Tag: Offshoring Critical Supplies

China’s Torpedoing the Supply Chain

The Daily Escape:

Spring snow, Mt. Princeton, CO – April 2022 photo by Haji Mahmood

For the past two years, Covid has thrown the global supply chain into a tailspin. Even though the cargo industry’s ships, trains, trucks, and planes worked full-time, we still have shortages. Now, China’s zero Covid policy is increasing both the uncertainty and costs of efficiently operating the still-choked global supply chain.

From Bloomberg:

“We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”

Bloomberg says that China accounts for about 12% of global trade. It’s recent Covid lockdowns have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. And since US and European ports are already swamped, this new outage will leave them vulnerable to additional shocks.

China is home to six of the world’s 10 largest container ports. It’s the global economy’s most important manufacturing hub. While most countries have decided to learn to live with the Covid, Beijing has maintained its Zero Covid policy, where even small outbreaks can shut down large population centers and slow economic activity.

It’s taking an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory. That’s similar to the record of 113 set in January 2022 and more than double the time that the same trip took in 2019, according to Flexport Inc., a freight forwarder.

Julie Gerdeman, CEO of supply-chain risk analytics firm Everstream Analytics says:

“Once product export activities resume and a large volume of vessels make their way to the US West Coast ports, we expect waiting times to increase significantly…”

You’d think that after more than two years into this pandemic, America would have realized that single-sourcing much of our industrial production to a dictatorship is a bad idea. One with enormous consequences when something goes wrong.

But we haven’t. US Treasury Secretary Janet Yellen has advocated for what she calls “friend-shoring” meaning reducing our dependence on China and Russia. Brian Ehrig, a partner at the consulting firm Kearney is co-author of a report that found 78% of CEOs are either considering reshoring or have done it already. He says that relocating supply chains:

“…might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game…”

Le Monde reminds us that capitalism has created hidden dependencies in Ukraine. It is the main producer of the wiring harnesses that hold together the many electrical cables in a car. They quote Christine Lagarde, president of the European Central Bank (ECB) in a speech in Washington, DC: (brackets by Wrongo)

“Ukraine produces one fifth of Europe’s [harness] output,”

These parts are low value added, but essential in the construction of cars, a perfect outsourcing target for capitalism. Globalization isn’t going to die; but maybe it can evolve. Much of that possible shift hinges on convincing consumers to accept higher prices for the certainty of supply.

For example, once the CDC finally gave us unambiguous advice about wearing masks, there was a huge rush to open mask production facilities in the US. But now they’ve all closed, because it’s cheaper to make masks in China.

Dictatorships can ensure that labor remains cheap. That’s great for capitalists, not so good for people who needed masks in 2020 when China decided to keep most of them for their population. Or, now, when China is still willing to shut down its economy to stop a Covid outbreak.

And, despite all the good will in the world, nobody will make masks in the US if it means their five-dollar boxes of masks go unsold because everyone is buying the one-dollar boxes. Instead, they will complain about how the company asking five dollars is a bloodsucker.

We’re told that capitalism works. That it just does. That just-in-time supply cuts costs for consumers. But does it?

Art installation by Steve Lambert – 2013, Times Square, NYC

It’s proven not to work during an emergency. But what are the chances of re-shoring ever happening? Business school really only teaches one thing: Short-term profits rule and everything else is irrelevant.

After all, America is a business, not a country.

What should be readily apparent is that despite the CEO poll above, our corporate masters are certainly not thinking about systemic change to supply chains. Nor will they, as long as the focus is reducing costs as low as possible for maximum shareholder gain.

The point is that unless business is incentivized otherwise, don’t expect the supply chain to get any better. That incentive must come from the government in the form of tax policy or subsidy.

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Sacrificing Resiliency For Efficiency

The Daily Escape:

Convict Lake, Eastern Sierras, CA – photo by wild_NDN. It got its name after a group of escaped convicts ambushed the posse at the lake in 1871.

