The Global Chip Shortage Highlights Importance of great Supply Chains & a Proactive Government

Akin to the many crises we have witnessed before in the United States, the global chip shortage that has halted many car manufacturers, chip manufacturers, and defense departments alike, could have, and should have been prevented with swift policy intervention. While the global supply chain challenges Covid brought to the forefront of casual conversation are definitely of focus in this essay, the shortage also offers us a great perspective on how our government isn’t structured to proactively deal with obscure issues vital to the function of this country. The sluggish nature of our two party system doesn’t show we need to eliminate the system completely, but we should at least have teams in place to review industries consistently, and assess possible updates needed to maintain normalcy in the United States. As time progresses and we evolve as a society, our government must evolve with us, and whether it’s by introducing committees, or increasing accountability of our officials. As a result of the global supply chain disruption, consumers have been left without their desired laptops, phones, and PS5’s. The issue may seem superficial when considering it’s driven by a desire to get a new IPhone, or a new console, but facing realities, as we grow more and more reliant on technology and vehicles reliant on chip technology, these global supply chains and issues of its nature are only going to be of increasing importance. For the United States to truly sustain itself as a super power of the globe, our government policy action and focus needs to be more forward looking.

Due to the advancements made in the travel and transportation industries over the last couple of centuries, most businesses decide to venture into international business. In a time where it’s generally not hard to build facilities on a whim, many businesses enter markets in foreign countries, with considerations for cheaper labor, tax breaks etc. In a Global Supply Chain risk management book by Ph. D Manuj, and Ph. D Mentzer, states:

“At this point, it is reasonable to ask the question, if global supply chains are complex and difficult to manage, Why would a firm choose to go global? The answer is that global configurations provide access to cheap labor and raw materials, subsidized financing opportunities, larger product markets, and the governments of different countries may sometimes offer widely varying inducements (e.g., tax abatements) to attract new business. Further, they may also deny sanctuaries to competitors by locking in suppliers and/or customers…”

Dr. Manuj and Mentzer manage to summarize in a brief passage why most companies looking to expand in their field are looking at global supply chains and foreign investments. Not only is it keyed on expansion and growth, but also to keep competition from accessing certain resources, ecosystems. When thought about from this perspective, the problem dives a bit deeper than just not having a large enough IPhone supply, or enough PlayStation 5’s to meet demand. We saw, at the height of Covid how the threat of the pandemic strained our grocery stores and food supplies, issues like these derive from companies supply chains and business models, being affected by travel restrictions, and demand increases. Throughout the nation we have establishments aimed at the verification of worker safety, food safety, etc, I think it’s time we had a government organization aimed at assessing companies supply chain efficacies, as well as stress tests to model possible deficiencies. Proactivity saves time and money in the long run, and would better protect our citizens.

With a small background in the importance of supply chains and how they are involved in the success in essentially every industry, how could the Trump Administration have let a problem this large creep up on us? Over the course of Trump's presidency we constantly were told to fear China, and engaged in a constant trade war marked with constant interest rate hikes, and widening trade deficits, in an attempt to win against them, when our focus should have been on building our supply chains at home.

Model depicting the dynamic trade war between the United States and China

In the past, companies have managed to shrug off major natural disasters disrupting their companies supply chains as one off events, from the Japanese earthquakes and tsunami of 2011 disrupting Japanese companies in the U.S to stop production and lose money. In a novel on Covid-19 and trade policy, the authors Baldwin and Evenett describe how companies and firms are already noticing the need for transition,

“Firms will be forced by their shareholders and rating agencies to think about the resilience of their global value chains. They will need to diversify their supplier base to protect against disruptions affecting a particular producer or a particular geographic location. There may be some reshoring, especially as automation has already reduced the importance of labour costs”

