companies were able to provide goods at low cost when they established factories in China, but now the world better appreciates the cost of low-cost goods. Moving toward self-sufficiency will make products more expensive,
to solve supply-chain issues
The coronavirus exposes the fragility of an economy built on outsourcing and just-in-time inventory.
n general, hospital supply chains work like this: A hospital (or nursing home or health agency) enters a group purchasing organization, or GPO, with several other providers. They pool together to order what they need, in bulk. When the system works, everyone saves money. But GPOs aren’t nimble; when there are problems, they’re felt across the system. And individual hospitals can’t immediately get what they need.
That means someone like Watkins ends up appealing to state and federal authorities for help. The World Health Organization is asking manufacturers to ramp up production of personal protective equipment for health-care workers. There is a strategic reserve of health-care supplies, which the White House has discussed tapping. And now it’s invoking the Defense Production Act.
But across other industries, the supply chain doesn’t have a similar cushion. And the strain is obvious. The Institute for Supply Management, which conducts monthly economic surveys, found that nearly 75 percent of the companies it contacted in late February and early March reported some kind of supply-chain disruption due to the coronavirus. And 44 percent of the companies didn’t have a plan to deal with this kind of disruption. “That is a little surprising in this day and age,” ISM’s CEO, Tom Derry, said in an interview.
“However,” he added, “you have to realize that there’s almost no industry sector—and when I say that, I mean manufacturing and nonmanufacturing—that isn’t reliant on China in the United States.”
Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most companies have become. “If you don’t have a first-tier supplier who’s sourcing from China,” Derry said, “then your supplier’s supplier is.”
To understand why the modern supply chain is uniquely vulnerable to a threat like the coronavirus, you have to realize how quickly it has changed. China joined the World Trade Organization in 2001, and surpassed the U.S. as an industrial powerhouse in 2010. During the SARS epidemic of 2002 and 2003, China represented 4.31 percent of worldwide GDP, wrote the MIT professor David Simchi-Levi, who studies supply chains. Now that’s 16 percent.
Western companies find it cheaper to manufacture goods in China, and elsewhere in Asia, than to do so closer to home. Car parts, technology, fashion, medical gear, and drug components are particularly vulnerable to disruptions in Asian markets. Derry noted that in 2012, after the Japanese tsunami, “you couldn’t buy a red Toyota for months, because the one factory that made red pigment for Toyota was offline.” Apple, Fiat Chrysler, and Hyundai have already warned investors of potential supply constraints due to the coronavirus pandemic.
In addition to offshoring, Simchi-Levi told me, companies have emphasized “just in time” delivery, keeping only 15 to 30 days of products on hand. That has made global companies more profitable but has also “significantly increase[d] supply-chain risk.”
He predicted that the worst of the supply-chain disruptions would begin now, in mid-March. Fewer Chinese ships are on the water, and major ports around the world, such as Rotterdam and Le Havre, are already feeling the effects. Those 15 to 30 days of inventory (even if a company stocked up prior to the Chinese Lunar New Year holiday) are likely running low now. “We are going to see a slowdown, disruption, less variety, less options to the customers,” Simchi-Levi said.
As the COVID-19 pandemic ripples throughout the world economy, it’s possible that it may begin to change the way global supply chains work. Simchi-Levi said companies will come under pressure to diversify where they make their products, which will prove easier for some than for others. While the blood thinner heparin may still be made in China, it’s not as difficult to move the infrastructure for, say, the kind of fashion sold at H&M and Zara to other Asian countries. “You can still emphasize low labor costs by moving into Vietnam, Malaysia, and Cambodia,” he said. More electronic and car-part production could shift to factories in Mexico and Brazil.
One thing not to worry about is the grocery supply chain. While some consumer products, such as toothpaste or shampoo, could be limited because of components sourced from China, that’s not the case for food.
