Jeff Johnston: Hello there and welcome to the All Day Digital Podcast where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange Group. And I'm your host, Jeff Johnston. On today's episode, we get to hear from David Strauss, senior vice president, general manager and board director for ACE Technologies, to get his perspective on the current state of the communications network supply chain.
The communications industry is not immune to supply chain bottlenecks, and it's causing all sorts of problems for operators, especially those in rural America, who are required by law to rip and replace non-compliant network equipment. ACE Technologies is a global supplier of wireless network infrastructure equipment and as such is intimately involved in the day-to-day operations in the supply chain.
They also have ideas on how smaller rural operators can navigate their network equipment supply challenges. So without any further ado, pitter patter, let's hear what David has to say. David Strauss, welcome to the podcast.
David Strauss: Thank you, Jeff. Thanks for having me.
Jeff: So let's talk communications supply chain. You know, there's all sorts of chatter out there right now regarding supply chain issues across numerous sectors of the economy. But I don't know that the communication supply chain and the challenges that they're dealing with get as much press as maybe some of the other sectors of the economy get. So, David, please tell us, what is the current state of the communication supply chain and where are some of the delays?
David: Yes, thanks, Jeff. I think the delays or the supply chain is seeing similar to what we see with agriculture and other industries. First and foremost, we're seeing delays in the communication network equipment supply chain due to shipping. For example, right now most of the equipment comes in from Asia and is coming through the Western ports.
In some cases we're seeing delays once the ship arrives at port, delays upwards of 50 days or more depending on the port. Then once it's actually the cargos taken off the ship, we're seeing upwards of another two weeks for that container to be put onto a truck and taken into its destination. So, in the past, we're seeing cargo travel from Asia to the U.S. Western ports of about four weeks. Today, we're seeing that more than double. It's about 130% to 140% longer in terms of the time.
In addition to that, we're seeing raw material issues. In the US we're seeing a lot of product with small suppliers, small component pieces that are important in terms of making radios or antennas or anything else that due to COVID and just general shipping delays, we're seeing plants being shut down.
In China, a few weeks ago, we saw provinces being shutdown, 26 million people being shut into their homes. That meant those 26 million people were not working in factories producing products. It might have been a small little piece of plastic that goes into a radio or an antenna, as I mentioned, and that delays the whole process of getting finished goods.
Then something to think about down the road. There's a lot of talk now about the International Longshore and Warehouse Union contract. But their contract has not been renegotiated since 2015. It's up on June 30th, actually, the new contract should start on July 1st. They haven't even sat down to negotiate yet. That's causing a lot of concern and a lot of additional bottlenecks as vendors start to work away from the Western ports and move product through the Panama canal into Eastern ports, that is causing all kinds of congestion.
Jeff: Wow, that is really interesting. And I wasn't aware of some of these potential strikes on the labor front. I mean, geez, talk about adding insult to injury in this current labor market. So David, I'm curious, you know, a lot of times when we have supply chain issues and the supply chain is constrained, customers tend to double order. And that's certainly something that we've seen in the semi-conductor industry over the years. And I'm just wondering, are you seeing any evidence of double ordering in the communications equipment market?
David: I haven't seen the issue with double ordering mostly because the way the operators handle their assets is on a site by site basis. The site is designed and they place the order on various different ways, either directly through the equipment manufacturer, or through a distributor or through a contractor.
What we've seen in the case of radios or antennas, those are designed in some cases under contract two, three years in advance, in some cases, as it relates to the antennas. Antennas are designed in 12 to 24 months in advance.
There's a cost associated with then going back and redesigning, going back to the municipality for zoning approval to change out that antenna. They exhaust all options to try to get what was designed and to begin with.
Jeff: So, David, let's talk about COVID for a moment and specifically what's happening in China, because, you know, we're seeing widespread lockdowns in cities like Shanghai and these lockdowns could potentially spread to other cities and provinces in the country. So how is this impacting the communication supply chain?