As is the case with how most of our major companies responsible for fulfilling requirements of their customers function in the United States, companies have long been expected to evolve with the times, without the need for government intervention. Whether it’s been the airline industry, or gas/oil, or financial/banking industry we shouldn’t be naïve and act as if our model of capitalism and minimal government intervention has actually succeeded. The airline industry and banking industry have both been inches from ultimate collapse in 2020 and 2008, with both requiring massive government bailouts, and with our non-intervention in the oil and gas industry causing us to foot the ultimate bill environmentally speaking. I’m definitely not calling for government ownership of multiple companies in these industries, but hoping to illustrate the point that proposing for proactive support of an industry isn’t the most ridiculous concept. Ultimately with a proactive response to bolstering our manufacturing industries and global supply chain, you not only avert a crisis, but can use these assistance programs to create jobs, career pipelines, and more.

Many people, politicians definitely included, simply won’t ever understand the importance of efficient global supply chains, until the consequences of the supply chain problem are illustrated, compared to just hearing about a “supply chain” problem. One article that highlighted how deep the supply chain issues are striking, was written by Eric Sagnowski on how J&J who is responsible for the delivery of vaccines for the U.S and Europe, was already running into supply chain problems after recently assuring investors they would be good on meeting their delivery targets. This drastic switch in messaging after recently signaling to investors they believed they didn’t foresee any troubles ahead, and they were on track, shows how delicate any supply chain With issues that we assume are being addressed with precision by private companies being mishandled, what can we assume of things being handled with much less importance such as our health of food and prescription medicine supply chains. Supply Chain and manufacturing expert Cathy Morrow Roberson, discusses the impact of supply chain disruptions in businesses. According to Cathy, many companies complete all of their supply chain bookkeeping over spreadsheets or through email, making for very inefficient and disorganized work, which would likely yield miscalculations and errors. Accuracy and disorganization have an almost indirect relationship. Cathy also shed light on a fact of the supply chain industry, confirming historic trends on business models involved most businesses overlooking risk planning in favor of a focus on optimization, that time, “While important, risk planning often took a backseat to optimization. Mitigating ‘as best as possible’ was the norm.” is seemingly coming to a swift closure.

An article that should raise alarm for multiple reasons, was written about how pet prescriptions and medicine supply are experiencing extreme supply issues that affects many pet owners nationwide, “There’s a lot of medications that just aren’t in the market,” said Sam Abdrabouh, the Owner and CEO of Wespaw Pets and Wespaw Pets Pharmacy. “They are either backordered or there might be a supply chain issue. COVID unfortunately affects everybody, whether it’s food or it’s medicine”. Issues like this still being present due to Covid-19 supply chain complications should not only make you fear for your pets safety, but it should also make you fear for the safety of your own health! Have you ever wondered where a lot of your key prescription medicine is sourced from? Unfortunately, a majority aren’t manufactured in the United States.

According to FDA tracked Data, only 28% of the manufacturing facilities providing us our pharmaceuticals are actually in the United States. This shows a real weakness in the globalization of supply chains, vulnerability.

Model illustrating U.S. reliance on other countries for medical manufacturing

Whether the next trade war occurs 10,20 or 30 years from now, who’s to say this won’t be the main target. Unfortunately for the U.S research on eating habits has shown that trends over time do not favor local grocers, and distributors. Department of Agricultural Resource Economics professor mentions how Covid-19 did temporarily give local distributors an increase in business, but long term the trends are expected to to return to non-locally sourced food based on the economics of the industry,

“Although the current crisis may well give a boost to the local food movement in the short to medium term, there has been little change in the fundamental economics of the sector. Smaller scale, localized food supply chains are less cost efficient than the mainstream food system and offer less variety. Price and convenience remain strong drivers of consumers’ food purchase behavior, and mainstream food supply chains have a clear competitive advantage in this regard. Nevertheless, consumers are inherently heterogeneous in their preferences and food purchase behaviors (Hobbs, 2019). For some consumers, the COVID‐19 pandemic will solidify an existing interest in locally sourced foods, while others may be newly attracted to the sector. The extent to which the latter proves to be a long run shift remains to be seen.”

