How companies are playing in the changing technology landscape

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At the beginning of February, Apple announced record revenue of US$88.3bn and net income of $20.1bn for the final quarter of 2017. Operating profit at the US giant’s Korean rival Samsung was $14.1bn for the same period, up 64% from the previous year. The big internet companies are continuing to capture more of their customers’ attention and advertisers’ budgets. Facebook and Google’s parent group Alphabet enjoyed year-on-year revenue growth of 47% and 23% respectively in 2017.

It isn’t just the largest players that are enjoying a boom. Their success both drives and reflects strong conditions across the sector. The global market for semiconductor products – the building blocks of technology products and services – grew more than 20% last year, to more than $408bn.

So what’s new?

Look at today’s homes and workplaces and, at first glance, it can be hard to see where all those chips are going. The industry hasn’t found another game-changing blockbuster product like the PC or the cell phone. Apple’s big seller over the Christmas of 2017 was the latest incarnation of its iPhone, a product range that is now more than 10 years old.

In fact, that lack of obvious new devices may be a mark of the industry’s success. Technology products are now woven so tightly into the fabric of our lives that many have become invisible. Rather than living within a dedicated device, the technology that is driving much of today’s growth has flown away into the cloud, or embedded itself deep into all sorts of everyday products.

Take the humble bicycle for example. It may have been world-changing in its social and economic impact, but the bicycle has always been a simple machine, little changed in its overall configuration since the late 19th century. When today’s enthusiastic amateur cyclist heads out for a weekend training ride, however, they may travel with a constellation of sensors and computing devices. Strain gauges built into the transmission measure the power they put into the pedals. Sensors on their body will detect every heartbeat and even the quantity of oxygen reaching their muscles. Their bike may be equipped with cameras to record exciting descents, or radar to warn of approaching vehicles.

All those devices will transmit their data wirelessly to an onboard computer, which uses satellite positioning and air pressure measurement to track every kilometre ridden and every metre climbed. Back home after the ride, all that data can be uploaded automatically to an array of cloud-based services, allowing the cyclist to review their performance, monitor the progress of their training and boast about their achievements to friends on social media networks.

Smarter bicycles are just a tiny sliver of the exploding new world of connected devices. The internet of things (IoT) now encompasses thousands of products and services, from smart tags on parcels to smart speakers in homes, medical devices, manufacturing machines and, soon, fully autonomous vehicles. For the technology industry, these applications create a virtuous circle: a fast-growing market for the sensors, processors and communication hardware used in millions of devices drives a second market for the infrastructure needed to collect, manage and analyse the data they generate. The cleverest new services increasingly rely on sophisticated artificial intelligence technologies, which further increase the appetite for computational horsepower.

Much of the technology that has revolutionised cycle sport, social interaction and so many other aspects of our lives is concentrated in huge data centers dotted around the world. And as our appetite for cloud services grows, so do those facilities. According to Synergy Research Group, there were almost 400 “hyperscale” data centres in operation worldwide at the end of 2017. These facilities, most of them owned by IT giants such as Google, Amazon, Oracle and Microsoft, each contain tens of thousands of servers. The industry is rushing to build more of them. Synergy says that at least 69 new hyperscale data centres were being planned or under construction at the end of 2017. And property consultancy JLL, which monitors the global data centre market, says some major cloud providers are planning to triple the size of their infrastructure by 2020.

The search for easy money is another age-old pastime that is increasingly moving online, bringing its own new forms of growth to the technology sector. Nvidia, a manufacturer of high-end computer graphics hardware, announced record profits and a 52% increase in sales last year. Much of that growth came from an unexpected source, however. Many of its customers are using the powerful parallel processing capabilities of its graphics cards for the computationally demanding task of “mining” bitcoin and other so-called cryptocurrencies. By some estimates, the global bitcoin network is now consuming 32 terrawatt hours of energy per year, more than many small countries.

The changing technology landscape is reflected in the output of the semiconductor industry. In revenue terms, the fastest growing subsectors in 2017 were sensors and memory chips. The former play a frontline role in IoT devices, allowing them to transform real-word events into data. The latter go into everything, but are required in especially large numbers in the powerful computers used to run fast databases and complex artificial intelligence applications.

Testing times

Even good times bring their challenges. For the technology sector, one perennial source of pain is the need to ramp up production quickly to meet fast-growing demand. Many parts of the industry, notably the production of memory components, are highly cyclical in nature. Rising demand puts supply under strain, leading to long lead times and higher prices, at least until producers can bring more capacity on stream.

The changing technology landscape is reflected in the output of the semiconductor industry. There’s some evidence of that strain today. Last year’s boom in demand took many in the industry by surprise – most had expected 2017 to be a year of relatively slow growth. By the end of the year, however, factories were running at full output and concerns were rising about shortages of critical materials, machines and production capacity.

At the beginning of this year, order-to-delivery lead times for some categories of semiconductor products had risen to more than seven months, with some customers complaining that suppliers were offering delivery dates as far away as 2019. Component shortages can affect research and development activities too. In the US, technology companies rolling out experimental fleets of self-driving cars are being forced to wait several months for the delivery of Lidar units, the sophisticated laser scanning systems that help vehicles build up a 3D image of the environment around them.

Network effects

As if upstream supply wasn’t challenging enough, technology companies are also having to deal with ever more demanding downstream customers. Manufacturers of consumer devices are used to fickle, impatient customers. Many have honed their new product introduction processes to meet short, sharp sales windows. They have worked hard to juggle multiple markets and distribution channels, and to deal with huge seasonal spikes like Black Friday in the US or China’s Singles Day.

Today, says Thomas Dammann, Vice President of Technology Sector Strategy at DHL, the expectation of exceptionally high service levels has migrated into the B2B sector too. Industrial and corporate customers want the same short times and easy interactions with their suppliers that they enjoy in their consumer purchases. “We are seeing a rapid growth of e-commerce in the B2B sector,” he notes. “Distributors of technology products are looking to operate more like Amazon, with processes that allow them to work more efficiently, especially with smaller customers, and a better overall user experience.”

As consumer-facing companies already know, downstream supply chains and logistics processes play a decisive role in an organisation’s ability to offer quick, responsive service at acceptable cost. The wider technology sector is now applying many of the approaches pioneered in the B2C world to push the limits of agility and flexibility of its own supply chains. “Improved visibility, enabled by technology, helps a lot,” says Rob Siegers, president of Global Technology for DHL Customer Solutions & Innovation. “If you know exactly how demand is evolving across the world, and the precise status of your current inventory, you can make smarter decisions about what to make and where to send it.”

The design and operation of logistics networks is becoming more challenging, he adds, because the distribution of demand is changing rapidly. The location of big data centers can be chosen as much for the availability of low-cost electricity as for proximity to end users, for example, encouraging operators to seek out remote locations. And the manufacturing and support supply chains for cars, medical devices or mining machines look very different from those of servers or smartphones, forcing technology players to adapt their networks and processes as they move further into those industries.

The industry is actively embracing these challenges, however. “Two or three years ago, many companies in the sector were rethinking their strategies, deciding which technologies and which markets would be their focus for the coming years,” concludes Siegers. “Now the emphasis has switched to execution. Companies are building innovative products in both new and established categories, and they are developing innovative supply chains to support them.”

This article was originally published in DHL’s Delivered magazine.