On February 24, US president Joe Biden issued an executive order to strengthen the resilience of America’s supply chains in vital sectors thrown into turmoil by the Covid-19 pandemic. “The US needs resilient, diverse and secure supply chains to ensure our common economic prosperity and national security,” he proclaimed.
Within days, an irony of fate added punch to this view, as the giant container ship Ever Given, wedged on a Suez Canal sandbank and blocking all cargo traffic, added symbolic and literal proof of how easily global supply chains can be thrown into chaos, before it was refloated a week later.
Mr Biden’s announcement was greeted with cautious optimism and some scepticism by industry groups. If the resulting plan succeeds, it is also likely to encourage shifts in both inbound and outbound foreign investment.
The executive order has two components. First, it launches a 100-day risk and policy review of supply chains in four key industries: semiconductor and advanced packaging manufacturing; electric vehicle batteries; strategic raw materials; and pharmaceuticals and active pharmaceutical ingredients (APIs).
Simultaneously, there will be a one-year policy review of supply chains in other important sectors, including defence, public health and biological preparedness, information and communications technology, energy, transportation and agriculture.
The reviews must identify the US manufacturing capacities needed for national and economic security and recommend ways to address them, including finding foreign allies to work with. This includes gaps in domestic capacity and workforce, points of failure or limited resilience, research and development needs, and climate risks. They can also propose needed executive, legislative, regulatory or policy changes.
Federal officials stated that the government will use “a mix of incentives” to encourage production in the US, including using its procurement authority. Solutions will be tailored to the needs of each industry, and there will be consultation with stakeholders like business and labour, as well as a new commitment to public–private partnerships.
Hard pill to swallow
One potential driver is the fact that the federal government has floated ideas for legislation to incentivise companies that onshore and penalise companies that offshore, notes Derron R. Stark, managing director for transaction strategy with EY Parthenon in New Jersey and an expert on pharmaceuticals. These include reduced tax benefits for US companies that offshore or subsidies to promote onshoring.
Mr Stark also thinks the Biden order fails to take into account the complexity of pharmaceutical supply chains. He cites statistics showing 85% of APIs and 65% of finished dosages are sourced from Asia — particularly China and India. “Even if you bring API manufacturing back to the US, you would still depend on [Asia] for raw materials and other formulation components,” he notes.
Furthermore, he says essential medicines tend to be generics with low profit margins that drive production out of the US, and are unlikely to be onshored without subsidies.
Mr Stark also cites the high cost and time requirements to build new drug manufacturing facilities, with high hurdles for regulatory approval.
One solution would be for drug companies to find contract manufacturers in the US and avoid the expense of greenfield investment.
In addition, Mr Stark says foreign companies that market and produce non-critical medicines in the U.S. might choose to invest in these existing facilities to add capacity for essential or critical medicines they currently buy or make overseas to avoid penalties and optimize incentives. Manufacturers of new technologies with US patents could also find it attractive to reshore.
Some of the same problems regarding cost and time to market also apply to semiconductor production. The automobile industry — hit by a shortage of both chips and electric batteries — was among 17 leading industry associations to sign a joint letter applauding Mr Biden’s executive order.
The list included the Semiconductor Industry Association. Once the global leader in chip making, the US share today is just 12%. The industry blames this on the substantial subsidies offered to foreign competitors, while the CHIPS for America Act, which grants investment tax credits to US makers, remains unfunded.
Protecting vulnerable supply chains
Robert Handfield, a professor of supply chain management at North Carolina State University, agrees that vulnerabilities in the supply chain need to be addressed. But he is sceptical about whether Mr Biden’s plan will be effective, saying: “Mr Biden’s statement reveals a profound naïveté of supply chains.”
Mr Handfield notes that healthcare vendors buy on the basis of cost, mostly from producers in Asia. He questions who will fund the capital investment and take the risk to produce in the US where labour and capital costs will be higher, and whether government procurement programmes — which are now based on cost — will reimburse them for higher prices.
“I think it would be difficult not to hurt corporate profits without some guarantees,” Mr Handfield comments. “There will have to be incentives like a guaranteed contract or a change in regulations. They would have to break down the cost of capital and determine a fair price based on that determination — and that gets to be very political.”
Mr Handfield thinks that Mr Biden’s strategy will also increase automation, especially related to the Internet of Things. And he believes that creating the right kind of incentives could encourage foreign investment, especially since some multinationals are starting to ask whether they need to be closer to their markets.
In contrast to the view that cost is king, Mr Biden’s emphasis on resilience delights Vedat Verter, supply chain management department chair at Michigan State University. “The main issue is not about company profits — it is supply chain resilience,” Mr Verter says. While acknowledging that profits may fall in the short term, he adds that increasing resiliency enables redundancy, geographic diversification and flexibility in company supply chains, which will help companies manage abnormal events such as the Covid-19 pandemic and survive the next catastrophe.
“When you are so lean and cost-effective you increase your dependence on suppliers because you go to the cheapest place and you make your supply chain more fragile,” Mr Verter says.
While incentives may be needed to encourage resilience, he says they should be specific and targeted, and not leave loopholes in the implementation phase.
Meanwhile, those weighing plans to reshore supply chains await the administration’s recommendations with interest.
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.