While this short term shift isn’t expected to be sustained, now is the time to try and maintain current trends. Investments in local food manufacturing, distribution, and related entities, would help not only alleviate the concern of future pandemics and diseases disrupting the global ecosystem, but increase the strength of the job markets and economy. The pandemic ironically was the most recent catalyst in recent history for a push toward a more United States based supply chain, keeping jobs in America, ideas rooted in nationalism but also practicality.

President Biden made a small stride toward my request when he signed his executive order targeting our Supply Chains in critical areas, but it remains to be seen the depth to which we take our interest in our supply chains as more time passes post peak Covid-19. Biden, while making a small step forward, also symbolizes the U.S government's response often being disconnected with the reality and gravity of the situations. Biden’s executive order calls for a 100 days review of critical supply chains and industries, while also requesting funding from congress to invest 37 billion dollars in manufacturing companies. This means that at least for the time being, the executive order’s effect will be limited to the knowledge gained from the review of critical supply chains and industries. Knowledge is power, but only when able to be applied, and since the government cannot take over these companies and integrate changes themselves, change is essentially reliant on the funding being approved, or companies implementing changes necessary for self preservation. This is where the sluggishness of our government stings intensely, on issues even Republican representatives see a need to address, and weren't rushed to the floor to proceed through the house and senate signed. Bipartisanship, or the complete lack of bipartisan support of issues directly affecting all Americans, will definitely be the downfall of the United States if we do not change something fast.

Even the immediate plan of action by the Biden administration to tap our allies such as the Taiwanese and others, symbolizes what we have evolved to in America in the coming years. Depicted in a graph from data derived from IC Insights, from 2015 to 2019, we allowed countries in Asia to gain control over portions of the semiconductor industry, that we are seeing play out in huge ways in 2021.

Among the leaders of the semiconductor industry, even in 2015, was the Taiwan based company TSMC, who our administration is looking toward for assistance. Stated in the article;

“Deese’s letter shows that top White House officials have become involved in trying to resolve the shortage, which has presented an early challenge to Biden’s administration. Deese, the director of the National Economic Council, as well as National Security Adviser Jake Sullivan are both personally engaged in the effort to address bottlenecks in auto companies’ supply chains”

This quote demonstrates that due to our government not investing enough in domestic supply chains and manufacturing, we are at the mercy of other countries' decisions in the continuation of key U.S industries, a nation within such close proximity to our economic rivals in China at that.

For a government official, it’d likely be easier to imagine an investment in domestic/local supply chains as an investment in defense, defense from trade war, global supply chain disruptions due to disasters, pandemics, weather crisis and more. Every year a seemingly consistently increasing amount of money per year is given to the United States Department of Defense, with 704 billion dollars planned in the federal budget towards the organization this year. The Department of Defense, while responsible for protection, can’t protect us from a major disruption in our supply chains, or our food manufacturing, transportations industries etc. As a government, we need to wake up to the value of investing in our engineering in a similar way to how we invest in a constantly evolving military. We are never afraid of losing money in the name of military expansion and development, so we shouldn’t wince writing the checks for upgrades to U.S supply chains, and manufacturing industries. In the field of engineering itself, industrial engineering is often an overlooked discipline, but with supply chains increased importance in enterprises times may change. The United States is slowly losing ground to China and other countries in

Science and engineering output. Action may only be taken when it’s too late, but the time to invest in science and engineering of all disciplines is now. We have seen the popular development of green technology and non fossil fuel reliant power vehicles being championed, while we seem to fall behind in other very important industries.

Manufacturing Employment Trends

A quick snapshot of the employment trends over the decades in the manufacturing industry, also strengthens my point that this is the perfect sector for the government to focus on driving employment towards. As we as a society transition to using more and more advanced technology, the demand for semiconductor chip production should continue to increase. Employment in manufacturing has seen a year over year decrease of 25-30% from peak 90’s levels, showing we have a lot of room for improvement.

