Connecting the Dots from Past to Future
This edition pulls together stories from 2022 into one big picture and sets the scene for 2023.
I’ve covered a range of stories and issues in 2022. Looking back, some of the stories may seem somewhat disconnected, coming from different sides of the world and focusing on a wide range of topics: from a communications cable cut in Tasmania, to truck driver shortages in Europe and cybersecurity breaches at a medical insurer. There is however method to the madness and there is a thread connecting these stories.
Each story is illustrative of a facet of a supply chain, energy or technology domains. I look to extract the knowledge and concept from each story, irrespective of where it takes place, to then develop principles that may be applicable in (seemingly) different situations. For instance, these stories - renewable energy curtailment in Australia, monetizing congestion management with vehicle booking systems and car-features-as-a-service - illustrate the same concept: the growing power imbalance between platforms and consumers exaggerated by digital tools. The world is a much less complex place when some concepts become more evident.
Interconnected has grown beyond expectation reaching the 600 subscribers mark just prior to Christmas. I thank all of you for being part of this exploration with me. Without further ado, let’s thread the needle between the key 2022 stories.
Global Container Logistics Chains– Cashing In or Cashing Out
Container logistics has been in the spotlight for the past few years as containers’ role in global trade was brought out by the Ever Given obstruction of the Suez Canal in 2021. The obstruction was followed by an explosion of shipping rates, for which shipping lines have been repeatedly accused of cartel behaviour, accusations that have been repeatedly rejected. Subsequently, shipping rates imploded which led me to question the sectors financial and environmental sustainability in are plummeting container shipping rates bad for the environment?
Although ocean shipping has made the news often, the trucking and port terminal operations also face their own issues. Worldwide, the truck driver shortage has accentuated partly due to governments’ response to the pandemic which has in itself affected logistics chains. Truck congestion at ports is often a source of inefficiency in an already stretched-out logistics system which doesn’t really need more inefficiency. Most recently, I looked at the success of Australian port congestion management at reducing queuing to highlight that perverse incentives may be at play when congestion management is monetised.
Two features of global logistics systems are evident: fragmentation and market power differences. Logistics chains are typically fragmented, with multiple different companies performing successive steps (ocean shipping line, terminal operator, third-party logistics provider, trucking company, etc.), all of which have individual incentives and profit motives. At the same time, there are multiple independent providers performing the same function in a logistics chain, sometimes even for the same customer. The intersection of independent operations, incentives and profit motives in logistics chains contribute to conflicting decision-making. Differences in market power within logistics chains, where multinational organisations interact with small businesses, can be exploited using digital tools which monetise behaviours, often in the favour of their operators. When a new digital tool is released or start-up emerges purporting to address issues in global logistics chains, the question I try to ask myself is who is benefiting from this and what behaviours are incentivised in logistics chains?
Supply Chain Pains
Key supply chains in Europe and Australia have been disrupted mainly by some rather uninspired policy decisions. I looked at a few instances in 2022, including the EUdecision to move away from natural gas supply from Russia and rely heavily on liquefied natural gas (LNG) for which the infrastructure and supply chains are underdeveloped, the domestic AdBlue and urea supply in Australia which is set to disappear due to the producer’s environmental commitments and the neon shortage which was supposed to be the latest explanation to the superconductor chip shortage until it wasn’t. Possibly the most interesting and underrated supply chain story I’ve covered this year is that of the looming food crisis in Australia due to the low migration into the country coupled with rising house prices.
Then, There’s Electricity
A supply chain often overlooked prior to the start of the push for the renewable energy transition is the electricity supply chain. Electricity supply isn’t often perceived as a supply chain but shares many supply chain features – inputs (fuel sources), production (power stations), logistics (transmission infrastructure) and consumers. Electricity supply chains are a special case of Just-in-Time (JIT) where electricity must be produced (nearly) simultaneously as it is consumed. With increasing efforts to increase electricity consumption by electrifying heating and mobility, reduce electricity generation from fossil fuels, and turning electricity consumers into prosumers (consumers that generate electricity themselves for the market by using solar panels for instance), electricity supply chains have become increasingly complex and exposed to risks.
The aforementioned EU decision to move away from Russian natural gas and the EU’s reluctance to pursue nuclear generation led to the reactivation of coal power plants in several European nations which somehow tied in with protecting the environment. Concurrently, global emissions from electricity generation have increased mainly due to low wind. On the other hand, solar photovoltaic generation from households is increasingly curtailed (remotely suspended, often without the homeowners’ knowledge) as the timing mismatch between renewable energy generation and electricity consumption patterns becomes more evident.
