Rethinking global supply chains could be long, hard process
Finding alternatives to sourcing in China won’t happen overnight
The administration of President Joe Biden wants the global supply chain of the future to look markedly different.
In February, President Biden issued the Executive Order on America’s Supply Chains, initiating a 100-day risk assessment to determine strengths and weaknesses of supply chains across key American industries.
The goal of the Biden administration is to remove U.S. dependence on foreign-made goods required by critical industries — especially semiconductors, lithium-ion batteries, pharmaceuticals and rare earth minerals.
Biden’s executive order comes after a global shortage of semiconductors continues to disrupt the automotive, aerospace, medical supplies and electronics industries.
“The United States needs resilient, diverse and secure supply chains to ensure our economic prosperity and national security,” the order says.
Though the executive order does not mention any one country by name, China remains a key supplier for many of these goods.
Daniel Gardner, president of Trade Facilitators Inc., said Biden’s executive order is a step in the right direction, but changing supply chains for critical goods is not something that can be done overnight.
Trade Facilitators is a Los Angeles-based supply chain consulting and training firm.
“The chip shortage has gotten people’s attention rather quickly,” Gardner said. “Reshoring, which is bringing jobs, production back to the U.S., and nearshoring, which is more North America — i.e., Mexico and or Central America, it depends on the industry — is not as easy as it sounds. It’s quite difficult by an order of magnitude for a lot of different reasons.”
Gardner said China has a 40-year head start over many countries in terms of manufacturing capacity for products such as semiconductors, high-capacity batteries and rare earth metals. China also currently has a more diverse supplier ecosystem than any other country and a large pool of available labor with the right skill sets.
“In Mexico, automotive manufacturing and electronics like flat-screen TVs, those [are] a very clear exception to what we’re talking about here. Other industries, the supplier ecosystem isn’t there to support manufacturing, which is to say tier 1, tier 2, tier 3, and raw material suppliers, they don’t exist,” Gardner said.
Gardner has been working in Mexico trade for 20 years and spent four years living in Guadalajara as president of Latin America for Exel Global Logistics.
“When people think nearshoring, obviously it’s Mexico and Central America and the Carribean islands,” Gardner said. “All of the production capacity in all of Mexico, added to all the production capacity in all of Central America and the islands, it might add up to 10% of what China can make. The manufacturing capacity isn’t there yet.”
The top five semiconductor-producing countries during 2020 were Taiwan, South Korea, Japan, China and the U.S., according to the Semiconductor Industry Association.
Gardner said low cost was one of the main reasons the U.S. began outsourcing manufacturing to other countries, especially China “so we can enjoy the benefits of Walmart the last 40 years and not pay a price for it economically.”
“People would be well advised to study the economic history of China, going back to the late 1970s when the Chinese government policy changed from an agrarian agricultural-oriented society to export manufacturing-oriented,” Gardner said. “It’s 41 years that the U.S. spent outsourcing all its manufacturing know-how, not only capacity, but manufacturing know-how to make stuff, and having people that run factories, we don’t have as much manufacturing data as we used to.”
For most companies, assessing their supply chain vulnerability and diversifying suppliers can be a complicated task, according to Alfred Hille, director of product marketing for Descartes.
Descartes Datamyne is a global trade intelligence solution that provides a searchable database of import/export trade.
With the spotlight focused on supply chains more than ever, Descartes Datamyne recently conducted a study and published a white paper titled U.S. Supply Chain Vulnerability Analysis, aimed at showing companies alternate sourcing strategies for critical supplies to help fortify supply chain resilience and maximize the bottom line.
“The idea for this whitepaper was to look at the vulnerabilities in the key industries that the Biden administration was focusing on,” Hille told FreightWaves. “We used our Descartes Datamyne solution to review the trade flow data and try to pinpoint, or elaborate on, what the final vulnerabilities would be by giving each of the industry’s supply chain vulnerabilities a score.”
In the four key industries outlined by Biden — semiconductors, lithium-ion batteries, pharmaceuticals and rare earth minerals — Descartes provides a supply chain vulnerability score based on the current situation.
Semiconductors, lithium-ion batteries and strategic minerals all showed risk scores trending higher, a combination of low availability of inventory with reliance on a few supplier nations.
