Research Analyst, Global Supply Chains, S&P Global Market Intelligence Panjiva
Chairman, CNS Global Advisors; Senior Managing Director, Pt Capital; former Under Secretary of Commerce for International Trade, U.S. Department of Commerce
U.S. Business Editor, Economist
Panelists discuss the stress COVID-19 has placed on global supply chains, the vulnerabilities of “just-in-time” manufacturing and rigid supplier systems, and ongoing production risks during the pandemic.
VAITHEESWARAN: Thank you so much. Ladies and gentlemen, welcome to our virtual meeting: The Future of Global Supply Chains. I’m Vijay Vaitheeswaran. I’m the U.S. business editor for the Economist, and author of a recent long special report on this topic of global supply chains. It’s my great pleasure to be your immoderate moderator today, especially given the distinguished panel of experts we have with us. We have Shannon O’Neil, who is the deputy director of studies as well as senior fellow here at the Council. We have Chris Rogers, who is research analyst in global supply chains at S&P Global Market Intelligence Panjiva. And Francisco Sánchez, who is chairman of CNS Global Advisors, as well as a former official at the U.S. Department of Commerce. So we’re delighted to have all of you with us.
Just by way of framing the discussion, we have to recall though there’s a lot of excitement and interest about global supply chains these days, they’re nothing new. The Romans two thousand years ago traded with Kerala for pepper. And throughout history we’ve had periods of waxing and waning globalization. And so the idea that there should be some changes in our arranged economic arrangements is not such a great surprise. But even so, we have come out of three decades of an extraordinary period in which global supply chains stretched to every corner of the world, and in particular to China—what has been called the great convergence of multinationals—typically Western and American multinationals at the forefront—with factory China.
And we saw that golden age, from the point of view of efficiency, of cost, of procurement, of consumer surplus each perhaps a slowing down in the last few years. Even before the current COVID crisis, or even before President Trump’s tariffs and trade wars, we began to see a change in the pattern of prevailing convergence to something that we’ve called on our pages at the Economist a slow unraveling that’s already beginning. Now, the question to us, I think we’re grappling with—and I want to get to my experts on this—what happens because of the COVID crisis, which seems to have affected so many dimensions of our lives and the economy? Are we going to see that slow unraveling that was beginning to happen become a rapid unraveling? Could it be the death of globalization, as has been forecast by some people? Or might we see a snapback after the immediate crisis passes?
We’ll explore this set of questions and others. Let me perhaps start with Shannon. Can you give us an update on what sort of disruptions have happened to supply chains that you see, to give us, again, a context for the discussion?
O’NEIL: Yeah. Thanks, Vijay. And pleasure to be here with all of you.
Sure. So I’ve seen over the last few months—I think there’s different ways that COVID has been affecting supply chains, right? So there’s sort of different elements. So one of the first ones is a very direct one, in that an outbreak happens in a factory and it gets shut down. So we’ve seen that in North America. We’ve seen that in meatpacking. We’ve seen that along the U.S.-Mexico border when particular factories down there have had an outbreak. And so production stops. So that’s one.
A second one that we’ve seen has been sort of uneven opening of factories. And, you know, I would say globalization has been with us, or supply chains have been with us forever. But a difference from the Roman times, or a different from even the—you know, the end of the—beginning of the twentieth century, end of the nineteenth century, beginning of the twentieth century before World War I is what is being sent around in supply chains is not finished goods today, right? It’s pieces and parts that are moving around. And so that is a bit different than pepper or other things moving that we saw in the past.
And with this uneven opening of factories, right—so, for a while China was shut down in Wuhan because they started. And so, you know, auto parts weren’t getting to the United States. And then when China reopened, then the United States, and Italy, and other places were shut down. So this sort of uneven opening is causing a lot of problems. I think for the U.S. in particular, the differences between Mexico right now we’re seeing, where some things were classified as essential businesses here so remained open, things down there weren’t classified. So there’s sort of this difficulty because of the intermediate goods. So that’s another disruption.
A third disruption is in logistics. And so these things need—supply chains need to move around the world and they need to get to places. And so ships were on the wrong side of the ocean to get parts that had been made in one factory to something on the other side. We just saw, there was an article in the FT over the weekend that said that, you know, that crews on ship—you’re going to have problems with the crews on ships, because some of them have been there over a year and they don’t see a way to get off the ships, nor to get new people on the ships. So you have challenges there.
The other challenge is that of the things that are flown around the world, almost 50 percent of those goods go in the bodies of passenger planes. And so as people have stopped flying, so too have the mechanisms for moving stuff around. So those are kind of three things that have happened that I think we can work through, right? Those are a bit transitory, a few weeks, a few months, we’ll see how it goes.
The last category where I think we’re just starting to see changes to supply chains is in government policies. And so there you saw some immediate ones where people were stopping PPE, protective equipment from leaving their countries, or they start putting in buy-American, buy-other policies, or they’re talking about it. There’s stockpiling. There’s different policies there. Some are shorter term, but I think we’re starting to see more and more companies—or, sorry—countries talk about industrial policy, and bringing that back, and what that might mean. And that could lead to much longer changes for supply chains, as sort of the rules on the ground in various places shift.
VAITHEESWARAN: Sure. Let’s hold off on the discussion of government policy, because in a sense that’s looking forward or—I don’t know if anyone looks forward to it—but it’s forward-looking, let’s say. And let’s maybe for the moment dig a little deeper into the first of the three—the first three that you mentioned. Chris, I know you also look at the different phases of supply-chain disruption. How would you comment on Shannon’s division of how she sees the disruption, either to agree with her or disagree with her?
ROGERS: Yeah, sure. Well, thank you, Vijay. And thank you to the Council for inviting me along today.
