How the supply chain upheaval became a life-or-death threat
By Peter S. Goodman
For much of this year, Joseph Norwood’s next breath was locked in a zero-sum competition with people eager to upgrade their iPhones.
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. 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 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, Farrell said, constraining its ability to make a range of vital equipment — from ventilators used by COVID patients to breathing devices that sustain premature infants.
The company is “producing less than 75% of what our customers need,” Farrell said.
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.
“I’m fighting against very big-name automotive companies and cellular communications companies and others who also want more supply,” Farrell said. “We’re such a small percentage of the total semiconductor chip output that we don’t often get the attention.”
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.
That proved a colossal mistake. The pandemic shut down restaurants, movie theaters and hotels, while slashing demand for cars. But lockdowns imposed to choke off the virus increased demand for an array of products that use chips, like desktop monitors and printers for newly outfitted home offices.
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.
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, Farrell rooted through his supply chain, identifying the suppliers of his suppliers, in the hopes of persuading them to prioritize ResMed’s factories.
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.
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.
In October, during a getaway with his wife in British Columbia to celebrate their anniversary, 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. Farrell connected the sales chief of the wafer company with ResMed’s president of operations in Singapore.
ResMed’s orders amounted to barely 1% of the wafer company’s output. A mere fraction of 1% 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,” Farrell said.
All of this explained why Norwood was stuck waiting for his CPAP.
Born in Minnesota, Norwood, 44, has spent his adult life seeking refuge from the bite of winter. He lived in Maui for seven years, and then moved to San Diego in the fall of 2019, working as a waiter at a waterfront hotel restaurant.
Early this year, he spent a night in a sleep laboratory at the University of California, San Diego. Doctors observed that his breathing stopped 62 times per hour, while his blood-oxygen level decreased to alarming levels.
When the doctors administered a CPAP, Norwood’s breathing returned to normal. They arranged for him to receive one at home. He looked forward to resuming a normal life.
Yet weeks later, the device had yet to arrive. When Norwood called his insurance company to inquire, it told him that he was on a waiting list, with no clarity on how long he should expect to wait.
“They said: ‘We have no idea. No one is telling us anything,’” Norwood recalled.
On the web, he learned about the shortage of computer chips. He read a story about an airline pilot who had sleep apnea and was not flying because he had yet to receive his own CPAP.
“I’m just a waiter trying to bring people food and drinks, and I can’t get a CPAP,” Norwood said. “If the airplane pilot isn’t getting his, it might be a while before I get mine.”
When he finally received the device in November, it changed his outlook.
“Last night was the best sleep I have had in years,” he said the day after picking it up, adding that he was hoping to return to work.
But the experience had left Norwood 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.”