Almost 30 years ago, independent Presidential Candidate H. Ross Perot famously said, “You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement, no pollution controls, and you’re going to hear a giant sucking sound of jobs being pulled out of this country.”
Ross didn’t win the election, but he wasn’t far off with his prediction. If anything, he wasn’t aggressive enough with his forecast. Manufacturing that was once done in the U.S. heartland has migrated not only south of the border but also across the Pacific, to low-cost labor markets around the world.
Today, Washington finally understands the damage that was done to the American supply chain. “The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.” That’s how the president opened Executive Order 14017 on American Supply Chains, dated February 24, 2021.
According to President Biden, “Resilient supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs.”
We’d all like greater resilience in the industrial and agricultural base. Executive Order 14017 outlines a long list of what needs to be done: We should identify single points of failure, protect at-risk capabilities, catalog essential materials and capabilities, itemize alternative sources of supply, enhance industrial skill sets, reinvigorate research and development, address transportation infrastructure needs, consider the impact of climate change, coordinate with allied and partner nations, identify risks, prioritize critical goods and services, and generally strengthen supply chain capabilities through government action.
This is quite a wish list (President Biden might as well have included a pony, too). But wishing isn’t enough. It’s not enough to catalog what we want. We need a blueprint on how America can make it happen.
Low-cost vs. resilient
This brings us back to Ross Perot. Production logically flows to lower cost sources. To energize the development of a resilient supply chain in the United States, American companies need to figure out how to compete against lower labor cost producers. Can the United States compete as a lower labor cost source? Or does it need to look for another way?
President Biden is wise to focus on the need for “resilient” supply chains. Resilient means robust. Resilient means flexible. Resilient means adaptable. Resilience is the ability to recover from or adjust easily to misfortune or change. Considering resilience along with cost creates a different value proposition.
American supply chains are resilient. Offshore competitors, less so. That’s where a competitive advantage can be found.
Look at what’s happened in the automotive industry. Over the course of several decades, American automakers have outsourced huge portions of previously vertically integrated operations. Where they once had absolute control over all tiers, they evolved into being more like systems integrators rather than assemblers. Eventually, those outsourced processes left the United States and migrated to nearshore or offshore locations.
This evolution is easy to understand. When the goal is to reduce labor cost, it makes sense to migrate to where there are lower cost sources of labor. The United States is a lot of things, but it will never be—even with massive improvements in productivity—a low-cost labor source.
But that focus on cost has come at a cost. The vulnerability of the automotive supply chain can be seen in how hard it has been hit by this year’s semiconductor shortage. On April 21, The Wall Street Journal reported, “Since early this year, the semiconductor shortage has forced global auto makers to intermittently cancel factory shifts and shuffle production schedules to divert chips to high-priority vehicles, primarily pickup trucks and larger SUVs that generate bigger profits. Still, Ford has been forced to cancel weeks of production at its two F-150 plants, crimping supply of a model that generates the bulk of its global profit.”
According to the article, Ford estimates that the disruption could reduce its operating profit by $1 billion to $2.5 billion this year. Ford is not alone. General Motors Co., Toyota Motor Corp., Volkswagen AG, and Stellantis NV (formerly Fiat Chrysler) have all had to halt or alter production due to the semiconductor shortage. Analysts have estimated that the chip shortage could cost the auto industry tens of billions of dollars in 2021 revenue.
Sometimes low-cost strategies can be expensive. Offshore sourcing can reduce resilience, and rather than enhancing profits, it can diminish them.
Build demand for resilience
Resilience matters, and the semiconductor supply chain is not resilient. Chip production went offshore years ago, and the focus of production activity is now on one small island: Taiwan. CNN reports that in April Taiwan Semiconductor Manufacturing Company, the world's largest contract chipmaker, announced that it expects to pour $100 billion into chips over the next three years to keep up with rising demand.
There have been repeated calls to revive semiconductor manufacturing in the United States. But capitalism seeks profits, and supply chains respond to demand. For a resilient supply chain to emerge in the United States, demand for that capability needs to exist. This means that we need to reframe the conversation to induce industry to produce goods and products in the United States and to redevelop the domestic supply chain. If the government can induce industry to make the linkage between resilience and profits, it’s show time.