I’d agree with—you know, with that kind of layout that Shannon’s put there in terms of the different phases. I think one of the challenges for companies has been those initial areas of supply chain breakdown were easy to analyze. You know, each company knows their supply chain. They can analyze other companies’ supply chains. They know if that particular district of China is taken offline, what that will mean for them and possibly even for their competitors. So, you know, that part was comprehensible. But the second stage, the biggest state, and the one I think a lot of—has brought a lot of decision making into doubt, is actually demand destruction. So it’s people no longer buying things. It’s the retail lockdown. It’s the focus on, you know, buying baked beans not cars that’s, you know, led to these kind of significant shifts in supply chains that have created the challenges that logistics companies have faced.
I personally think logistics companies have done an incredible job of keeping everything moving where it needs to move to under very difficult circumstances. But they’re now having to make those long-term decisions as well about, you know, how many people should they be employing on these different shipping routes to make them work. But certainly, you know, we saw those disruptions initially in electronics and in consumer electronics and in autos, which you’d expect. You know, to Shannon’s point about finished—semi-finished goods being moved around the world, those industries have the longest, probably most complex supply chains, and are therefore the ones that are most exposed to those specific areas.
I think the comment about an uneven reopening is spot-on as well. It’s what we kind of characterize as kind of the third phase that we’re going through at the moment, the first being specific factory closures, the second being demand destruction, the third being this reopening. We’ve seen car companies in the United States, Daimler being one example, specifically saying: You know, we brought our factory back, and we’ve had to shut it again until we get the new parts coming along. So, you know, we have seen that. We’ll continue to see that. The trade data that we had for China just today—you know, last month their exports went up by 3 percent—excuse me—April they went up by 3 percent. May they came down by 3 percent. Imports dropped by nearly a fifth in May. You know, that’s an economy that’s reopened. So—
VAITHEESWARAN: But let me—but that prompts me. I know you have another one of your arguments to make, but just to clarify, you know, it has been observed that this is a very unusual kind of economic downturn, unlike, say, the global financial crisis or some previous crises, because both supply and demand has been hit at the same time, in various ways, obviously.
And from your point of view, do you think the supply shock—that is, the disruption we saw in China early on, the disruptions that are more easily mapped on to conventional supply-chain thinking—were more important, or do you think it’s the demand collapse that has really wrong-footed companies? Which is a more important dimension of supply-chain disruption?
ROGERS: I think for what we’ve seen, both in terms of the data and in terms of the conversations we’ve had with our customers, it’s the demand side. It’s also the demand side that’s the least comprehensible, as you just mentioned. You know, you can understand your supply chain and what happens, where are your customers, when are they coming back, how are they coming back, what are they going to want when they come back—those are very difficult to handle. And by the way, that’s not just retail suppliers to you and me; that’s companies particularly in the capital goods industry who don’t when investment in new plant and equipment is going to start.
So I would say it’s the demand shock that’s kind of ricocheting through the supply chains as much as the supply chain, but they’re the supply side.
VAITHEESWARAN: You had one last point quickly you wanted to make.
ROGERS: No, I was going to say the fourth phase, which we are just not at yet, is deciding what to do about the future, but we can come to the future in the future.
VAITHEESWARAN: Great. Yeah, that’s a good jumping-off point.
I want to come to Francisco. You have studied what companies have learned from past disruptions. Obviously, we’ve had everything from the tsunami in Japan to Icelandic volcanoes to numerous warning signals and sort of alerts that multinationals have received over the last twenty years to make their supply chains more resilient, to invest in alternatives.
Is it fair to say, by and large, companies hadn’t done that? And without putting words in your mouth, what do you think should be the right lessons to have learned from previous disruptions?
SÁNCHEZ: Thank you, Vijay, and thanks to the Council for inviting me to participate on this panel of distinguished presenters.
I would say that companies have not learned much, or at least there is little evidence that they’ve learned a lot. You mentioned the tsunami that hit Japan in 2011. They were also hit with a 9.0 earthquake that caused great devastation and massive disruption to the supply chain. But there is little evidence to suggest that companies made changes to how they manage the risk of supply-chain disruption.
Now if we fast-forward to this current crisis, there was a recent survey taken in March that suggests that 950—actually a little more than 950 of the Fortune 1000 companies have suffered supply-chain disruptions. So I would believe that this current crisis might offer a different response than we saw in 2011 and we’ve seen in past major disruptions.
Part of that reason that I don’t think we have seen them is because of this strong drive for efficiency and for cost reduction. And as we go forward it’s going to be important for companies to strike a better balance between managing efficiency, reducing costs, and risk mitigation. And that’s not going to be an easy balance to strike. For some companies—you mentioned the car industry—it’s essential that they do because of the complexity of their supply chain. For companies that have low-margin products, that’s a little tougher. They may suffer disruptions, but how do you add cost to mitigating risk without damaging—severely damaging your bottom line?
But at the end of the day I think it’s going to be a critical question for companies to ask what is the right balance, how do we strike it.
VAITHEESWARAN: So you put your finger right at the heart of something I wanted to spend a little time on; that is, it’s very much in vogue to talk about resilience in the wake of this crisis. You know, having followed these topics for a number of years at the Economist, and seeing that boards and senior executive leadership typically did not take supply chains as one of their top three issues. Usually supply chain management was left to middle managers, and they were asked to make 1 or 2 percent reduction cuts every year. That was the level of strategic thinking that historically went into most companies—I don’t want to exaggerate—but it was not seen as a board-level priority. We’ve certainly seen—into the trade war and now much more so since COVID—this has become a high-level priority of companies to think this through.
I’ll start with Francisco, but I’ll ask each of you to give your perspective on, you know, how do you define resilience meaningfully in a corporate supply-chain context? What does it mean? And, you know, the point alluded to previously by Francisco: Is it too costly? Somebody has to pay the cost ultimately. Presumably, it doesn’t come out of shareholders pockets; it will be through the price of the product in the marketplace. Now will companies be willing to take on that extra insurance policy, as it were, of either redundant capacity, or multiple suppliers, or better information systems that help them manage in real time how they manage supplies to avoid problems?
I’d like to get a sense for how realistic, what are the companies you are talking with and advising—which direction are they going and how much might it differ by industry. Again, just back to you, Francisco, for a follow-up.
