 Sweet. Okay, we're recording. 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 build out hospital capacity. That's what's most important. But behind the public health crisis, there's also a manufacturing gridlock that's going to 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 stockpiles 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 a while. 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 smartphone 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. Every day, as many as 80 box cars 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 stockpiles of inventory, whether it was parts waiting to be assembled or cars waiting to be sold. 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 took decades to perfect, but by the 80s, they were making cars more cheaply than anyone in Detroit, and they became the first manufacturer to make 10 million cars a year, all thanks to the 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 year's camera or last year's processor in this year's 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, and 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 reactor 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, and 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, and 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 can 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 teardown 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, and the Wi-Fi module is built by Corvo, another US company that's most likely building in China. That's a really big supply chain, which is a dangerous thing to have during a global pandemic. Any one of those companies might have to shut down because of the coronavirus, either because the factory closes or because the home offices are so messed up that they can't respond to orders. If that happens, Samsung's going to have a really hard time making this phone. And 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. At this point, Chinese factories are starting to open up again, but they're running at half capacity and it's going to 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, and 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.
 Sweet. Okay, we're recording. 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 build out hospital capacity. That's what's most important. But behind
 the public health crisis, there's also a manufacturing gridlock that's going to 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 stockpiles 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 a while.
 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 smartphone 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.
 Every day, as many as 80 box cars 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
 stockpiles of inventory, whether it was parts waiting to be assembled or cars waiting to
 be sold.
 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 took
 decades to perfect, but by the 80s, they were making cars more cheaply than anyone in Detroit,
 and they became the first manufacturer to make 10 million cars a year, all thanks to
 the 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 year's camera or last year's processor in this year's 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, and 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 reactor 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, and
 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, and 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 can 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 teardown 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, and the Wi-Fi module is built by Corvo, another US company that's
 most likely building in China. That's a really big supply chain, which is a dangerous thing
 to have during a global pandemic. Any one of those companies might have to shut down
 because of the coronavirus, either because the factory closes or because the home offices
 are so messed up that they can't respond to orders.
 If that happens, Samsung's going to have a really hard time making this phone. And
 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.
 At this point, Chinese factories are starting to open up again, but they're running at
 half capacity and it's going to 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, and 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.