How small operators can pivot under the supply chain squeeze

Justin McClung: Every company is different, and your ability to invest is different, but if you have the capacity financially, and especially if you're dealing with competitive environments, then I think you have to. You have to get the raw materials to be able to do the projects because you can't take a year off, because guess what? Your competitor is probably not taking a year off. If they're going to get those houses passed and built, and you're stuck because you couldn't get the fiber, you just lost that town or that zone or that area or whatever it is you're building.

Jeff Johnston: That was Justin McClung, chief operating officer at Nex-Tech, about why broadband operators should take on increased inventory risk given the tightness in the equipment supply chain.

Hi, I’m Jeff Johnston 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 digital infrastructure market. This podcast is brought to you by CoBank’s Knowledge Exchange group.

It’s no secret that hyperscaler capex is skyrocketing as they race to build AI data centers. But what’s not fully appreciated is the impact this is having on smaller broadband operators. Securing equipment such as fiber and optical gear to meet build plans is getting harder for these folks because the hyperscalers have been buying up most of the supply.

As Nex-Tech’s COO, Justin is dealing with these challenges daily, so I asked him to come on the pod to discuss what is really going on and how Nex-Tech is managing their supply chain.

So, without any further ado, pitter patter let’s see what Justin has to say.

Justin, welcome to the podcast. It's a pleasure to have you on. How have you been?

McClung: Good. Thanks for having me, Jeff. It's exciting.

Johnston: I'm excited you agreed to come on. I think when we think about supply chain and what's happening in the AI space and the impact that it's having on optical equipment and fiber and other things, I'm certainly hearing a lot about that throughout my travels. I'm excited to have you on to hear it from the front lines, what's really going on

A lot of talk around Corning doing these big deals with Meta and other companies locking up long-term fiber agreements. Then, on the optical side, I hear a lot about tightness there. I guess, generally speaking, what are you seeing out there?

McClung: We're definitely seeing it, just like every operator in the space. Our warehouse team is even telling us, in some cases, our suppliers don't even want to quote because they know they're not going to get fiber anytime soon. It is something that we hear about. As you know, you go to industry events, and the last couple that I've been to, it's either talking about AI or it's talking about fiber constraints and not being able to get enough fiber to do your projects for the next couple of years or so.

Johnston: Is that largely the large hyperscalers coming in and locking up this supply with the buying power that they have?

McClung: That's everything that I'm understanding. That's exactly what it is. They've got the power to go buy it up, and the producers don't have enough capacity for the demand right now. I know they're scaling up, but at the end of the day, they can't scale up as fast as the AI guys can throw money at them. The little guys are held back a little bit.

Johnston: No, that's tough. I think it's like the perfect storm almost. You've got a lot of fiber activity going on in rural America and other parts for fiber to the home. You've got the BEAD program. Then you've got this huge AI demand. It feels like this couldn't happen at a worse time.

McClung: Yes. There's so much money in the industry overall. It's just getting thrown around like water. Again, if the glass providers can't keep up, somebody's got to take the pain. Right now, that is the smaller providers that are having to do that. Just the fiber counts they're talking about, 6,900 fibers. In my world, we never even considered anything like that. I didn't even know that existed until about a year ago. The capacity is just unimaginable. That's a lot of glass having to be produced.

Johnston: I think that's a good point. I think I read somewhere that the AI data centers require something like 36 times more fiber than a traditional cloud data center, call it, five or six years ago. Just incredible.

McClung: It is. It's all about latency. You need fiber where they need to replace copper wherever they can, so fiber's the logical choice. Instead of just having transport fiber needs, now you've got intercabinet or interbuilding fiber needs. It does add to the issue of not having enough fiber availability.

Johnston: I understand you guys at Nex-Tech, I think you've done a pretty good job navigating this. I think you guys are executing on your plan pretty well despite some of these bottlenecks and supply chain challenges. Maybe you can just talk a little bit about how you guys have been navigating this.