SÁNCHEZ: Well, let me first comment on the board responsibility on this topic. I think it’s—the whole topic of risk management is something that’s taken on new importance for boards, more so than we saw say even ten years ago. So I think as companies continue to—or I should say as boards of companies continue to pay more attention to risk management at the board level, supply chain management is going to have to be there as part of it. So I think that’s number one.
There are things that you can do in trying to strike that balance. It’s not a total mystery; there are specific things, and I’d say the first one is putting an ongoing monitoring system—and some companies already have that—to monitor at a more granular level what’s going on in their supply chains. I’d say that, number one.
I’d say employing technology, including artificial intelligence, to run scenarios on what if this crisis happens, or what if that crisis happens, how do we respond, and to do that not during the crisis but long before a crisis ever happens. For many companies, they’re going to have to take critical looks at just-in-time inventories and whether that really makes sense, or do they need to carry inventory in ways that they haven’t recently; how they manage their supply chains in terms of redundancy in suppliers. A lot of these things will not have huge costs, but others will have significant costs. But I think these are things that companies can do to try to find that right balance.
VAITHEESWARAN: Shannon, how do you see the question of resilience and tradeoffs?
O’NEIL: I mean, I think this is a hard thing, and as you say, this is something middle managers have been thinking a lot about, right? There’s all kinds of software out there, how do you manage your risk, the things that you might do. You had—in front of the tsunami and other things, you had boards say, oh, we’re going to rethink this, and then it gets lost in the shuffle.
So I think the question is, is this time different, right? It’s different, as one of you alluded to earlier, in that it’s hitting 950 out of one thousand companies, right? It’s not just Toyota because there was a tsunami that took out some roads or electricity. It’s hitting the whole world.
So I think there’s a little bit more of a rethink here, but it’s really hard because if you introduce too much resiliency or you pay for too much resiliency, particularly in something that’s not going to happen every nine months or even every eighteen months, but might only happen every couple of decades, then other companies aren’t going to do it, and they’re going to beat you in the marketplace. So you could have a company that spends a lot to be really, you know, protected and have different sources of parts, or whatever it is to provide this resiliency, but if it’s not used, and others do it without it—they sort of make that bed and they win in that bed—you’re going to have a disadvantage in the marketplace. Your products are going to be more expensive or not.
And this is actually where I think we are having discussions, and I don’t know exactly where governments are going to come out on this, but governments are starting to think, OK, are there particular sectors that we need to incentivize resiliency, right? We need to pay companies in some way, shape, or form, or incentivize them in some way, shape, or form to make that bet, and to take the edge off in case they put in that investment and it’s actually not needed.
So I think that—
O’NEIL: —so I think this is the larger discussion here. But I—I’m more pessimistic that companies—we come out of this whenever we come out it; yeah, for a couple of years people think about it, but then it goes back to normal, and they start—the boards start thinking about their bottom line again, right? They start looking at shareholder value, they start looking at those metrics, and this is an added expense. So I think you have to change a little bit of the rules, and not in every sector, but in particular sectors that we think are most important.
VAITHEESWARAN: Sure. So there’s a couple of very interesting ideas in there, Shannon: the idea that there is a cost. The market may not bear it in, you know, the kind of competition that has prevailed in the marketplace, but that governments could selectively choose to either mandate it or pay for it in some sectors like health care where clearly we’ve seen concerns about supply or liability. So that’s an idea. And Francisco’s notion about risk has become seen not as a midlevel staffing function where you’re sourcing stuff cheaply, but rather central to the risk of a company. And it becomes material to disclosures, for example, that the CEO and CFO have to sign off on.
We may be able to find some inspiration from the financial sector, where, you know, tests of risk of financial institutions are made and they’re required to set aside capital, for example, by regulation, and therefore there’s no competitive disadvantage. So it’s an interesting idea perhaps we can discuss further.
But Chris, I wanted to give you a chance to weigh in on the question of resiliency.
ROGERS: Yeah, sure. So I think it’s—whilst this is a terrible, tragic event, it’s actually come at a good time because corporate managements are thinking about resilience more broadly, whether that’s in sense of climate exposure, diversity of employment in all its different ways, actually thinking beyond the is EPS going up or down by 5 percent; so this kind of broader thinking.
And remember, the job of a senior management is to maximize the economic value added. And you can do that by boosting returns. You can also do it by cutting the required return. And that’s reducing your risk. So there is a balance there.
I think what’s important as well is many firms are now putting data at the center of decision-making rather than it being the kind of—the purview of the finance officer or the finance merchandising department. You know, one of the things we produce is a supply-chain graph. So it’s a mathematical representation of all the buyers and suppliers that you deal with as a network.
And you can go into those now and say—and we’ve had companies say, look, we need to understand where our risk exposures are, where we think we’ve got a diversity of suppliers. But they’re all relying on one top-level supplier, and that one’s in this place in Japan that’s been hit by a tsunami or this place in China that’s been hit by a disease.
So I think we are seeing companies focus on that a lot more, interested in putting the data around the center of their decision-making. I think also companies have started to think about this because of the trade war. We’ve had a number of companies in their earnings calls say, hey, we were already thinking about our geographic diversity of our supply chains because we didn’t want to be in just China. There’s a lot of talk about should we be China plus one or China plus two. It doesn’t matter. The fact of being just one, whether it was China or Japan or Taiwan or the U.K., you know, there’s always some sort of risk to measure; so that need for diversity.
Coming back to that supply-chain graph I mentioned earlier, one thing we have seen in a number of industries is actually supply chains have become shorter and denser. So as we see consolidation among a lot of the capital-goods companies and parts manufacturers, actually you’re starting to see more kind of big with big rather than big with small. And that changes the nature of the discussions around long-term relationships as well.
VAITHEESWARAN: Let’s pursue that a little bit with the time we have remaining for our panel discussion, and that is the idea of the forces other than crisis that have led to changes in supply chains. For example, you talked about shorter and denser supply chains. I think for the better part of a decade we’ve been seeing regionalization of supply chains, in Asia particularly, but also in North America with the automotive sector.