China, South Korea, Japan, Germany and Taiwan were the top five exporters to the U.S. in 2020 for lithium-ion batteries. China is the world’s biggest importer of lithium-ion batteries, while the U.S. is the largest producer/exporter.
The distinction to be made here is that China is the leading producer of lithium-ion electric vehicle batteries, which is driving the boom in electric vehicles, according to Descarte Datamyne. The U.S. is the leading exporter of other lithium-ion batteries used in mobile phones, tablets, laptops and other electronic gadgets.
South Korea was the biggest exporter of semiconductors to the U.S. by value in 2020 at $118 million, followed by Taiwan at $72.9 million and China at $52.2 million, according to U.S. Census data researched by Descartes Datamyne.
In 2020, imports of lithium-ion batteries into the U.S. surged 31% in value and grew a slower 12% in quantity, according to Descartes Datamyne, pointing to supply not keeping up with demand.
“What you can really see is the focus on low cost sourcing and the effect of tariffs have really driven these situations where there are some countries that have a concentration of certain supplies,” Hille said. “In addition, certain governments have been very proactive in building up domain expertise in certain industries.”
Descartes also examined existing weak points in supply chains, showing potential alternative sources of supply to minimize the risk of further disruptions.
One of the key vulnerabilities companies face is a concentration of supply sources “in a given country,” said Chris Jones, executive vice president, marketing and services at Descartes.
“What is the density of your sources and suppliers? You could say I have a risk mitigation strategy since I work with five manufacturers,” Jones said. “However, looking at last February or January, if your five manufacturers happened to all be in China — they could be everywhere from Beijing, Hong Kong, geographically spread out across the country — but when China itself shut down (because of COVID-19), it didn’t matter.”
Jones said it’s also not just a question of where a company is sourcing their suppliers, but also how much inventory they carry.
“I think before the pandemic there was a feeling of comfort in global trade that really allowed people to concentrate and tighten supply chains. It isn’t just a question of where you have sources, it’s also how much inventory you are carrying in that supply chain,” Jones said. “There’s no publicly-traded company or even major private ones that don’t look at how much cash they’ve tied up in things like inventory. Taking [inventory] out means you have less room or margin for error.”
Another reason a company’s supply chains could be vulnerable is many manufacturers don’t know their supply chain beyond their Tier 1 suppliers.
“Descartes conducted a survey last year of importers, shippers, brokers, logistics and supply chain operators. We found that 35% of them were forced to research sourcing products and items from alternative suppliers because of COVID-19,” Hille said. “But that is easier said than done, especially when everyone is scrambling for alternative suppliers at the same time. If you’re all in the same industry, that’s even worse.”
Jones said manufacturers have to think of sourcing in two ways, such as where your key materials for making products come from and addressing a heavy dependence on one medium- or high-risk source (such as a single factory, supplier, or country).
“Apparel manufacturers don’t make fabrics, so you have to know what the source of the fabric is for some key materials,” Jones said. “The other thing you also have to look at — understanding just the density of the things that you have in terms of supply sources.”
Jones said supply chain risk mitigation is something that companies need to put in place before a crisis arises.
“What you can’t do is wait until something happens,” Jones said. “When it happens, you and everybody else is out doing the same thing. Unless you are really moving very quickly, you’ve probably passed the point of being able to take advantage of it. It is something that you need to put in place, like an insurance policy for somewhere down the road.”
Gardner said for the U.S. to bring critical supply chains back to North America, it needs to create a collaboration “between business, academia, the government, labor — putting together a national strategy for global competitiveness.”
“Some of the greatest things that the U.S. has accomplished — the development of what was originally the integrated circuit, the microchip, the internet, GPS, the mainframe computer, the personal computer, all of these things were all born of collaboration between government, industry and academia,” Gardner said.
Gardner pointed to the May announcement from Taiwan Semiconductor Manufacturing Co Ltd. (TSMC) that it would build several more semiconductor factories in Arizona beyond the one currently planned, according to Reuters.
TSMC, the world’s largest contract chipmaker, announced in May 2020 it would build a $12 billion factory in Arizona. The facility is expected to start production in 2024.
TSMC manufactures the bulk of its chips in Taiwan and has older chip facilities in China and Washington state.
“My point is it can be done, if we take an integrated collaborative approach to developing a legitimate long-term strategy for global competitiveness, it can happen,” Gardner said.