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Everything is Connected!

March 14, 2022 | Posted in: Insights, Wealth Strategies

Despite global supply chain problems that have caused periodic product shortages and contributed to a surge in inflation, most of us do not really understand the extent to which the world is connected. Do you know that an iPhone contains more than 1,600 parts sourced from forty-three countries? We currently have a fascinating example of a problem in one country that may well impact the availability and price of many products around the world.

Until several weeks ago, most of us were only vaguely aware of Ukraine. However, it is now very much top of mind as we witness tremendous destruction and dislocation of millions of people. Moreover, there has already been an important impact on our economy in the form of rising gasoline prices. Another little-known fact is that Ukraine produces roughly one-half of the world’s supply of neon which is a critical component in the lasers that are used to manufacture computer chips. The two companies that account for Ukraine’s neon production have ceased operations in response to the war, and one operates in Mariupol which is currently under siege although the extent of damage to their facilities is unknown.

The large chip manufacturers in Asia maintain emergency supplies of the gas which should allow them to continue to operate for the moment. However, a sustained conflict could curtail production, and smaller companies are already being impacted because they do not have the financial resources to maintain an inventory. New neon production facilities could be built in other countries but one to two years is required to bring a new plant on line.

The world has already experienced a chip shortage that is attributable to tremendous product demand, the pandemic, shipping difficulties, and other factors. The net result has been a shortage of automobiles, appliances, and consumer electronics, among other products. In turn, the shortage of new cars caused a dramatic increase in the price of used cars as well as the cost of renting a vehicle, both of which contributed to the 7.9% year-over-year inflation rate that was just reported.

It is too early to tell whether the war in Ukraine will seriously impact chip production. Regardless, this is a great lesson in the complexity of economic relationships. Who would have thought that a shortage of a rather obscure product in a distant country could lead to a global ripple effect?