At the New York Times Ana Swanson and Keith Bradsher lament that impending Chinese lockdowns may aggravate supply chain problems:
WASHINGTON — Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about a third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay.
The measures have already confined tens of millions of people to their homes in several Chinese cities and contributed to a suspension of connecting flights through Hong Kong from much of the world for the next month. At least 20 million people, or about 1.5 percent of China’s population, are in lockdown, mostly in the city of Xi’an in western China and in Henan Province in north-central China.
The country’s zero-tolerance policy has manufacturers — already on edge from spending the past two years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports. Additional disruptions to the global supply chain would come at a particularly fraught moment for companies, which are struggling with rising prices for raw materials and shipping along with extended delivery times and worker shortages.
I would submit that’s not a supply chain problem or at least not just a supply chain problem.
We’re two years into the pandemic at this point. That’s plenty of time to make alternative arrangements unless
- the complexity of the product was such that more time was needed
- no alternative source was possible
- there was no downside risk in delay
- management opposes seeking alternative sources
a is possible but probably uncommon; I simply don’t believe b; c is likely; d is possible. Why isn’t this problem already sorting itself out?
This is the kind of thing you would expect markets and companies being run by business people to be able to address well but they have not. Looking at the shortages for my work I keep seeing, and we have greatly broadened our searches for alternative sources, it looks like in a lot of cases there are alternatives but not very many. When one company has a problem it is also a problem shared by others in the same sector. I dont know about the rest of the economy but competition for stuff off of patent is especially fierce. Often end up with just two or three companies who can sustain the competition.
Steve
Yep. That’s my question: why?
Markets tend to be myopic, and established businesses tend to be conservative.
My sense is that most everyone is making the assumption that things will go back to normal – so the strategy for most business and government policy is to simply wait.
Secondly, spooling up additional capacity takes time. I work in the cellular and wireless industry and the major problem is a shortage of chips. New foundries are being built, but they take a significant amount of time to construct. And since most foundries are in Taiwan, US government policy has relatively little influence and can’t, for example, privilege US markets and consumers over others.
Two points.
Things are happening, but its a process. As an example, take semiconductors. The “big 3” (TSMC, Samsung, Intel) have all committed to building new state of the art fabs in the US — and are deadly serious, projecting out capital outlays for 10+ billion a year for a single fab until it is in production. But look at the timelines, my understanding is TSMC committed to a US fab at the end of 2020. 2021 was spent doing site selection, getting local permits, and starting construction. 2022 will be finishing construction, installing equipment, and doing trial runs. Realistically, it will be 2023 (and likely H2) before TSMC’s US fab produce chips in volume. And in semiconductor terms, this is lightning fast. Samsung just finished site selection, and they are saying 2024 before the plant is in production. Intel just broke ground on its newest fabs and 2024 is Intel’s schedule for the fab to be in volume production.
Supply chain offshoring was a process that happened over 25 years, I imagine nearshoring will be a process over a similar magnitude of time.
The second one is the gross domestic production formula Y = C + I + G + (X-M). Where Y is production, C is consumption, I is investment, G is government spending, X is exports, and M is imports.
A succinct rearrangement is I = Y – C – G – (X-M). That investment is what’s left of production after consumption, government spending, and net exports. The higher the consumption and government spending, the less production for investment.
The only alternative to boost investment without cutting consumption, government spending is boosting imports. But given imports are already historically high, I believe this country cannot rely on that approach.
steve gave us the answer a month ago. Companies are using boats as cheap warehouse space, so they can save costs but they can’t make sales. Yeah.
The answer is pretty straightforward. To believe there are significant alternatives is to believe there was significant excess capacity. Or inexpensive substitutes. Our firm knows a thing or two about procurement, and our companies purchase everything from agricultural commodities to hydraulic or electronic to concrete to rebar………….. I don’t know where these alternatives exist.
Andy is again correct. It takes time to “spool up” capacity, and it is unclear when the manufactured covid hysteria will subside, so when to take the plunge and invest in what may be an albatross is not a decision taken lightly.
When the comment is made that the covid hysteria comes with costs, there it is. We are two years into this and covid is sweeping through the country and the world like mad. Just about every public policy initiative has been a dismal failure. Vaccines have attenuated disease; that’s pretty much it. The notion of two weeks to “bend the curve” appeared to have merit but proved a bust.