How the Icelandic Volcano Rocked Global Business

As the ash cloud emanating from an Icelandic volcano wreaked havoc on global travel, Cisco Systems completed its $3.3 billion acquisition of Tandberg, a Norwegian teleconferencing company. Marthin De Beer, Cisco's senior vice president of emerging technologies, found that his flight from San Jose, Calif., to Oslo, where he was to discuss the deal, had been canceled. So he and Tandberg's CEO, Fredrik Halvorsen, held a virtual press conference using the merged firms' equipment. Since the volcano erupted on April 14, Cisco's TelePresence service (think a very high-end Skype) has boomed. Thanks to cheap and pervasive information technology, TelePresence and similar products from competitors have emerged as a sort of redundant network for business meetings. When face-to-face meetings are impossible, executives can go to a specially equipped conference room, flip a switch, and share bad jokes and PowerPoint presentations.

For business, investing in that kind of redundancy is a form of insurance. And for those in the business of trading information, this insurance comes relatively cheap. They won't divulge the locations, but most major Wall Street firms have backup trading floors in the Northeast—desks, chairs, and computer equipment that lie fallow. If a man-made or natural crisis shuts down their Manhattan headquarters, workers can show up and start trading derivatives. Google says, "Every action you take in Gmail is simultaneously replicated in two data centers at once." If one fails, the user won't experience a disruption. A company spokesman says Google has put a lot of thought into the "geographic diversification" of data-center site selections, so that if one area of the globe is affected by a disaster, traffic can be routed to another. And with the rise of cloud computing, everyone can have a backup network.

But as the global economy learned last week, it's much harder—and in some instances nearly impossible—to build redundancy into the vital networks that now move people, goods, and services around the world. The same technology-abetted forces that spur globalization and efficiency have left the world economy particularly susceptible to disruptions.

The International Air Travel Association reported that airlines lost $1.7 billion due to the shutdowns in Europe. But disrupted business travel and tourism (this writer's family vacation to Paris was buried in volcanic ash) are only the tip of the iceberg.

A hundred years ago, even 30 years ago, an eruption from Iceland wouldn't have affected menus in Florence or the ability of autoworkers in Tennessee to assemble cars. But things have changed. The just-in-time mentality dictates that factories and retailers build super-efficient, lengthy supply chains and keep as little capital and warehouse space as possible tied up in inventory. Globalization has meant that companies source components and products from all over the world. The upshot: when there's a small disruption anywhere, the machinery of global capitalism slows down. And when there's a disruption in Europe, look out. The slow-growing region is actually a highly globalized economic powerhouse. "Europe is the biggest exporter in the world and the second-biggest importer," Eric Chaney, chief economist at AXA Group, told The Wall Street Journal. And while container ships are the workhorses of global trade, plenty of really valuable stuff crosses the Atlantic in airliner cargo bays. By Tuesday, with flights from Europe having been canceled for a few days, the automaker Nissan suspended some production at factories in Japan. They were lacking pneumatic sensors made in Ireland.

Natural phenomena have laid bare the fact that the networks that power our economy are both fragile and really expensive to duplicate. Consider electricity. A recent windstorm in the Northeastern U.S. knocked out electricity to homes and offices for several days. But installing a home generator that can pick up the electric load would cost several thousand dollars. Manufacturers can't afford to keep fully equipped factories on standby, with workers on call, on the off chance an epidemic in China halts exports.

When it comes to transport networks, it's very difficult to build an adequate level of redundancy. Europe's extensive system of trains and ferries wasn't nearly extensive enough to handle the flood of traffic that materialized when aircraft were grounded. If the Panama Canal were temporarily shut down, goods could be shipped around South America or humped overland across the isthmus—but only at great cost and delay. In theory, flights from the U.S. to India via London could have been rerouted through airports in Africa. But Dakar's airport can't possibly afford to maintain extra runways and keep air controllers and ground crews on call so they can be called into action the next time Heathrow shuts down. Airplanes, ships, ports, and landing slots at airports are too valuable and expensive not to be used.

There's hope, though. In an effort to capitalize on global capitalism's lack of redundancy, Dubai opened a big hub called Logistics City last year, providing a potential alternative. And some environmental disruptions may work in favor of less fragile supply chains. Thanks to the melting of the North Pole, Russian ships are beginning to forge a new, quicker shipping route from Asia to Europe and North America.