Inaction has most always been the dominating characteristic of the two party system in the United States of America. Perplexingly enough, not only has political division fueled the ongoing partisanship seen in Washington, but also the lack of awareness of global issues by both houses of congress alike. While semiconductor chip shortages caused workers to lose hours, and quotas to not be met, our legislators, who were warned about these problems month in advance after seeing how Covid crippled supply chains earlier in the previous year, were just beginning their pr rollouts leading up to announcing their plan intended to help the troubled industry. Years and years of consistent outsourcing for cheaper goods and labor, by top companies and our government are finally beginning to rear their heads as a possible danger, and weakness in our economy. Of course this paper is going to sound pessimistic, that is how almost anyone governing a country should be thinking when drafting policy, “What if xx goes wrong and this can’t happen, what is in plan to address yy…”, proactivity, will almost always save money, and pain for government citizens, and corporations alike. We can only hope our government learns from these painful lessons of the past year, and instead of looking at the past, begins to move to solve issues we know will come along in the future.

Works Cited/Referenced

Baldwin, Richard. “Chapter 8 Covid Supply Chains.” Covid-19 and Trade Policy Why Turning Inward Wont Work, edited by Simon Evenett, pp. 120–150.

Bloomberg.com, Bloomberg, www.bloomberg.com/news/articles/2021-02-18/biden-aide-deese-asks-taiwan-to-help-resolve-auto-chips-shortage.

Clark, Dartunorro, and Lauren Egan. “Biden Signs Executive Order Targeting America's Supply Chains in Critical Areas.” NBCNews.com, NBCUniversal News Group, 24 Feb. 2021, www.nbcnews.com/politics/white-house/biden-sign-executive-order-targeting-america-s-supply-chains-critical-n1258684.

Hunnicutt, Trevor, and Nandita Bose. “Biden to Press for $37 Billion to Boost Chip Manufacturing amid Shortfall.” Reuters, Thomson Reuters, 24 Feb. 2021, www.reuters.com/article/us-usa-biden-supply-chains/biden-to-press-for-37-billion-to-boost-chip-manufacturing-amid-shortfall-idUSKBN2AO13D.

“Is Bipartisanship Dead?” Google Books, Google, books.google.com/books?hl=en&lr=&id=IClhBwAAQBAJ&oi=fnd&pg=PR9&dq=bipartisanship&ots=GIhDlTQmRK&sig=ipsbHRZmS9KZdtyjvTW5s7RWfEs#v=onepage&q=bipartisanship&f=false.

Manuj, Ila, and John T. Mentzer. “GLOBAL SUPPLY CHAIN RISK MANAGEMENT.” Wiley

Online Library, John Wiley & Sons, Ltd, 10 May 2011, onlinelibrary.wiley.com/doi/full/10.1002/j.2158-1592.2008.tb00072.x?casa_token=g6EJu6Gmi28AAAAA%3AtDhLWYEwl5dAeVensQ0YykNQJcDxTstJCx_wmTgGMqnT8lg0rAiRAEUo8kDOafzQ5wrl3-Sp8IkHjj_f.

Roberson, Cathy Morrow. “Preparing For The Unknown In Your Supply Chain.” Forbes, Forbes Magazine, 7 Oct. 2019, www.forbes.com/sites/cathymorrowroberson/2019/10/07/preparing-for-the-unknown-in-your-supply-chain/?sh=45fdffcb39ff.

Semiconductors: U.S. Industry, Global Competition, and ... fas.org/sgp/crs/misc/R46581.pdf.

West, Darrell M., and Christian Lansang. “Global Manufacturing Scorecard: How the US Compares to 18 Other Nations.” Brookings, Brookings, 10 July 2018, www.brookings.edu/research/global-manufacturing-scorecard-how-the-us-compares-to-18-other-nations/.