The Global Supply Chain is Collapsing
Over the past 18 months, I’m betting there isn’t a single person who hasn’t been affected by supply chain issues. From toilet paper to home appliances to semiconductor chips, it has become obvious that the global supply chain we have blindly depended on for so long is collapsing. Today we’re experiencing a period of massive changes to the way everything once worked. Ultimately, and for reasons to be explained here, the collapsing supply chain is good news for America.
Let’s begin by dispelling a common misconception. The collapse of the global supply chain is not the result of the COVID-19 pandemic. COVID-19 merely accelerated a breakdown that was already underway for years. The global supply chain was reconfigured in the mid-1980s when American companies, at the urging of short-term investors and financial “experts,” shifted manufacturing out of the United States to countries in Asia with more favorable labor rates.
The impact on American manufacturing was a slow but inevitable decline. But these companies soon came to realize that inexpensive labor is not enough reason to upend operations and move overseas (particularly for companies who moved to China where labor is no longer cheap). I have identified four what I call MaxTrends™, which are fundamentally changing the dynamics of product manufacturing in the global economy.
MaxTrend™ one: Cyber Warfare. The last nine months have seen increasing numbers of ransomware attacks on American companies, the most memorable being when the Colonial Pipeline was attacked, paralyzing East Coast gas lines for more than a week. This event represents the recognition by hackers that supply chains, because of their complexity, make a tempting and easy target. Companies are realizing that their traditional supply chains are inherently weak and extremely vulnerable, particularly when spread around the world. American companies are now being forced to re-evaluate their supply chains, and where possible, relocate them out of Asia and back to American shores.
MaxTrend™ two: 3D Printing. There is a production revolution underway that is not widely understood but will change the dynamics of manufacturing. This revolution is known as 3D printing (aka additive manufacturing). No longer does a component have to be made by workers in a factory on the other side of the world to be economical. 3D printing gives companies a way to make parts not just for prototypes but now in larger quantities, ultimately making local manufacturing more economical and much more secure. I predict the impact on Chinese manufacturers will be significant when they feel real competition for the first time in decades.
MaxTrend™ three: Robots. Robots no longer exist only in science fiction. Robots are among us, and their impact is growing. With increasing frequency, robots powered by AI are working alongside humans in factories and warehouses. Considering how Amazon and other major retailers have changed the way consumers purchase goods, companies need to have goods immediately available and delivered overnight. Localized sourcing is leading to less dependence upon the global supply chain. For those concerned about American jobs, robots are not replacing human workers but instead are erasing the need for cheap overseas labor. In the end, robotics growth will actually foster U.S. employment.
MaxTrend™ four: The Growing Role of Governments. One thing that COVID-19 did do was to make governments more aware of how vulnerable they are to foreign-based supply chains. Nowhere was this more obvious than in sourcing personal protective equipment (PPE) and vaccines. Led by the United States, many nations around the world began adopting policies encouraging, and in some cases, mandating certain essential products to be manufactured at least in part within their own borders. I expect the Biden administration will be much more aggressive about this over the next year, using both tax incentives and mandates.
For example, one of the most shocking things consumers discovered in 2021 was a shortage of available cars and trucks to purchase. Why? Because of supply chain breakdowns among foreign suppliers, semiconductor chips essential to modern automobiles (gas, hybrid or electric) are no longer readily available. While America was at one time the world leader for semiconductor chip manufacturing, today less than 18 percent of the chips used in the United States are sourced here. Because of increased government dedication to encouraging local manufacturing, that is going to change.
What does all of this mean? What I foresee being driven by the four MaxTrends™ is a significant decrease in what is now being produced for export in China. Over the next five years, China’s two decades of dominance over global manufacturing will decline. Because China manufactures a diverse array of products with an annual value of around $2.4 trillion, this will have significant impact on the global economy.
American and European manufacturers with operations in China are already looking into realigning or reshoring. Because Chinese labor is no longer cheap (which was the main draw to China in the first place), some companies are being incentivized to move their supply chains to other locations such as Malaysia, Indonesia, the Philippines and India.
Critically valuable goods that are vulnerable to cyber attacks or easily produced through 3D printing are more likely to reshore back to the United States. Of course, this will not occur overnight or without proper U.S. government tax incentives. Hopefully, our political leaders from both parties will take note and do the right thing. This is a unique period where if America is smart, it can recapture the manufacturing capabilities it gave up over the last three decades and regain its economic power. pq
An international business attorney with Meyer Unkovic and Scott, Dennis Unkovic has written a new book- — “Transforming the Global Supply Chain: Cyber Warfare, Technology, and Politics” — which will be published Sept. 3 by Ankerwycke Publishing.