Four years ago, Peter Navarro, then economic adviser to US president Donald Trump, summoned me to the White House to discuss a report he had initiated with the un-catchy title “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States”.
My initial (misguided) reaction was to joke that it “seemed very retro”. Navarro was, in essence, arguing that government and companies had to realise the risks of using non-American supply chains — and rapidly co-ordinate to create domestic alternatives. But this type of government meddling — with its anti-globalisation stance — seemed almost quaint then, given the post-cold war ethos of Wall Street capitalism.
No longer. Last week Larry Fink, head of BlackRock, warned that “the Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades”. This week the White House invoked Korean war-era powers to boost supplies of battery minerals such as lithium, nickel and cobalt.
Meanwhile Intel, the US chip group, is touting plans to boost production in Germany and Ohio. Whether or not you espouse Navarro’s mercantilist creed (and I do not), these ideas are now resurfacing in the Biden administration, with a vengeance.
So, what does this mean for investors? Judging from recent conversations with C-suite executives, there are at least three practical implications.
The first is that a radical “what if” mindset is reshaping scenario planning around supply chains. No, this does not mean that companies are reshoring all production; as the economic historian Adam Tooze argues, Fink’s prediction about the end of globalisation still seems a bit overblown. But boards are now envisaging once-unimaginable tail risks and repositioning.
Consider chips. US executives have theoretically known for years that modern industry is highly — dangerously — dependent on Taiwan; the Taiwan Semiconductor Manufacturing Company has a 53 per cent share in the global semi conductor foundry market and 92 per cent for advanced chips. Until recently, though, few companies actively created contingency plans for a scenario in which, for example, Taiwan’s supply could collapse because of a Chinese invasion.
“But now we are actively thinking about this [Taiwan risk],” the chief financial officer of one gigantic American company tells me. That is partly because pandemic disruptions highlighted fragilities when chip shortages forced some of the US and European auto sector to halt production.
Meanwhile the Russian invasion has made it easier to visualise an assault on Taiwan. This seems unlikely in the short term, since Putin’s problems in Ukraine have given Beijing a salutary lesson about the risks of military attacks. Yet it remains a medium-term risk and China will hone its planning to avoid Russia’s mistakes, says David Sacks of the Council for Foreign Relations. He notes that “despite the world’s reliance on Taiwan’s semiconductors, there isn’t any realistic plan or option to diversify chip sourcing yet”.
This is prompting a second shift: stockpiling. A decade ago, words like “efficiency” and “streamlining” were all the rage. Now there is a newfound realisation that resilience requires redundancies, ie slack and bigger inventories. It is not easy for companies to achieve this, given strains in warehousing and supplies. US commerce department data suggests companies only have five days’ worth of chip inventories right now, down from 40 in 2019. But the stockpiling aspiration is there, hence the fact that inventory increases accounted for 4.9 percentage points of American growth at the end of last year.
The third shift is that companies are now looking at supply chains with lateral, rather than tunnel, vision. A decade ago, procurement managers typically developed their strategies based on the principles of individual rational self-interest, profit maximisation and efficiency. But the 2008 financial crisis showed that what seems “rational” for an individual can be irrational for a group; when investors all tried to reduce their risks by hedging with AIG, that created a single point of failure — and more risk. The same lesson is being learnt now for supply chains: if every company uses the same transport nodes in search of “efficiency”, this creates new bottlenecks. Group dynamics matter.
That has already prompted government interventions in the realm of chips: the White House has created an “Early Alert System” to “[bring] industry together and encourage increased transparency throughout the supply chain.” In truth, this does not work particularly well (yet). But the messaging is clear: supply chain data is no longer just a matter driven by proprietary interests. And the initiative is likely to spread beyond chips or metals; Navarro’s 2018 report detailed numerous high and low tech items that face supply chain fragilities, ranging from carbon fibres to chaff.
There are, inevitably, big downsides to these three shifts: even a modest return to a world of corporate reshoring, redundancies and government meddling will be inflationary, as Fink notes. That is also very retro. But the main point now is that events in Ukraine have shown that it is even more costly to ignore “what if” scenarios. The C-suite executives of America will not forget this again soon; nor should investors.
gillian.tett@ft.com
Source: Economy - ft.com
