There are things in Lori Esposito Murray, Vicki Poponi, and Hollis Hart’s post at RealClearPolicy on rethinking U. S. supply chains with which I agree, things I think verge on the unhinged, and two observations I wanted to make. I’ll make the observations and leave it to you to figure out which I agree with and which I think are nuts.
Here’s a passage I wanted to comment on:
This will require that private producers review the resilience of their own supply chains, enhance their backup supplier strategy, consider appropriate stockpiles based on both cost efficiencies and elasticity of alternative supplies, and work with public authorities in genuine cases of national security or public health vulnerability.
I think that very few companies actually have “backup suppliers”. Some have none as a cost-savings strategy. Some may think they have backup suppliers but in reality do not. Most have no real ability to determine whether they have backup suppliers or not. I will merely point out that in many countries including China, South Korea, Japan, and Taiwan there are a lot more brands than there are producers. I haven’t kept up-to-date but at one time practically every Ethernet adapter made whatever the name under which it was sold was actually produced by one of just two Taiwanese companies. Similar situations are the rule nowadays. There aren’t very many companies that produce EV batteries, for example, and I suspect there are even fewer companies that produce parts for EV batteries.
The other observation is this. There is no such thing as an enforceable, international system of civil law. It’s caveat emptor. If your supplier cheats you or sends you defective products or products that do not meet specifications you can stop buying from that vendor but that’s just about the limit of your recourse. In most countries particularly in China you will have practically no standing in their courts and the courts only exist to carry out the wishes of the authorities anyway.
That doesn’t mean we can’t trade with these countries but it does mean the buyer should beware! We need to be a lot less credulous and a lot more circumspect than we have been for the last 30 years.
“We need to be a lot less credulous and a lot more circumspect than we have been for the last 30 years.”
You bet. I don’t know what a true “backup” supplier is either. I do know what a secondary supplier is. Most businesses have them, (or attempt to have them per your multiple brand/common producer observation) and of course its just a diversification of risk issue.
All of the sole supplier/JIT/Kanban etc systems were designed in part to lower inventory investment and expose manufacturing deficiencies. I think what covid may have illustrated is that you can fly too close to the sun.
This is just one aspect of a broad philosophical topic discussed a number of times here. Do you design products, or systems, (capacity/redundancy/physical robustness/diversity) for rare events? Very few products or systems warrant that. But if they do: DFU. From a technical standpoint its situational and basic risk/reward but is complicated by the question of the wisdom of reliance on unreliable, and potentially hostile, entities. That means you, China.
The fact that you can’t get yellow pigment for paint right now is one thing. That we are beholden to China for refractory or rare earth metals is quite another.
As I see it the problem is not just that they shouldn’t screw up, it’s that the incentives are out of alignment. There are relatively few incentives for many producers not to screw up and plenty of them to take risks. That is the cost of consolidation among other things.
I was calling out two distinct phenomena: one is that there aren’t actually as many suppliers as you might think and the other is that China is so dominant in so many areas there is no other near term alternative.
I completely understand. The response to screwing up is all too often “whatcha gonna do about it.” The textbook theory is that consolidation generally occurs when industries become unattractive and require a rationalization. All too often near monopoly is government granted. Warren Buffett, cited positively elsewhere today, isn’t lobbying – coke and ice cream in hand – for the railroads because he had a boffo train set as a kid.
The China policy has for far too long been ill conceived. But the guy who wanted to attack it is out, and the guy who gets paid for it is in.
My own view is that cost of entry has a lot to do with it.
There are some economists who think that all or nearly all monopolies are in fact government-granted, i.e. that there are very few natural monopolies. When you own the only gold mine, it’s a natural monopoly. When you’re the only one who’s allowed to prospect, it’s government-granted.
There’s a tremendous confusion about what is natural and what is an act of government. Discoveries are natural; patents are acts of government.
As I’ve said before I think the degree to which presidents craft foreign policy is overstated. I think that for almost all foreign policy is something that happens to them.
“My own view is that cost of entry has a lot to do with it.”
Oh, it has a lot to do with it. But first mover status eventually fades; they have to continue to run hard to be preferred. Intellectual acumen flows, just like capital. Barrier to entry becomes just a matter of capital formation. And capital seeks good returns, and exits bad returns. I say it over, and over, and over here. Most just don’t want to hear it. But you can take that to the bank.
Its the life cycle of industries. Rise, dominate, encounter competition, rationalize. Its only government that facilitates the truncation of the process at dominate.
“As I’ve said before I think the degree to which presidents craft foreign policy is overstated. I think that for almost all foreign policy is something that happens to them.”
Yes, but does State sabotage Biden? Does he give them reason? Or is he a beneficiary of the scam and plays along? Was State supportive of Trump? No. Was Trump a threat? Of course. Stop with the academic points and get into the swamp, where the ox goring becomes real.