The current and future constraints on the electricity grids in regions such as Australia and the UK also came under my radar as the UK’s National grid operator released its 2050 “credible ways to decarbonise” the country’s energy system. While I struggle with the credibility of these pathways, one underlying assumption struck me. Currently, the UK transport sector uses the equivalent of 400 TWh of energy (all from fossil fuels). The plan assumes that by 2050, the completely electrified transport system will use around 120 TWh. Australia’s Integrated system plan and modelling undertaken through my consulting business highlights similar expectations for Australia. Without delving into the more obvious questions – how will transport become 75% more energy efficient or how can renewable electricity generation increase to compensate for decreased fossil fuel reliance AND increased consumption – the other interesting question that emerges is how will all that electricity be transported?
Despite the fact that some of the largest stimulus packages in history have been announced in 2022 which quite literally throw trillions of dollars or euros at renewable energy projects, none of the electricity generation, infrastructure and renewable energy integration issues I mentioned are likely to be resolved in the short or medium-term.
Digital Automation and Connectedness
Digital tools complement supply chains and the “green” transition as an almost indispensable component in two main ways: automation and connectedness. Automation has been seen as a success, especially in manufacturing environments and has increasingly made its way into the ‘real world’ through self-driving features in cars, trucks or auto-pilots in airplanes. Automation, removing humans from the loop in the real world, also creates some serious issues:
Workers typically perform more tasks than those usually automated. While removing humans from the loop does reduce costs associated with the activity automated (e.g., self-driving trucks do not pay driver costs), it may also create costs on other fronts. A tyre blow-out in a self-driving truck becomes a logistical nightmare which requires a self-driving truck to sense a tyre issue, safely pull over, call for help, wait for road-side assistance which may end-up costing thousands of dollars in assistance costs, delivery penalties etc. These issues and costs are rarely considered in the automation equation
Responsibility and liability are typically unclear. We operate in a legal system which seeks to assign responsibility to humans. The fault of digital technology is rarely (if at all) considered. This is increasingly problematic as self-directing tools interact with us and, increasingly, have the potential to and do harm. The 737 MAX crashes as well as the 2018 Uber self-driving vehicle crash were examples of situations where software failed but humans paid.
There are benefits and costs to automation and removing humans from the loop which should be considered when making such a choice. As the tasks and environments increase in complexity and interactions, the ‘humans are error-prone beings’ view may become increasingly counterproductive.
Digital Connectedness and Cybersecurity Risks
Digital connectedness is a big thing. More and more SMART devices, phones, stoves, fridges, watches, vacuum cleaners, assistants, are being released to businesses and consumers. The concept of Industry 4.0 describes this ecosystem of devices continuously connected to the internet, gathering and exchanging data and responding to external inputs. Despite an increase in the number of SMART devices, the purported benefits – quality or costs of service – have generally failed to materialise. SMART printers do everything from recording your voice, capturing and sending metadata about your use, automatically order ink with your credit card except … actually printing. The newest vehicles remotely restrict access to certain features or to the car itself. When communication networks fail, as they did in Tasmania during the touristic season, the island’s economy crumbled for a day – electric scooters, flights, cloud services for businesses.
The vast amounts of data, infrastructure and exposed digital systems create cybersecurity risks. This past year saw a massive number of breaches. I’ve covered the Medibank breach in Australia where medical data of half of the country’s population of the most sensitive kind (personal details, chronic medical conditions or abortion treatments) were released online. If more data and connectivity has gotten systems more exposed and prone to increased cybersecurity risks, it seems so foolish to expect that the solution to these issues are more data and connectivity.
Coming Up in 2023
Although uncertainty is a defining feature of our complex environment, some aspects seem more uncertain than others. As energy becomes more expensive thus increasing transportation costs (if not for any other reason, because of inflation), it seems likely that many supply chains may start nearshoring (bringing manufacturing closer to their customers). Inflation also makes labour cheaper which may facilitate nearshoring mainly in the EU and the US. While this may have been a repeating cycle in the past, the addition of ‘green’ policies may restrict access to energy. Does this mean a return to ox-drawn plow agriculture and human powered supply chains?
In almost complete opposition with the supply chain trajectory, every other aspect of life seems to be undergoing massive digitalisation. The release of ChatGPT, broader reach of 5G networks, digital identities (for people and things) are poised to change lives and businesses. Short of dismissing these innovations as meaningless (some predictions have been rather misguided e.g., Robert Metcalfe’s statement "I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse."), we have witnessed both the centralisation of power using technology – which all these innovations are perfectly capable to achieve – and reactions pointing towards decentralisation as a result. Will knowledge become more controlled or more accessible with ChatGPT? Will connected devices yield expected productivity benefits?
Stay tuned in 2023 as we’ll be exploring these and many other questions with a healthy dose of humour and cynicism.