Derry noted that the grocery supply chain is remarkably robust. Stores that run out of ingredients one day will be full a day or two later. As for nonperishable goods,
Aime Williams in Washington APRIL 2 2020Print this page48
Be the first to know about every new Coronavirus story
Get instant email alerts
Trump administration officials and lawmakers from across the American political spectrum are increasingly anxious about the national security implications of sourcing medical supplies from China, as a surge in coronavirus cases across the US has sent demand for drugs and protective gear rocketing.
Republican senator Marco Rubio of Florida, a China hawk, and Elizabeth Warren, the progressive Democratic senator from Massachusetts, have recently joined the likes of White House trade adviser Peter Navarro and US trade representative Robert Lighthizer in raising concerns about medical supply chains that rely heavily on China.
“Unfortunately, like others, we are learning in this crisis that overdependence on other countries as a source of cheap medical products and supplies has created a strategic vulnerability to our economy,” Mr Lighthizer told G20 trade ministers on Monday.
The US imports almost half its personal protective medical equipment, including masks, goggles and gloves, from China, according to figures compiled by Chad Bown at the Peterson Institute for International Economics.
America’s reliance on China for key ingredients in medicines is harder to measure. A recent Senate bill co-sponsored by Mr Rubio, Ms Warren and Connecticut senator Chris Murphy, among others, called for pharmaceuticals companies to report the volume of active ingredients sourced from China to the Pentagon, allowing the defence department to survey US exposure to China in the drugs supply chain.
As part of its trade war with Beijing, the Trump administration had already leaned on US corporations to reshore operations from China, partly through its punitive tariff regime.
In February, as concerns increased about the effect of prolonged coronavirus-related closures of critical facilities in China, Mr Navarro told the Financial Times that the outbreak was a “wake-up call” for the US to reduce its reliance on pharma and medical supply imports from China and the rest of the world.
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
https://www.ft.com/content/d71c01db-5333-470b-abcd-0df126864447
Now, the rapid spread of the disease in the US is giving the issue new urgency, as healthcare providers and state officials clamour for supplies.
Andrew Cuomo, the New York governor whose state has seen the most coronavirus cases in the US so far, called it a “real cruel twist of fate” that China is now the main manufacturer of ventilators and other equipment that states are desperately trying to acquire to fight the coronavirus outbreak.
“It all comes back to China,” he said on Wednesday.
Analysts say the big question is how the US will persuade companies to reshore manufacturing when they are vehemently opposed to the idea.
While Phrma, the trade body representing US drug manufacturers, agreed with the need to explore ways to “encourage even greater domestic development and manufacturing of medicines”, it added that altering just one element of a supply chain could take “years” and incur “significant costs”.
Congressional staffers and trade lawyers say a complete shift in the way companies think is needed.
“Up until now, most industry supply chains have been designed for efficiency and price competition — where can you get the quality you need at the best price?” said a senior Democratic aide. “We need to redesign the way these supply chains work.”
Aside from mandating federal bodies to only purchase goods made in the US, policymakers on Capitol Hill have discussed government-backed loans specifically for companies to move supply chains to the US, along with tax breaks as a reward for doing so.
But in the long run there is still doubt it would be enough to make leaving China worth it for US companies.
“They’re going to have to want to do this, and there will have to be a sense of patriotism,” said the Republican aide. “If China cuts off our access to key medical ingredients, that would be devastating.”
Leaving China can also be logistically difficult. “You don’t just turn off the lights and leave. You have to pay off employment contracts, and you also have to get a permit to leave,” Ms Coates said.
Even the most diehard proponents of reshoring manufacturing for strategically important US companies admit the difficulty of crafting policies to make that happen.
“We want companies to make their products here, and source them here, but they won’t do that unless they make a profit,” said a senior Republican aide. “And we want them to make a profit. The biggest question that we have been grappling with is: how can we incentivise them?”
The Trump administration is considering an executive order implementing “Buy American” rules to force federal agencies to only buy drugs and medical supplies made in the US, according to American media reports.