David: Well, there's a couple ways to think about it. Yes. We certainly see the zero tolerance in China as being a major contributor. Despite the fact that manufacturers have moved out of China for final assembly and tests, there's still components that are being manufactured in China. We're still dependent upon that economy due to the zero COVID rule, they're just shutting down cities no excuses and that's causing a major ripple effect. We're seeing that in the area of anything from plastics to semiconductors and in the ripple effect that has all the way through some of the smaller electronics that cell sites.
Jeff: So as I think about what you're saying, I mean, this is got to put rural carriers in a really difficult position because, you know, they don't have anything close to the buying power of like an AT&T or Verizon.
So presumably, you know, they're getting sent to the back of the line. But yet at the same time, many of these small rural operators are up against these federally mandated time frames to rip and replace non-compliant equipment. So, I mean, isn't this I mean, isn't this a huge issue for these guys?
David: I think that's absolutely spot on. I think if I was a rural carrier, I'd be concerned about where I fall in the prioritization for the equipment manufacturers. If I'm building 30 sites in a year, which is not atypical or untypical, I should say of a rural carrier versus tens of thousands of site touches that AT&T or Verizon may have at a given year. It's not just the equipment, it's the resources required to build those cell towers.
You think about the contractors, there's already not enough contractors in the environment, large build-to-suits are bringing contractors in from Canada. Prior to Ukraine, they were bringing in climbers and so forth from Russia. We're bringing them to this country from Mexico and other places. Naturally the contractors want to go where there's volume.
There are things that the rural carriers can do to combat that. Many of them belong to consortiums or organizations. They should get together and we've seen some of it happen in the past. My prior life, I worked in distribution. We worked with a consortium that bought together and they increase their size as a result of that. You see 25 of the rural carriers coming together, showing some standardization, sharing their build programs with the vendors, and becoming a much larger target that gives them a lot more visibility. It gives them a lot better buying clout as a result.
Jeff: So, David, talk to me about costs and specifically the cost that operators are paying for network equipment. Because, you know, as I think about it, when you've got shipping costs that are that are going up, you've got factories that are not running at maximum capacity and then you've got, of course, all of these labor shortages, you know, that these manufacturers are having to deal with. I mean, all of this has to put upward price pressures on, you know, the cost of these and the prices of these finished goods. So how is all of this playing out?
David: It's really all over the place. Some vendors have tried to hold their costs and absorb the margin hit, to keep their market share, so to speak but in many cases, we've come up against in the community where vendors have raised their price. They've had to. Raw material costs have gone up and the operators have done a very good job in negotiating. We are not enjoying in the community today the margins that we saw back in the '90s, as an example. We’ve seen price increases from a raw material perspective. We're seeing labor costs go up despite everything that's going on, there's a small labor pool.
And then, on top of that, you mentioned the shipping cost. To put things in perspective, pre-COVID to bring in a full container from Asia would cost a US company somewhere in the vicinity of $4,000. Today that cost without zeroing in exactly it's greater than $25,000 for that same container.
Again, there are things I believe that the smaller operators carriers can do to combat that and that's through size. There's also, if I may jump a little ahead for you is something that our company has done very successfully with some of the smaller operators, as well as some of the larger operators, even on a market at level is for planning, sharing, and committing so what by that is that the carriers, while they design sites, sometimes upwards of two years in advance, they don't share that information with their contractors or their equipment manufacturers.
By getting them to think further than 30, 60, and 90 days out, we're working with many of them and getting them to share what the next six months looks like. In one case, we have a customer looking at nine months out, 270 days out, and they're sharing that information. They're sharing their build schedule, and they're willing to commit upwards of six months of that, based on a full year. That allows us to plan everything, the raw material, the manufacturing, all the labor, and the shipping, and be able to deliver and every 30 days, we review that for the next 180 days.
We're seeing them much higher success rate with those customers where we're meeting their expectations and delivering them the material when they need it on time.
Jeff: So this collaborative planning and forecast methodology that you're talking about, you know, makes a ton of sense to me. I mean, so I guess my question is, is why haven't all these operators implemented such a process with their suppliers already? You know, and especially in light of this constrained supply chain environment, we find ourselves in, it would seem like, you know, this is almost like a no brainer that you should be doing this.
