I was reading a WSJ article discussing the key trends of this recession which is already in its 19th month. One of the key trend identified by the author was the time it is taking for the market to hit rock bottom and go for the upward swing. The author had compared the numbers with previous years.
In my opinion, one of the key reasons why it is taking longer for the market to recover is the nature of the beast itself. Today, supply chain is much more sophisticated than ever before. Even between 2001 and now, myriads of changes has taken place, pushing global supply chain network upwards on a complexity and sophistication scale.
To understand the scale of complexity, let’s consider the most popular product of current genre. The iPhone. The iPhone is a perfect example of globally networked supply chain. Tens of thousands of people at more than 30 companies on 3 continents work together to make iPhone possible. Some of them are well known names, like Intel, which supplies the flash chips and Samsung, which makes the video processor IC. Sharp and Sanyo Epson for 3.5-inch display. Then there are the multitudes of unknowns, each of which plays a small but vital role in making iPhone assume shape.
Now, that is just one side of the picture.Another equally important aspect is the geographical distribution of the individual activities. Design of software and hardware occurs in USA. Chips are designed in Europe and USA, Production of these chips takes place in Asia from companies like Taiwan Semiconductor Manufacturing Co (TSMC)or United Microelectronic Corp (UMC).
Supply chain has also evolved to cater to this well distributed environment. Companies need to plan their product in advance, so that parts suppliers and assemblers get enough lead time to prepare. It is like a machine. When you initiate the process, it takes time but after a while, once all the wheels are in motion, it works like a charm, efficiently delivering the results. In action, delivery can be very fast and the entire chain can react very fast to cater to needs.
Now, what happens when the engine suddenly stops? Different parts of the engine comes to a halts at slightly different points in time. Considering the case of recession, primary company would have placed the orders from each supplier in 2007 January for September release. now, when the recession hit market in September (at least in the public eye), primary company would have informed its supplier to reduce the production. These suppliers need to inform their supplier to do the same. By the time all the entities slow down (and retrenched its workforce), some time has already passed.
Now, equally interesting action follows when the economy starts showing signs of recovery. Primary company informs its suppliers to start manufacturing more. But that would mean that the suppliers need to inform its own supplier for the raw material. By the time all the different parts start firing on cylinders again, together they would have added between 3 and 6 extra months before main street starts seeing the green shoots since the tipping point of market activity (hiring, increased sales etc.) gets reached. So, a recession which would have lasted 12 months in 1993 starts appearing more like a 20-24 months recession in 2009. It is interesting to note how a system laid out to increase efficiency can also lead to longer market recovery during extreme situations.