Is it possible that, piggybacking on the existing trend—Chris, we’ll start with you on this since you’ve written about this before—are we seeing a reshoring trend, which has been maybe a dream? You can call it a fantastic dream or a delusion, those who think we can bring back those jobs that went to China exactly as they are back to Michigan. You know, what’s going to happen with reshoring? Are we going to get a renaissance of manufacturing in the U.S. as a result of this?
ROGERS: I think if you do see a renaissance, it’s not necessarily going to be employment-driven. It’s going to be investment-driven. So, you know, we’ve seen—
VAITHEESWARAN: You can bring the factory back but not the jobs. Is that right?
ROGERS: That’s right. I mean, you know, if you look at the new factories that Samsung built, for example, to build washing machines, they employ, I think, around eight hundred people. So there’s some good jobs there. But there’s a lot of automation there as well. It’s not like when the factories left the U.S. to go to Asia; so that kind of sliding scale, I think, between automation and work.
I think also technology is developing very quickly as well that’s going to change the decisions companies are making about the regionalization of their supply chains. So we’ve seen a lot of discussion in the engineering sector about additive manufacturing. There’s not just 3D printing. There’s sintering and a lot of other stuff that happens; but, you know, moving what you can back, because if you’re dealing with a big market like the U.S., like China, like Europe, like India, you would for sure rather have everything local if you can minimize your costs. So, again, it’s that balance between the risk and the return. And technology as a non-crisis factor, I think, has been important.
ROGERS: Certainly, the commentary we’ve seen from companies has supported that.
VAITHEESWARAN: Francisco, what do you think about that argument, that technological innovations in advanced manufacturing could be an important driver to bring back factories?
SÁNCHEZ: I think Chris is absolutely right. If you follow his washing-machine example, that washing-machine factory that used to be in Pennsylvania employed over two thousand people. And you heard Chris say that the Samsung company will bring back approximately eight hundred workers; still a significant number of workers, but a lot smaller.
So, yes, I do believe technology is going to play an important role, and it will be more investment-driven than employee-driven.
I also think we need to be careful. What’s the question, what’s the problem we’re solving? So in the recent days of the last couple of months, we’ve heard some commentators, some leaders, say we’ve got to take production out of China because we don’t want to be beholden to China or any country on critical medical products.
But that really wasn’t what caused a problem for the United States that they were coming from China or from Europe, wherever they were coming from. The problem was we didn’t stockpile enough equipment prior to the crisis. And so I think we need to make sure we define the problem properly and make sure we’re trying a solution that will be helpful in the future.
VAITHEESWARAN: Shannon, what’s your view, before we turn to questions?
O’NEIL: I think we’ve already started to see, I mean, as Chris was saying, the sort of shortening of supply chains or making them more dense. You know, the trade—world trade peaked a decade ago, right. Before COVID, we started to see a decline. So I think we’ve already started to see, because of automation, because of logistics, because in many industries time to market is more important or more important than it used to be versus money. You know, it means you want to be closer to the big markets.
So I think there is this idea, you know, as things get cheaper, as you have 3D printing, as demographics change, as wages go up in certain parts of the world, there is an incentive perhaps to reshore or come near and the like.
But I think there’s a couple of worries here, frankly, as I think about particularly the United States. So one is actually resilience. If we had been making all of the masks in the New York City greater area, boy, would it have been a real big mess—(laughs)—just a few months ago.
So concentrating in one place, say, in the United States will not make us safer in terms of resilience than concentrating in a different country across the world. So I think we need to think a bit about what it means. Resilience may mean spreading out across countries. In case something hits one country and not another, you have a bit of a backup plan.
And the other thing is, especially when I think about U.S. companies, is as we go forward, as you think about how you’re going to grow, how you’re going to increase profits, how you’re going to increase, by that, jobs, you know, 95 percent of the world’s consumers don’t live within the United States. And at least in some countries, the ability to serve those consumers—let’s take China as an example—you have to be in that market and you have to produce in that market, or at least some of your operations have to be in that place.
And I think if we get a world out of COVID that has a much stronger industrial policy, a much more active involvement in the state, those incentives to make things in local markets might increase in particular sectors. So I think before we pull all the way back or think about that’s the way to go, where are we going to sell? Where are we going to sell U.S. products and the things that go along with and the jobs that they support in the future? It’s not just going to be to Americans. I would hate to lose some of that as we go forward as we think about this, the benefits of reshoring. There’s also costs.
VAITHEESWARAN: Right. So be careful what you ask for, I think, is the lesson from Shannon.
I think we have a question waiting in the queue. We’re just getting ready to open up the line to our participants. I just wanted to remind everyone that we are on the record. And so perhaps I can ask the operator to go to the first question.
STAFF: (Gives queuing instructions.)
We will now take our first question from Moushumi Khan.
Q: Hi. My name is Moushumi Khan. I’m joining you from Dhaka, Bangladesh. I’m a transplanted Michigander working here. In the last—as of last month, I was the CEO of a North American brand initiative—safety-monitoring initiative looking (at ?) source in the RMG sector.
Now, my question—first of all, I very much enjoyed the panel. Thank you, Vijay; excellent moderation. My question is, what is the balance for countries like Bangladesh, where RMG sector has really been at the cusp of moving it into middle-income country? And now you see these shocks. What is the balance in terms of economy, public health?
And then, secondly, just to share with you, I just learned a couple of days ago that one of the largest garment manufacturers here in Bangladesh has opened a mask factory in Detroit. And so my question, just to reiterate, is what is the impact on countries like Bangladesh that are so dependent on supply in the global supply chain and kind of the balance between public health and economy and perhaps onshoring, what would be the impact? Thank you.
VAITHEESWARAN: Thank you, Moushumi.
Chris, do you want—I see you’re nodding vigorously. Would you like to take that question?
ROGERS: I’m just so excited to be here. That’s why I’m nodding. (Laughter.)