David: It's just been this overprotective mentality for years and in some cases on a national level with the large carriers, a market may do it. There have been times where one national carrier, in particular, shared their build program, what they call the plan of record. They're not doing that today and so you have to get down at the micro level or the market level and work on that.
With the rural carriers, it's almost a must that they do this. They should be thinking, especially, with the rip and replace program that's coming. It's really important for them to consider when they would commence the build, the rip and replace and what the next six months looks like because of the pressure. You don't just have T-Mobile, AT&T, and Verizon today. But now you have DISH, and DISH has come out publicly with a number of sites they're going to build in order to provide their 5G coverage. That puts even more pressure on the community, right?
Jeff: Yeah. No, no doubt. No doubt at all, David. As I understand it, rural operators who are subject to the rip and replace mandate have one year to complete the rip and replace once they submit their first invoice to the to the government for reimbursement.
And as I listen to everything you're saying, it sounds like many of these operators will be hard pressed to meet their deadlines given that, you know, they call it they only have a year. So, I mean, what are some of the things that these operators can do to help ensure they remain on track?
David: You're spot on with your concern, but there are a couple of factors that contribute to further delays or success, depending on how you look at it. As a rural carrier today in the rip and replace program, your requirements may be a subset of what the national carriers are doing.
If you have a roaming agreement or what have you, and you're going to standardize on something that they're already doing -- easy, you're adding on the same type of material. But what we're seeing in many cases is that the rural carrier has selected spectrum in each market, and they need something different than what the four national carriers are buying, which requires immediate design resources in order to meet that. The more of those rural carriers, again, I'm going to keep beating the drum. The rural carriers really need to come together and understand what their needs are together so that they have leverage.
In order to also have a bigger footprint, they have to think a little bit differently about the supply chain -- doing what I already said, plan, share, and commit if they can do that. The other thing they can do is they can partner. There are two ways. One is in several cases, we're seeing rip and replace partner with an OEM, like an Ericsson, for example, right? Ericsson will do a total turnkey, and then they leverage their resources to put them at the same level as a tier one so that's one way to do it. In some cases, the rural carriers want to have a little bit more control and they don't want to pay what we call margin stacking -- negotiating a price and paying not only our margin but the margin to the OEM.
The way you can do that is to negotiate through a distributor. One of the great things about distribution with the exception of the radio, which you're not going to get through the distributor and they can get the antennas through the distributor, but those are the only things that really require a specific design. Everything else you may spec in, but it's rather agnostic, the cabling, the mounting hardware, they're used on other sites.
The great advantage of using the distribution is that distribution has the ability to push and pull that material. Meaning that if AT&T or Verizon are to push some sites out because they can't get material to build out the full cell site, they may delay a site for 90 days or even longer we've seen the distributor has those resources, they have to have many ways they can pull them in for another site on that original network or they can allocate that to another carrier so they have less risk with the inventory -- and that's better for the rural carrier as well so they can take advantage of that. And those are two ways. The third way as I mentioned at the beginning of this is to work with a vendor like us that's very, very proactive where with a commitment we'll bring the inventory into a warehouse and look for partners that will do this. We'll have the inventory on hand so that we can ship when they need it usually within two to three weeks we can have the inventory on say or less if that's needed.
Jeff: Yeah, that makes a lot of sense. I mean, this whole six month forecast on a on a rolling 30 day basis, you know, seems pretty clear to me. So just to kind of summarize, I guess, so these smaller operators should really think about standardizing their equipment and collaborating and sharing these plans with their suppliers on a pretty coordinated and deliberate basis.
David: I'm glad you put it that way so the carriers have standard materials that they buy, they have very set vendors that they buy from and only certain items or certain antennas or certain cables that they buy from that certain vendor. That limits and provides a lot more control over network quality and integrity.
The rural carriers do this to some degree but what we've seen over time is that they'll buy in many cases what's the least expensive, knowing that most of these materials, all the manufacturers are building to meet a certain criteria for one of the top four carriers or an OEM. So there's less risk than there was 10 years ago from that perspective. But by standardizing and again to beat the drum if they can come together and try to create some volume on standard through a buying consortium, they would have a much greater success in driving cost down because by having small quantities that are different than what the large carriers are buying you can have naturally much higher cost associated with that.