McClung: We're really very fortunate to have a forward-thinking board and executive management team where we project out one, three, and five-year plans. We have a board strategic planning meeting that just happens to be next week or for the next one. We talk about these kinds of things, of "What are we doing not only for the budget year next year, but the next two years after that." When we see these issues come, in the past, we have pre-purchased fiber well ahead of time just to have it sitting in the yard with the intent of, if for whatever reason we have too much, there's always going to be a market for fiber that we can still get rid of it.

To my knowledge, I don't know that we've ever sold any of that fiber, but even with that pre-planning, there's still nervousness of not having enough for the projects at that time. It is still a concern that we work on all the time, for sure.

Johnston: Would you characterize the challenges with fiber similar to the optical equipment or the core network stuff? Are we talking about the same thing as far as bottlenecks and so forth?

McClung: We haven't really seen the equipment-side shortages, not like the fiber itself, realistically. We haven't really been hurt by that just yet.

Johnston: Oh, that's good. Are there any other collaborative planning aspects as to how you deal with your vendors that you think might also help insulate you from some of these supply chain challenges?

McClung: I know on the electronics side, we do work with Calix quite a bit and some with Adtran as well, but mainly Calix. We do talk to them a lot. They know what our plans are. We do projections of what we're going to purchase for the next year. They've always done a really good job of making sure that we're not left without equipment, and that is the thing that's holding up the project. Really, to me, it's all about communication and having good relationships with your providers, with your vendors, your partners. We definitely have that on the electronics side.

On the fiber side, it's a little different because you can buy from so many different places. And when there is a shortage, you're reaching out to everybody, trying to figure out who's got something available for you. Our warehouse team does a good job with that as well. They're talking to those wholesalers all the time.

Johnston: Justin, if you looked in your crystal ball and see how this could potentially play out over the next few years, do you see or do you hear about manufacturers aggressively responding to these demand signals by increasing capacity, or are they hedging things a little bit? When do you think we get past this? When does supply and demand get better and balanced here so that we're not having these kinds of conversations?

McClung: From my understanding, yes, the manufacturers have and are ramping up production to get to a point where it's not an issue. I think that is ongoing. To stand up any kind of a plant of any kind, you're talking years. It's not something you can just turn on. Now, when do I think it's going to get back to, say, normal? Honestly, I don't know. I think, to me, the biggest issue or the biggest trigger there is going to be, when will the AI infrastructure bubble burst? Because it will. It has to.

There's too much money going out there, too much construction going on. Eventually, it's going to get to the point where it doesn't make sense. The finances don't work.

Johnston: Yes, I agree. It's still a lot of questions to be answered. Exciting, promising technology, but still a lot of questions to be answered. It sounds like for smaller operators, to the extent that they can get inventory, taking extra inventory, taking a little bit of inventory risk, I guess, if you will, is probably a prudent strategy at this stage. You guys did it before you thought you needed to do it, it sounded like, and maybe that's not even an option right now, but is that how you would approach this if you were trying to figure out how to get on the other side of it?

McClung: Yes, absolutely. Every company is different, and your ability to invest is different, but if you have the capacity financially, and especially if you're dealing with competitive environments, then I think you have to. You have to get the raw materials to be able to do the projects because you can't take a year off, because guess what? Your competitor is probably not taking a year off. If they're going to get those houses passed and built, and you're stuck because you couldn't get the fiber, you just lost that town or that zone or that area or whatever it is you're building.

I think it is a risk, but it's a competitive risk I think you have to take if you can afford to do it, is to prepare and plan as long out as you can. Again, I personally don't see fiber being a loser money-wise if you don't deploy it. You can always find somebody who needs fiber to sell it. You may not make a lot of money on it, but at least you're not going to lose money. It's not a bad investment for it to sit in your yard in my opinion.