No. So, yeah, that’s a great question. Thank you for asking that. Just to explain, by RMG we’re talking about ready-made garments, so apparel, shirts, trousers, and so on where, you know, Bangladesh has seen phenomenal economic growth.
And I think it’s absolutely right, they have to ask that question around how quickly do you reopen the factories to remain—to maintain the health of the economy. It’s an unenviable decision to make. It’s one where, frankly put, some countries have got it horribly wrong.
I think also the example of Bangladesh is interesting in that a lot of the garment manufacturers there have suffered because of late cancellations of orders by some of the Western brands. So, you know, this kind of, you know, you’re keeping open, you are trying to manage your staff’s health, but suddenly that order you were staying open for isn’t there.
And I think some of the forward-looking global multinationals, I should say, that we’ve seen have said actually we’re committing to supporting our supply chain. Adidas’ CEO, for example, is very open about that, saying, look, we may well be building up our inventories but it’s the right thing to do right now.
Now, if we get a recurrence—let’s hope to God that we don’t—we get a recurrence of COVID or something similar on a six-monthly cycle, then it’s going to be up to, you know, the governments of places like Bangladesh to say, actually, how do we—how do we achieve that difficult balance between opening and closing and keeping the economy going.
The starting point now has to be with companies saying, how do we operate in the future in a world where we have to have social distancing. You know, that—or physical distancing, I should say, because it’s in the workplace, not in society.
But, you know, the companies have got to work out how they’re going to run their systems on that basis and, you know, as Shannon said earlier, that’s not easy to do and it’s expensive to do.
So I think it’s incumbent on the multinationals to help their suppliers in countries like Bangladesh find their way towards that balance between health of the staff and delivery on time and on budget.
VAITHEESWARAN: Shannon, do you want to jump in?
O’NEIL: Let me add, just putting—just stepping back a little bit from the immediacy. And there’s a debate going on in the economics field right now about whether the path that so many other countries took in the past is still viable. And so if you look at Asia, just taking that model where, you know, Japan invested in South Korea and Taiwan and first set up, you know, garments and flip flop factories and the like, and then they climbed up the scale and now they’re making semiconductors, and then they going out and, you know, send factories to Malaysia and the Philippines and China. Now China’s doing it the same.
So they’re sort of—like, this is the path, right. You start with garments and then you sort of move up and you go into more technically sophisticated things, and so Bangladesh is on this path. But there are a lot of economists that are looking out there—Dani Rodrik is one of them, up at Harvard—but saying, you know, we’re seeing a deindustrialization in those emerging markets, and actually that path is not going to be viable, and all the things we’re talking about—the technology and the automation and the sensors and the AI—you’re not going to need that sort of low cost, low to middle skill factories anymore, right.
You’re going to go straight to these sort of high-tech factories with not a lot of jobs, with a lot of skills, and it may leave countries like a Bangladesh or some either further down unable to kind of climb the scale in the past. And I don’t have a—I don’t think we have an answer to this yet, right? Will there still be a space for Bangladesh or for some—Ethiopia and other places to use this path, or will it be shut off? But I do think COVID and some of the decisions that are going to be made may accelerate some of the processes that will make it harder for a country that’s just getting on to this ladder.
VAITHEESWARAN: You make a powerful point, this notion of premature deindustrialization, if it is, in fact, borne out by the facts on the ground, would be devastating to the prospects for a number of emerging economies. If we just look at Africa, which is—much of sub-Saharan Africa is just coming into what should be its demographic dividend—India, of course, is in a similar position—will they be able to capitalize on this as others did before them, the East Asian Tigers and other economies? And so it is an open question. And the role that globalization or deglobalization, if we want to call it that, or the rejigging of supply chains plays in this, so in many ways determined their fates regardless of their own domestic policies. So I think it’s just something very powerful to be mindful of.
We have many more questions I am being informed by the operator. So let’s see if we can get another one. Please go ahead, operator.
STAFF: We will take our next question from Jose Fernandez.
Q: Hi. Good morning, everybody. Can you hear me?
VAITHEESWARAN: Yes. Good morning.
Q: Great. I’d like to go back to something that Francisco mentioned on the security angle in reshoring production. You know, we saw it over a decade ago in the rare earths field when the Chinese retaliated against Japan by withholding rare earths exports that were needed for electronics. And, you know, Francisco is right that you can stockpile to protect yourself against that. But then you run into the redundancy problems that Shannon alluded to.
And so my question is, do you think—on reshoring of critical products do you see any move, do you see any thinking out there, to try and use some of the existing trade agreements that the U.S. has in place to encourage reshoring of certain critical products?
SÁNCHEZ: First of all, hello, Jose. Very good question.
With regard to stockpiling, if I could comment on that first, I don’t think there’s a one-size-fits-all. The stockpiling that I made reference to had to do with medical products that we will probably need in the future and probably need to think not just about reshoring but what do we keep in inventory as a country to be ready for pandemics and the like.
With regard to things like rare earths, I do think that we need to use all the tools that we have available to us, including our existing trade agreements. Unfortunately, some countries, including China, have not always abided by our trade agreements.
So in addition to the trade agreements, we do need to look at other ways to ensure that we have access to critical things like rare earths. I don’t know that that is necessarily reshoring but it, certainly, is making sure that we’ve—that our companies have access, ready access, to alternative supplies if China or some other country decides to use their capacity to supply a particular resource in a way that is in conflict with rules and norms of free trade.
So yes, we should use our free trade agreements and we should not just simply rely on that as the sole tool to make sure we have access to critical resources.
VAITHEESWARAN: So that—thank you, Francisco. I would (append ?) a note of caution. I mean, the idea of stockpiling is attractive when you’re in the midst of a crisis. We all wish we had more ventilators and masks when this crisis broke. But let’s say we do build a strategic ventilator stockpile and the next pandemic then is not so aggressive on the pulmonary system but it affects a different part of the body (from being ?) stockpiled.