Jeff: OK, so let's talk about 5G and how all of these supply chain-related bottlenecks are impacting the rollout of 5G and especially in rural America, because, you know, one of the things that we learned from COVID during the lockdowns is, is just how incredibly vulnerable those who are living in rural America are, who do not have access to broadband.
So I think, you know, 5G and the increased speeds that come along with it are really important to to ensuring that those who are not connected get connected in rural America. I mean, we can't afford any delays here.
David: Correct.
Jeff: So I mean I mean, are we seeing delays to 5G? And maybe you could talk a little bit about that.
David: They're at the mercy right now of what's going in today's supply chain so we already know that the tier one carriers are seeing a slowdown.
As a result of that 5G C-band, whatever form you want to call it we've already seen delays. We heard with one particular carrier that their 5G deployments are down significant double digits -- so significantly above 10%. That's a trickle down for all the reasons we talked about before why the rural operators are at disadvantage so they're naturally going to see that unless they do the things we talked about in terms of planning. What we're seeing in order to work around that is finding a vendor who has availability regardless, and making sure that the RF design sheet or RFDS can be changed to accommodate that.
I just read an article this morning that we're still not going to see the issue with semiconductors. Semiconductors are not just the radios it's almost the data center type environment now with these very intelligent networks and there's semiconductors in those racks back at your network operating center. We're not going to see any real relief on semiconductors until sometime next year. We're still seeing those delays. We're hearing radios are shipping, but to what degree and what volume? I don't know. Fortunately, they're not the long lead time item in some cases. Again, I mentioned, we're seeing lead times for many products on a cell site in excess of 20 weeks, one particular product up to 52 weeks that we're hearing about. So yes, the impact is there and planning could and working collaboratively as you mentioned earlier, could go a long way to mitigating these issues.
Jeff: Wow. 52 weeks lead times. I mean, that is, boy, that's got to be a record, I would imagine. And I just can actually I just can't imagine how problematic that is from a planning perspective. So boy, that just that's a just a difficult environment, I'm sure. So we covered a lot of things today, David, but is there anything that we missed or, you know, questions I didn't ask that that you would like to address?
David: I talked a lot. Yes. Thank you. We talked a lot about the need to be thinking six months out, but there shouldn't preclude them from thinking about the near term. There's been some talk about, are the carriers putting less emphasis on or less focus on the near term? The actuality of that is they're doubling down; they're pulling resources off of other projects. Projects might be development of other products or technology because the networks are being somewhat delayed right now because of the supply chain issue.
What we're seeing is resources normally used for the development of product, or just for general engineering being pulled into the supply chain. Whether to approve another vendor or to leverage the vendors that they may be for, instead of buying 15 different products from a vendor, you focus on six that they could do really well.
We're seeing a doubling of efforts in the short-term or the near term, and the rural carriers really need to be focused on both right now. They need to be thinking about what they need done today and they need to be thinking about what needs to be done six months from now and they seem to be pulling at each other, but once you get the near-term and the long-term set what your end goal is, they all come together. The reason why I mentioned the near-term is the near-term is every 30 days, I can't emphasize that enough.
You can't just tell a partner, here's what we want to do over the next six months, and then raise your hands after six months and say, why didn't this happen? Collaboration happens all through the process and you need to be thinking about 30 days, 90 days, 120 days, 150 days, 180 days and it works like that.
Jeff: Well, David, I'm going to leave it there for today. I look, I want to thank you so much for your time today and for your great insight. It was an absolute pleasure
David: Thank you for your time today. I've enjoyed doing this.
Jeff: A special thanks goes out to David for joining us today on the podcast. So it's pretty clear that all these supply chain bottlenecks are disproportionately impacting small rural operators. You know, they don't have the buying power to compete with the large operators, which is particularly an issue for rural operators who are required by law to rip and replace their old equipment.
I think David's idea of having them establishing or joining a buying consortium is a great idea. And his other idea about standardizing their network equipment to align with the large operators. Also makes sense and should help them better navigate their supply chain issues. Hey, thanks for joining us today. And watch out for our next episode of the All Day Digital Podcast.
