“You product can’t get stuck on a cargo ship if it’s made in America.” That’s what critics of America’s dependence on Chinese production are saying as cargo ships are lined up off the coast waiting to be unloaded in California. Now companies are grappling with what to do about their problems. Willy Shih discusses supply chain turmoil in The Wall Street Journal, writing:
Supply chains as front-page news? That would have seemed unlikely—until the pandemic exposed many of the vulnerabilities in the far-flung networks that connect manufacturers, suppliers and buyers around the globe.
At first, the impact mostly reflected rapidly shifting patterns in demand, whether in personal protective equipment or work-from-home and consumer products. But a subsequent stimulus-fueled spending boom in the U.S. left companies struggling to find import capacity on key trade lanes. Flotillas of container ships waited outside ports, wreaking havoc on shipping schedules, and importers struggled to hire enough truck drivers or warehouse workers to move all the cargo. As bottlenecks spread across the economy, they in turn exacerbated the shortages, as companies resorted to excess ordering and stockpiling.
The disruption exposed deep interconnections in many supply chains, and just how dependent some sectors like the auto industry were on a few semiconductor factories in Taiwan, or the pharmaceutical sector on Chinese active pharmaceutical ingredients and fine chemical imports. This challenged companies and governments around the world to question their dependence on distant suppliers and logistics links that might be prone to interruption—not only because of public-health crises like Covid-19, but those that might be politically motivated.
As a result, “resilience” has become the new watchword. How quickly can a company or a country bounce back from an interruption in the supply of critical products, components or raw materials? What if China suddenly cuts off U.S. access to rare-earth minerals, semiconductor chips or the ingredients used to make antibiotics and other drugs?
Calls for resilience have led to a push toward more domestic production in the U.S. or within the European Union of PPE, semiconductors, pharmaceuticals, anything that might be exposed to future disruption. These parallel China’s “dual circulation” strategy, in which it stays open for the world to buy its exports, while fostering a domestic market that isn’t dependent on foreign-sourced critical materials like semiconductors, whose supply might be interrupted.
Resilience sounds great, of course. Who doesn’t want a resilient supply chain and a resilient economy? But while there are some things that companies and governments can—and likely will—do to increase their ability to respond to future shocks, these will all come with costs. So while we will see some improvements, I am dubious about how much of a difference they will make over the long term, especially for withstanding widespread shocks like another pandemic. In the end I think economics will trump current concerns.
For instance, if better resilience means a more geographically diversified supply base, we will get some of it from “China +1” strategies that many companies are already implementing. Politically sensitive gear such as telecom and computing equipment have been in the lead, with firms shifting production to Southeast Asia and Mexico.
But there is a limit to how much companies can reshore swaths of manufacturing. When labor costs aren’t a dominant factor in a product’s costs, domestic assembly costs have rarely been an issue. Thus there still is strong domestic manufacturing for high value-added products such as medical devices, jet engines or Tesla vehicles. They may use foreign-sourced parts such as castings or precision-machined parts, but production of those can be relatively easily relocated. Quite a few domestic battery factories are planned or under construction, because auto makers realize how much of an electric vehicle’s value-add is locked up in those essential components.
But for products with labor-intensive assembly, there are the dual challenges of hiring and training people to do the work, as well as the overall economics. When companies moved production to places like China in the early 2000s, the costs of setting up new factories, training workforces, and establishing local supply chains was paid for by the costs savings in the final products.
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