There are always going to be unknowns about the future, so it makes it difficult to stock the right thing. And so I would inject a note of caution. We can do (it with petroleum ?) because, basically, oil is a fungible global product, right? There is a Strategic Petroleum Reserve. It has played a role during crises. But that’s a peculiar market compared to most products.
I wonder if, very briefly, Chris or Shannon wanted to weigh in or go on to the next question. OK. I’ll ask the operator to go to the next question, please.
STAFF: We will take our next question from Dana Peterson.
Q: Yes. Hi. My name is Dana Peterson. I am an economist at Citigroup.
I was wondering—thank you, again, for this panel. I was wondering if we could talk a little bit about what types of industrial policies we might see, particularly from the U.S., with regards to supply chain management. Thank you.
VAITHEESWARAN: Terrific. Thank you for bringing us to what I promised we would talk about, and I’ll turn to Shannon first since you had brought it up first on our call.
O’NEIL: Right. Well, the ones that we’re hearing about, right, are things like “buy American” policies. We’re hearing about, you know—well, in the short term in the breach we heard about, you know, forcing factories to make certain things, using executive orders to do so.
We are starting to hear about others. You know, keeping exports from going outside or not letting—you know, not selling or not giving or allowing protective equipment to go to Canada or other places. We’ve sort of seen that kind of stuff.
You know, I think what we could see, also having kind of conversations about stockpiling, right. Do we stockpile different things? I mean, Jose or other comments here are important, but what are we—or, Vijay, what you were saying, you know, can we stockpile ventilators, but the next time we need something very different. How do we think about that? But expanding beyond, you know, we have a strategic petroleum reserve. Do we need some other strategic sectors? And how do we pick those?
What I would actually like us to be talking about in industrial policy—if I was thinking about how do you prepare and make the U.S. more resilient and, frankly, a more attractive place to locate, is how do we use now—a time of negligible interest rates and the like—how do we use it to strengthen the U.S. as a place? So let’s invest in infrastructure. That’s an industrial policy, right? Like, how do we set the right infrastructure? Let’s invest in 5G or 6G networks. Let’s invest in basic science. Let’s invest in human capital alongside financial capital.
That would be an industrial policy too, both in sort of educational systems that the public system goes into, but what about incentives for a company to invest in human capital themselves? They have it for financial capital, but could you give them incentives. Those would all be industrial policies that I think would be beneficial for the United States and U.S. companies, and not have—I would think, depending on how they’re set up—have as many draw backs in terms of the picking of winners and losers, and rent seeking, and these other kinds of things that you worry about when you start providing contracts that pay above market rates, or that kind of thing, right? How do you make the whole system more resilient, and then allow the markets to function a bit better than we’ve seen them in the last few months?
VAITHEESWARAN: So really a perspective of how government can provide the conditions for the market to flourish more effectively rather than picking specific winners?
O’NEIL: And that, too, is industrial policy in many ways.
VAITHEESWARAN: Right. Is there—Francisco and Chris, do you have different view? Do either of you want to make the case for a different kind of industrial policy? (Inaudible)—for example, has a very different view, China has a very different view. Do either of you want to offer a lesson from either of those places, or are you comfortable with Shannon’s description?
SÁNCHEZ: I think I’m in violent agreement with Shannon. (Laughter.) What she’s saying. Just to borrow on a comment that Shannon made earlier, if we had mass production entirely in the state of New York, the United States would have a problem, a serious problem. If you look back to 1917 and the Spanish flu, the first known case took place in the United States. And we ultimately had almost seven hundred thousand people die in the U.S. If we—if we try to bring everything that we think is critical back to the United States, and essentially in many ways contribute to limiting the supply, I think it could backfire and hurt us. So I do believe that the ideas that Shannon presented of making this a more attractive place for investment without necessarily trying to penalize other countries that for one reason or another we have concerns about is a far more forward leaning and thoughtful approach to dealing with these challenges.
VAITHEESWARAN: Thank you. I’m told there are thirteen questions in queue. So let’s see if we can accelerate or go to speed round. Let’s have the next question, operator.
STAFF: We will take our next question from Fred Hochberg.
Q: Hi, there. This is a great conversation.
And the question really briefly is: Government is racing towards mandating reshoring of certain supply chains. And I don’t think it’s just in health care. So the question is there’s a political issue that’s beyond any economic issue. And I think that the politics will take us there. What are we going to do to influence that so that we come up with actually a less-bad policy—it’s not going to be a good policy, just less bad—on reassuring? And particularly on the health care, which I feel like the Senate and the House are moving at breakneck speed, which means it probably won’t be that far.
VAITHEESWARAN: OK. So who wants to take that? We heard from Francisco and Shannon. Maybe Chris, do you want to jump in on how—what a less-bad policy would look like?
ROGERS: Yeah, sure. So I think the first point to make, and it’s a little bit an answer to the previous question, but it ties into this, what China and India did was sit down and have an industrial policy on a cohesive basis. Where are we? Where do we want to get to? How are we going to get there? What are the instruments that go with it? And the U.S. hasn’t done that. You know, to a certain extent the policies that are being used, the Defense Procurement Act, is a way to temporarily fix supply chains. Great. Tariffs is way of making stuff happen. It’s the 1930s tool trying to solve a 1970s problem in the 2010s. You know, there isn’t a kind of a holistic view. And I think going into the elections we’ve got a great opportunity for both sides to say: This is our vision for American industry and this is how we’re going to get there.
I think for the health care sector, you know, rely on innovation. America’s got an incredible innovative health care sector. Provide the—you know, say what you want the outputs to be, and let industry work it out, because I think, you know, time and again there’s a lot that’s wrong with the U.S. health care system, but that’s very much at the how it’s paid for sense rather than the innovation that’s in there. So I think, you know, we’ve talked about picking winners and losers. Nobody tries to pick losers. Let’s remember that. It’s misguided attempts to pick winners that are the issue. But I think, you know, set some outcomes and let the market solve it. This a long analogy to use. I’ll use it anyway. Europe wants to deal with climate change. It’s using carbon taxes. It’s not using dirigiste policies to solve the problem. Let the market work it out.
