware company.

It turns out mass producing hardware is really complex,

with thousands of moving parts,

and almost no stockpile to fall back on,

when a disaster like the coronavirus hits.

When China went on lockdown in February,

it basically stopped electronics manufacturing cold.

An analyst group called TrendForce

estimates that 5.7 million laptop computers

shipped in February, which might sound like a lot,

but it's a 48% drop from last year.

We're already seeing some of the impact from that.

If you need to replace a broken MacBook right now,

you could be waiting for awhile.

And some analysts are predicting

the next round of iPhones could also be delayed.

Manufacturing is just a much more brittle system

than people realize,

the result of a hundred years of cutthroat competition.

But to see how it got that way,

you have to look at the big picture.

Making a computer or a smart phone

is really complex.

But, the process itself is really just an assembly line.

This system was pioneered by Henry Ford

in the early 20th century.

- [Narrator] Everyday, as many as 80 boxcars of parts

arrive at each plant.

- Everything has to happen in the exact right order.

So, running out of a specific part

can stop the whole assembly line in its tracks.

To make sure that didn't happen,

Ford arranged his system in batches.

Executives would decide at the beginning of the process

how many cars to make.

But, batch production created other problems.

It was really hard to guess the right batch size

so far in advance.

And even if the executives hit the right number,

they had to manage huge stock piles of inventory.

Whether it was parts waiting to be assembled,

or cars waiting to be sold.

(metal banging)

After the second world war,

Toyota pioneered a new approach

that would fix the inventory problem.

It was called the Toyota Production System,

or just-in-time production.

It looks decades to perfect,

but by the 80's, they were making cars

more cheaply than anyone in Detroit.

He became the first manufacturer

to make 10 million cars a year,

all thanks to efficiency of the new system.

Under the Toyota System, production's continuous

and inventory is kept to an absolute minimum.

Components arrive just in time to be assembled,

and the finished product arrives just in time to be sold.

It takes a lot of coordination to make that work.

But, if you can do it,

you don't need those huge warehouses anymore.

Which saves a lot of money in the long term.

Keeping excess inventory down

is particularly important for electronics companies.

Nobody wants last years camera,

or last years processor in this years phone.

So, excess components are usually just wasted.

And the components that change the fastest

are often the most expensive ones in the phone.

When Tim Cook first came to Apple in 1998,

his main job was moving the company over

to lean, just-in-time manufacturing,

keeping inventory costs as low as possible.

Fast forward 20 years,

and the entire hardware industry works that way.

But, we know from previous disruptions,

that system can be really fragile.

- Okay, so remember the March 2011 earthquake and tsunami

that knocked out the Fukushima Daiichi Nuclear Power Plant?

Right, I promise I have a point.

As a result of the tsunami,

it suddenly became a lot harder

to buy cars in certain colors.

Here's how that happened.

There was a plant nearby that made a pigment

that makes car paint sparkle.

It was used by pretty much every car maker.

At the time of the tsunami,

it was the only place in the world that made this pigment.

Also, the site of the pigment stockpile.

Suddenly, it was really hard to buy cars

in certain shades of red and black.

In fact, about 20% of Toyota's inventory

was affected by this.

- Under the just-in-time system,

inventories are kept so low that manufacturers

don't have anything to fall back on if something goes wrong.

If any one of your suppliers stops shipping,

you have to halt manufacturing

until you would find a replacement.

That's hard enough for a car,

but for something as complex as a smartphone,

there are thousands of parts

and dozens of different suppliers.

The supply chain is bigger than any one company

or any one country.

Just look at this tear down

iFixit did of the Galaxy S20 Ultra.

Samsung is a South Korean company,

and they make a lot of their own parts.

But, you also have a ton of Qualcomm chips

designed in the US and probably fabbed in China.

The Bluetooth module is from Murata,

which is based in Japan.

The wifi modules built by Qoryo,

another US company that's most likely building in China.

That's a really big supply chain,

which is a dangerous thing to have

if you're in a global pandemic.

Any one of those companies

might have to shut down because of the coronavirus.

Either because the factory closes,

or the home offices are so messed up

that they can't respond to orders.

If that happens, Samsung's gonna have

a really hard time making this phone.

While you might think they have a lot of those chips

stashed away, just in case,

the logic of lean manufacturing

and just-in-time production means

they probably have less than you think.

(light music)

At this point, Chinese factories

are starting to open up again.

But, they're running at half capacity,

and it's gonna be a slow process

getting them back to full strength.

There's also a natural delay built into the product cycle.

Apple's new iPad Pro seems to be unaffected

since those devices went through production

two months ago.

But, anything that was planned for release

two months from now is probably running into trouble.

Which is why analysts are so nervous

about the next round of iPhones.

So, we don't know what will happen.

There's still a chance manufacturers

will get up to speed in time,

but don't be surprised if a lot of

the big hardware releases of 2020

end up getting pushed back.

- You remember the paint pigment I was telling you about?

So, the factory reopened in May,

but it took them until September

to catch up on their back orders.

But the good news is,

by 2013, the company that made the pigment,

Merck KGaA, had opened a second factory.

So, now there were two.

One in Germany and one in Japan.

It's not as easy to move the iPhone out of China though.

I mean, the iPhone relies on skilled labor.

In 2017, Tim Cook pointed out

that there are way more tooling engineers in China

than there are in the US.

The plain fact of the matter is that

there aren't a lot of places that Apple can go.

Just-in-time manufacturing is very efficient.

But, it's also very fragile.

Resilience doesn't show up as clearly

on a balance sheet.

But in times of crisis, it might be exactly what we need.

- Hey, thanks for watching.

Sorry for the shaky camera and the bad sound.

We're doing our best.

I know it's a little scary in the world right now,

but yeah, take care of yourself.

Wash your hands, and try not to go outside too much

and we'll get through this.