How supply chain woes with a Singapore link became a life-or-death threat

NEW YORK (NYTIMES) – For much of this year, Joseph Norwood’s next breath was locked in a zero-sum competition with people eager to upgrade their iPhones.

Mr Norwood has sleep apnea, meaning that he frequently stops breathing while sleeping.

A device known as a CPAP – or continuous positive airway pressure machine – can pump air into his body through a face mask while he sleeps, greatly reducing his risk of sudden death.

But such machines require computer chips, a component that is in critically short supply amid the Great Supply Chain Disruption. Mr Norwood waited more than six agonizing months before he received his device.

“It felt like forever,” he said. “I haven’t been working. I haven’t been doing much of anything.”

Around the world, many of the largest industries are jockeying to secure scarce stocks of computer chips. Automakers have slashed production for a lack of chips, threatening jobs from Japan to Germany to the United States. Apple has cut back on making iPads. Retailers have prepared for a holiday shopping season pockmarked by shortages of must-have electronics.

The companies that make computer chips – most of them clustered in Asia – have ramped up production while scrambling to fill orders from their largest customers. That has made purchasing chips exceedingly difficult for smaller companies. One of those niche buyers of chips is ResMed, the San Diego-based company that makes the CPAP that Mr Norwood finally received last month.

“Medical devices are getting starved here,” the company’s chief executive, Michael Farrell, said in an interview. “Do we need one more cellphone? One more electric car? One more cloud-connected refrigerator? Or do we need one more ventilator that gives the gift of breath to somebody?”

ResMed has struggled to buy enough chips, Mr Farrell said, constraining its ability to make a range of vital equipment – from ventilators used by Covid-19 patients to breathing devices that sustain premature infants.

The company is “producing less than 75 per cent of what our customers need,” Mr Farrell said.

Mr Farrell has found himself in an uncustomary role: beseeching his suppliers to allocate more of their goods to him so that his company can work through a growing backlog of orders.

This campaign has yet to yield more chips, though it has provided poignant lessons about the priorities at work as the global economy strains to return to normal nearly two years into the pandemic.

Medical device manufacturers have this year spent an estimated US$6.4 billion(S$8.7 billion) on computer chips, according to Gartner, a research firm.

Mr Norwood, who has been diagnosed with sleep apnea and requires a machine called a CPAP, in San Diego on Nov 21, 2021. PHOTO: NYTIMES

The automotive industry has spent US$49 billion. Makers of wireless communications gadgets like cellphones and tablets have purchased nearly US$170 billion worth of chips – more than 26 times as much as medical device manufacturers, according to Gartner.

The shortages are assailing every industry. But much as airlines prioritise their most frequent flyers in the face of a flight-canceling blizzard, chipmakers are in many cases favoring their largest customers, expert say.

“Everyone else is faced with the same struggle,” said Willy C. Shih, an international trade expert at Harvard Business School. “But it is true that if you are Apple or someone who buys a lot, you probably get more attention.”

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The shortages are in large part the result of botched efforts to anticipate the economic impact of the pandemic.

As Covid-19 emerged from China in early 2020, it sowed fears of a global recession that would destroy demand for a vast range of products. That prompted major buyers of chips – especially automakers – to slash their orders. In response, semiconductor plants reduced their production.

By the time global industry figured out that demand for chips was surging, it was too late. Adding chipmaking capacity requires as much as two years of lead time and billions of dollars.

A worker packs a box with various CPAP accessories at the ResMed fulfillment facility in Lithia Springs, Georgia. on Nov 23, 2021. PHOTO: NYTIMES

In North America, Europe and elsewhere, medical device manufacturers are governed by strict product safety standards that limit their flexibility in adapting to trouble. Once a company like ResMed gains regulatory clearance to use a supplier, it cannot simply seek out a new one that might have a ready stock of chips without first going through a time-consuming approval process.

That meant that ResMed had to figure out how to squeeze more chips out of its existing supply chain.

Far from simple components, computer chips come in enormous varieties, each made with multiple parts that are typically made in multiple countries.

Faced with the prospect of getting shut out, Mr Farrell rooted through his supply chain, identifying the suppliers of his suppliers, in the hopes of persuading them to prioritize ResMed’s factories.

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Mr Farrell soon realized that a primary reason that his chip supplier could not meet his demand was that – five levels up the chain – a Taiwanese manufacturer of silicon wafers had exhausted its inventory.

Because that plant could not deliver extra products, the next link in the chain – a company that combines wafers and circuitry – could not produce more of its components. That meant that another company that buys those components and packages them into clusters was unable to make more of them.

And that meant that ResMed’s supplier of circuit boards could not buy enough of those clusters, leaving ResMed’s factories in Singapore, Sydney and Atlanta short of circuit boards.

Mr Farrell took it on himself to try to unstick his supply chain. Drawing on government contacts in Australia, where he was born and raised, he set up a conversation with a board member of the wafer company.

Mick Farrell, CEO of ResMed, which makes CPAP machines, in San Diego on Nov 22, 2021. PHOTO: NYTIMES

In October, during a getaway with his wife in British Columbia to celebrate their anniversary, Mr Farrell took time out for a Zoom call. The board member introduced Farrell to another board member in London, who then reached the company’s head of sales in San Francisco. Mr Farrell connected the sales chief of the wafer company with ResMed’s president of operations in Singapore.

ResMed’s orders amounted to barely 1 per cent of the wafer company’s output. A mere fraction of 1 per cent in additional wafers was enough to satisfy ResMed’s needs.

The wafer manufacturer initially agreed to the increase, but then reversed that decision.

“In fact, they reduced our allocation,” Mr Farrell said.

All of this explained why Mr Norwood was stuck waiting for his CPAP.

He finally received his CPAP device in November, but the experience has left him shaken about the realities of who gets what in a time of bewildering shortages.

“It’s so unfortunate how money controls everything,” he said. “Our priorities are really skewed.”

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