VAITHEESWARAN: OK. So we’re not going to find any advocates of strong-handed industrial policy on this panel, I’m afraid. Hope we don’t disappoint our participants. Let’s see if we can take another question.
STAFF: We’ll take our next question from Mimi Haas. Ms. Haas, please accept the unmute now button.
We’ll move on and take our next question from James McGregor.
Q: Hello, Vijay. Good to see you.
VAITHEESWARAN: You too. Not to see you, but to hear you.
Q: This is—my question is about national security. We had the Department of Defense a few years ago did a very in-depth study of its supply chain. And so much of its supply chain was coming out of China, it kept the number classified, I’m told. And now we have this direct product rule, and Huawei, and TSMC, and whole chip battle. And the U.S. and China are in more of a tech war than a trade war right now. And the contest for technology, what is that going to do to supply chains, and how do we cope with that?
VAITHEESWARAN: Thank you, Jim. Who wants to pick up the security angle?
ROGERS: I can take a little part of it. So I think it’s a mistake to think about it just being the manufacturing of technology. TSMC has said they’re going to open a semis fab in the U.S. You know, that can be done. Intel are close to doing similar. So where you make it isn’t necessarily the issue. Clearly it is at time of war but putting aside the extremis. It’s actually the access to the intellectual property that’s been the big motivating factor behind the trade war, behind the Section 301 investigation of China’s trade practices. So, you know, it’s a need for an integrated policy on intellectual property protection and how that works, rather than necessarily worrying about the specifics of the supply chain at this stage. Clearly that needs to happen, but that’s easy to mandate for. If it’s going in a U.S. military vehicle, it has to be made in the U.S. That’s the easy part. The difficult part is the intellectual property.
I’m a fiscal supply chain guy, so I’ll let someone else answer the—(inaudible)—question.
VAITHEESWARAN: Can I press on that a little bit? Just saying something has to be made in the U.S., you know, one also has to ask, you know, who are the suppliers to your suppliers, and who supplies them? When I dug through one of those reports on supply chains for the Defense Department, looking into the footnotes, it became pretty clear that there are very gray areas about the supplier of the suppliers, typically that it is made American, what percentage components are either made in America or in friendly countries? It becomes very, very slippery very quickly, because I would posit if there were an immediate ban on parts made in China or nearby countries in the deployments chain, you would have virtually no—none, other than very high-end defense equipment, today.
And so if you make a transition with a lot more transparency and visibility through the supply chain than is the norm these days. And a lot of companies in my experience, having built a number of multinationals, they don’t want that transparency because once you know who supplies the supplier to your supplier, you can be held accountable. What if they run sweatshops, for example? The activists come after you. If it turns out they source from China, then it becomes a problem for you, and so on. So many companies, in my experience, willfully look away from knowing too much. Although we’ll see if that changes.
Let’s get back to another question since we have so many people waiting.
STAFF: We’ll take our next question from Miles Kahler.
Q: Yes. Thank you very much. I just wanted to ask the panel—Miles Kahler, Council on Foreign Relations, American University
I just wanted to ask the panel whether there’s any evidence so far that countries that have dealt with the pandemic well, that have demonstrated their resilience, are being rewarded by investors, or do you think they will be rewarded? We know that some countries—like South Korea, Taiwan, New Zealand—have done extremely well. Others have—Brazil—have done very poorly. Will that demonstration of collective resilience serve as a reward going forward to countries in terms of investment?
VAITHEESWARAN: Interesting question. It really is one that goes beyond supply chains. But somebody have a view from my panelists, want to give a quick response?
SÁNCHEZ: Just a comment. I have not seen evidence of it, but as companies take a more robust look at risk mitigation, it would seem to me that that would be something that would be worthwhile looking at. So while I haven’t seen anything for this date, I would not be surprised that we would see companies do that in the future.
O’NEIL: I would just say two quick things.
One is I do think you see a correlation with those have handled it well also having kind of robust systems—public systems, you know, ability to administrate, states that work. And so I think that is attractive in and of itself.
The other thing I have seen just specifically on this is I have seen a lot more interest in particularly Vietnam. And as far as I know, as of today Vietnam has no deaths and a very limited number of cases. That might have changed in the last couple of days, but I think you are seeing there—now, that was a place that had a lot of interest before COVID, as we all know, but I think you’re starting to see—my impression is, at least a few anecdotal companies, starting to see more interest there because they’ve handled this well.
VAITHEESWARAN: Great. Let’s go back to another question.
STAFF: We will take our next question from Louise Shelley.
Q: Thank you. I’m professor at George Mason University and director of the Terrorism, Transnational Crime, and Corruption Center.
We’ve talked all about licit supply chains, but illicit supply chains have also been disrupted during the pandemic, such as fentanyl from China. And we’ve had a lot of insertion of counterfeits, particularly of PPE, into the supply chain. What do you see as characteristic of this? And how much do you think this is an omen for the future?
VAITHEESWARAN: Which of you wants to jump on that, on the question? Illicit supply chains and how—a question I might add to that: Will things bounce back to the way they were after a couple of years; in other words, this is just temporary? Chris?
ROGERS: Yeah, I think—yeah, I can take a little bit of that. So, you know, clearly, one—as I mentioned earlier, there’s a lot more kind of data-driven decision-making being taken, not just by companies but by governments, and using the data that’s out there to look for patterns that are abnormal. You know, whether it’s an investor trying to profit from an abnormal behavior or a government trying to spot illicit behavior, then there’s a lot more data out there.
I think one of the things companies can do to deal with this—which will be a good we’ve learnt this now, let’s use it for the future—is to invest in supply chain visibility. You know, we can get very excited about blockchain-driven supply chain tracking and so on, but it is very important, particularly for goods where quality matters like supply chains for PPE, as you mentioned. You know, there could, should, and I think will be investment in resilience in those supply chains, in ensuring that you know where it’s all come from.