There will be a few winners in the race to source products for the Coronavirus fight. One winner is Puritan Medical Products Co. of Guilford, ME. If you’ve been tested for Covid-19, it’s quite likely that the swab used to collect a sample from inside your nose was made by Puritan.

Puritan is one of two companies that produce the world’s supply of the swabs used for coronavirus testing. (The other, Copan Diagnostics Inc., is in Italy). From Bloomberg:

“If swabs are necessary for testing, and if testing is crucial to slowing the virus’s spread, then it wouldn’t be an overstatement to say that the world’s future depends, at least in part, on Puritan.”

Unless the method for conducting the COVID-19 tests changes, Puritan’s ability to make more swabs will remain the long pole in the tent for figuring out which Americans have the virus. Puritan sells 65 different kinds of swabs. It has more than $45 million yearly in sales revenue.

On March 12, Puritan started getting calls from the US government. Bloomberg quotes Timothy Templet, executive vice president:

“We are ramping up to produce and wrap a million swabs a week that we need to put into the supply chain across the US…”

Please think about that. The Trump administration first contacted the swabs guy on March 12th, two and a half months after we should have known we needed as many as we could get, assuming America was interested in testing for the Coronavirus.

Early tests used two swabs—one for the nose, and another for the back of the throat, but the swab shortage forced changes to CDC guidelines, and now, only one is required. Puritan has two swabs patented for this purpose, and they’re making and shipping both, but scaling up production isn’t simple. Workers are in short supply, with more aging out of the workforce than entering in rural Maine. More from Templet:

“The whole labor shortage has created difficulties to have enough machines and build equipment…I could use 60 people tomorrow.”

Second, let’s talk the shortage of hospital safety gear, including disposable face masks, eye protection, gloves and gowns. Farhad Manjoo had an Op-Ed in Thursday’s NYT, “How the World’s Richest Country Ran Out of a 75-Cent Face Mask”, that details another sourcing problem:

“The answer to why we’re running out of protective gear involves a very American set of capitalist pathologies — the rise and inevitable lure of low-cost overseas manufacturing, and a strategic failure, at the national level and in the health care industry, to consider seriously the cascading vulnerabilities that flowed from the incentives to reduce costs.”

Twenty years ago, most hospital protective gear was made domestically. But like the apparel and consumer products business, face mask manufacturing has since shifted largely overseas. Today, China produces 80 % of masks worldwide. More from Manjoo:

“In January, the brittle supply chain began to crack under pressure. To deal with its own outbreak, China began to restrict exports of protective equipment. Then other countries did as well — Taiwan, Germany, France and India took steps to stop exports of medical equipment. That left American hospitals to seek more and more masks from fewer and fewer producers.”

In 2006, Congress funded adding hospital protective gear to a national strategic stockpile. At one point, it contained 52 million surgical face masks and 104 million N95 respirator masks. But in 2009, about 100 million masks in the stockpile were deployed to fight the H1N1 flu pandemic, and the government never bothered to replace them. Today, we have about 40 million masks in the stockpile — around 1% of the projected need for the Coronavirus fight.

Fighting the coronavirus is forecasted to require 3.5 billion face masks, according to DHHS. Mask producers say it will take at least few months to significantly expand production. Here’s a chart of the shortfall:

3M says that they are ramping up towards 100 million masks/month.

But, until that happens, the forecast is that we’re going to be short 170 million masks per month. Most of that must be sourced from China at a time when there is huge global demand, and Trump is fighting with the Chinese.

The real issue is that our system is built to optimize efficiency, not resiliency. But we’ve just learned the hard way that without resiliency, we could lose many more Americans.

This is where our priorities are misplaced. We have plenty of redundancy built into our military hardware, and our bloated defense budget assures it will stay that way. But pandemics are also a significant (and growing) threat to our national security.

How about rebuilding the “strategic reserve” of protective gear with some defense dollars? To add 300 million masks at $0.75 each would cost $225 million.

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