Johnston: That's a good point. Are you aware of any buying consortiums out there at all, like a bunch of smaller operators pooling their resources together, they're buying resources together so they can look bigger than they are individually, and therefore maybe move up the stack in terms of priority with these vendors?

McClung: Not as far as I know directly. I do know that there's conversations going on, but not that I know myself. I can also say I've sat on a couple of recent webinars talking about this issue. One of the things that was said on the last one I sat on was that even that right now isn't necessarily going to help you. They're not looking for a million miles of purchase. They're trying to project out month by month, almost, to say, "I need 100,000 feet every month for the next two years, something like that."

Then you might actually get your 100,000 feet versus saying, "I need a million feet." From the way I understand it, that's really not going to help you right now, not with what's going on.

Johnston: You raised a point on the competitive issue here where if you don't get your market built out when you're planning on doing it, you could run the risk of losing that market. Just thinking through that, do you think or have you heard at all about operators saying, "Well, if we can't do fiber to the home when we thought we were going to do it, let's just deploy fixed wireless now so that we can at least provide some coverage in that community, and then as soon as we can, overlay that with fiber?" Are you hearing about any of those sort of strategies to deal with the competitive angle here?

McClung: I haven't heard that. I can tell you that strategy in our world, that would have been 15 years ago. That's how we went into some of our towns. We actually did fixed wireless. Then, when we thought, "Okay, we have enough customer base, let's do the big investment and go." I don't know that that would work today simply because, at least if you're in our world, in our competitive environments, it's not just one. We're sometimes dealing with two or three, or in some cases, four fiber competitors at that same house. If you're going to roll out a fixed wireless versus fiber, you're just wasting your money, in my opinion.

Johnston: What do you do with all this? Any advice? It feels like there's only so much you can do. If the stuff's not available, it's just not available. Is there any creative things that folks can do to manage this, or you just have to wait until the product shows up?

McClung: Thankfully, in our case, we haven't had that issue, but if we did, my recommendation would be to focus on other products that you can sell to your current customers to wait until you can continue to grow physically. Definitely in the independent world, focus on customer service so that you don't lose your current customers. Keep doing the things that made you you, and do it even better if you can, so that when they do have other competitors come knocking on their door, literally, to try to take you, that you don't give them a reason, even if it is a cheaper price.

Just double down on what you're good at, try to layer on other products and services if you can. I would definitely say continue to build because if you're not growing, you're dying at the end of the day.

Johnston: That's good advice. Try and take advantage of this unfortunate situation. You said lean into your strengths and get better at things you can control.

McClung: Yes. The old saying that I like to go off of is, it's not what happens to you, it's how you react to it.

Johnston: Love that. Hey, we've covered a lot here, Justin. Before we wrap it up, I just want to give you an opportunity to-- I don't know if you have any closing thoughts or words of wisdom that we haven't touched on. The stage is yours.

McClung: I'd say, going along with the same concept in fiber, just stay informed. Hit industry events when you can, talk to people, make those connections because it does matter. Personal connections do matter in these kinds of situations. It might actually get you to the front of the line in certain situations. Just don't sit around hoping somebody's going to fix it for you because they're not. You have to stay engaged and stay educated on whatever's going on and just try to do your best to stay informed.

Johnston: We'll leave it there, Justin. Hey, thanks again for making time for us today. I really appreciate it.

McClung: Thanks for having me.

Johnston: A special thanks goes out to Justin for being on the podcast today. It’s pretty clear there is no silver bullet to solve this problem. Based on recent hyperscaler capex commentary, AI data center capex shows no signs of slowing down anytime soon. And while the supply chain is responding with increased capacity, all of that takes time. Relationships are key and being able to take on extra inventory, if that is even possible, seems like a prudent strategy.

Hey thanks for joining me today and a special thanks goes out to my CoBank associates Christina Pope and Tyler Heron because without them there wouldn’t be an All Day Digital podcast. Watch out for our next episode.