Have we seen actual evidence of that? That’s not something we’ve seen in data, but then the bad guys don’t wear masks so, you know, it’s difficult—well, they hopefully do wear masks, but they don’t—(laughs)—they don’t—they don’t hide in that way. So, you know, I think it’s a good time for companies to be looking to invest in their supply chain visibility.
VAITHEESWARAN: It’s so nice to know that Chris cares about the health and welfare of the bad guys.
VAITHEESWARAN: Just a note on blockchain, though it’s generally overhyped, we have seen pilots involving Walmart and its competitors using blockchain in the meat and food supply chain, for example, to ensure integrity. Alibaba has tried it with milk in Asia.
Shannon, I see you want to get in. Do you want to make a quick comment?
O’NEIL: Yeah, let me just say one thing on illicit supply chains. So you have seen these break down—exactly, Louise, what you’re saying—so in some ways that makes these transnational criminal organizations more vulnerable, right? They’re losing their revenue streams. Those are being disrupted. It’s harder to pay people off. It’s a time when security forces could actually perhaps dent these organizations.
The other challenge, though, is, like many entrepreneurs, these groups are very—they’re very entrepreneurial. They’re very flexible. And so in some cases—particularly, for instance, in Mexico—the fentanyl is not coming in to the Port of Samazaro (ph) and other places, they’re having their other retail drug and other things disrupted, so they’re turning more to other businesses that they can control—extortion, kidnapping, other things, right? They’re going to look for other revenue streams that are less dependent on international global flows.
So I think, you know, as you think about governments trying to deal with the fallout of this and the illicit markets, one is it’s a time to take advantage of these vulnerabilities, but also watch out where they might move their operations because it’s hard to imagine they’re just going to now decide to go back to school and, you know, get a job in the real economy, the formal economy.
VAITHEESWARAN: So resilience is a two-way street, works for criminals, too, it seems.
Let’s get another question, please, operator.
STAFF: We’ll take our next question from Tim Ferguson.
Q: Thank you. It’s Tim Ferguson, business journalist.
Back to the licit economy in Mexico. I’ll point my question to Shannon. You made reference early on to some of the factory disruptions recently. Looking beyond COVID, is there—can we determine at this point whether the new NAFTA and the political environment in Mexico are going to move the needle in terms of the regionalization prospects? Thank you.
O’NEIL: So one of the biggest things over the last twenty-five years of NAFTA has been regionalization, right, and particularly of supply chains. We talk about autos, but there’s aerospace, electronics, medical equipment, others where you see these ties, and that’s been really important. And I think over the last two years, with the renegotiate of NAFTA, there was a worry about whether those would continue and what the ground rules were going to be. So now we have a new USMCA that’s going to come into force in less than a month, on July 1. A lot of those rules will be, you know, reaffirmed. They’re there. There are some new chapters that are helpful for things that didn’t exist when the initial NAFTA was happening, sort of digital property rights and that kind of stuff. But there are also some limitations to the new NAFTA, and particularly for if you are not in particular industries like the energy industry or telecoms, you’re a manufacturer, you are not going to have sort of the international appeals and arbitration that you used to have under the old NAFTA, at least U.S. companies won’t. If you’re a European company you will because you have a different trade agreement with Mexico that allows you that, but not if you are a U.S. company. So there are some—I think a little bit of a loosening of the protections and some of the incentives to come together.
Now, that said, I think—so the new NAFTA is not—it’s still there, and I think it helps lay the ground rules and keeps things—keeps things and regions together, but not as—not as strongly as before. But that’s happening in this new world of COVID and the pullback of other supply chains and these other disruptions, and so I think there is sort of a different side there where Mexico and Canada being closer, being people that we’ve worked with for a long time—there are some cultural and other reasons, there’s intellectual property protections, there’s not as much forced technology transfer or active industrial policies that you see in China or other places—I think it could be an attractive place, frankly, as we go forward because of what the rest of the world is doing or other places where U.S. companies might have gone. Changes there make Mexico and Canada attractive when you’re trying to diversify a bit and bring some resilience by having kind of multi-country, economies of scale, and bring in other diverse factors into your manufacturing process.
VAITHEESWARAN: We have time for one last quick question if the answer is also short. Operator?
STAFF: We will take our next question from Lyric Hughes Hale.
Q: Yes, thank you. Really enjoyed the discussion.
I’d like to look at this from the point of view of Chinese policy. Do you think that—since China has the most to lose, do you foresee that they’re going to change policy, they’re going to incentivize people to stay or to come to China? Do you think they’ll wait till the election to figure out which way the wind is blowing before doing that, and allow entropy to sort of—(laughs)—rule corporate decisions until then? Thank you.
VAITHEESWARAN: On China, who has a view?
SÁNCHEZ: I’ll start. The Chinese have a long history of taking a very long, long view of policy and change, and so I don’t know that they’ll react to this particular pandemic. And one of my colleagues on this panel mentioned earlier that this is really a technology war rather than a trade war, and I think the implications of that are that they’re not going to make any quick, dramatic shifts. They have a plan, and I would say they’re largely going to stick to that plan.
VAITHEESWARAN: Having spent six years in China as our business editor there, let me offer a quick final thought before we close. And that is China has gained more from the global trading order than just about any other country in the last twenty-five, thirty years, and so I think we’re likely to see them try to retain as much of that order as possible. It’s unlikely that they’re going to go willingly to a borders-up world, a reshoring kind of world, because they would lose dramatically. They’re ill-suited to that world as a country of both exporters, but also as intermediate suppliers, and as a huge and growing market tightly integrated with Southeast Asia and other parts of the world—in fact, much more trading with Europe than with the U.S. European investment, European trade is much stronger in China than our American flows. And so I think China will largely continue on its current path despite its friction with the U.S., wherever that hits.
I’m afraid I took the chairman’s prerogative to have the last word so we are out of time. Please remember that this was an on-the-record meeting. There will be an audio and video recording of this at the Council website. And mentally, if silently, please thank my fantastic speakers for what has been a truly inspiring session. Thank you all very much and goodbye.