Supply Chain and the Next Normal
file under #disruption
The pandemic has shifted buying patterns and put a massive strain on the supply chain. Throw in the global worker shortage and deliveries for raw materials to make products — not to mention see them delivered — are even further behind. Delays cost money, and that inflated price is pinching consumers in America..
Consider the case of one notable company: Nike. Most of Nike’s shoes are produced in Vietnam but when the country had to shut down due to the pandemic, Nike’s shipments reportedly went from arriving in the US every 40 days to 80 days. And on the consumer side, as with most other items, shoes now cost more. Nike’s experience is not an anomaly. Most companies are suffering the effects of supply chain shortages and delays.
As to costs, a key question is how much, if any, of this inflation is artificially induced?
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According to a survey by digital.com “56% of retail businesses say inflation has given them the ability to raise prices beyond what’s required to offset higher costs.” That means some of these companies could absorb the cost caused by supply chain disruptions but choose to not only pass it on to the consumer but also increase their profit margin. These charts depict the data:
Long before the pandemic, U.S. shipping ports had been looking to automation as a way to keep up with the shifting buying habits of consumers. The progressive shift to automation is a move that is sure to upset unions, with the potential for walkouts, strikes and further setbacks in the future. The International Longshoremen's Association says “replacing manually operated yard stacking cranes, yard tractors, and other cargo-handling equipment with driverless machines, is the most contentious issue facing longshore unions on the West and East coasts of North America. It will almost certainly be an issue again next spring when the ILWU and PMA launch negotiations to replace the current contract that expires on July 1, 2022.” A disinformation campaign could turn this “contentious issue” into a flash point.
The supply chain strains have also exposed other weaknesses that could be exploited both economically and logistically. Consider semiconductors which are woven into the fiber of almost every technological advancement today and likely will remain instrumental to growth for the foreseeable future. With the shift to remote work and education, the Semiconductor Industry Association (SIA) says they achieved great success as the world relied more than ever on technology. But the “unanticipated demand” along with “fluctuations in chip demand for other products such as cars, triggered a rippling supply-demand imbalance felt across the world.” Meantime, global supply and geopolitical issues are becoming more apparent and for good reason: “75% of the world’s chip manufacturing capacity is concentrated in East Asia, with China projected to command the largest share of global production by 2030, due to its government’s massive investments in this sector.”
In the United States, the CHIP and Science Act of 2022 seeks to address some of these issues by providing $52.7 Billion for research, development and fabrication of semiconductors in the U.S. As a result of this legislation the White House says the company Micron announced “a $40 billion investment in memory chip manufacturing, critical for computers and electronic devices, which will create up to 40,000 new jobs in construction and manufacturing. This investment alone will bring the U.S. market share of memory chip production from less than 2 percent to up to 10 percent over the next decade.”
Additionally Qualcomm and GlobalFoundries announced a new partnership that includes “$4.2 billion to manufacture chips in an expansion of GlobalFoundries’ upstate New York facility.” This aims to steer the U.S. in the right direction in terms of driving STEM innovation. At present, the country is many years away from self-reliance in semiconductors, having held 37% of the global semiconductor manufacturing capacity in 1990. Now, according to SIA, U.S. manufacturers account for roughly 12% of the global semiconductor market. In short, as global sales and reliance have gone up over the years, the ability of US-based manufacturers to produce semiconductors receded.
Another potential weakness is the dramatic drop-off in ship tracking data from China. The number of Automatic Identification System (AIS) signals from ships in Chinese waters plummeted “85% in under a month” reports Bloomberg. The news outlet says the change in AIS’ ability to track Chinese vessels occurred after November 1, 2021 when China’s Personal Information Protection Law came into effect. “The new rules regulate how domestic and foreign organizations collect and export the country's data,” reports Bloomberg. “Although there are no specific guidelines on shipping data in the regulations, some domestic providers in China have stopped giving information to foreign companies as a direct consequence of the new rules,” reports Reuters.
On the jobs front, U.S. employment in manufacturing has been declining for decades. The Organisation for Economic Co-operation and Development (OECD) reports that manufacturing jobs had been “relatively stable at 17 million since 1965, (but then) declined by one third in that decade, falling by 5.8 million to below 12 million in 2010 (returning to just 12.3 million in 2016).” OECD argues automation wasn’t the culprit but rather problems “with capital investment, output, productivity, and trade deficits.” Notably, the OECD also reports that “the median income of men without a secondary school diploma fell by 20% between 1990 and 2013; for men with secondary school diplomas or some college, median income fell by 13%. The decline of US manufacturing–traditionally a route to the middle class–hit these groups particularly hard.”
All of the previously mentioned underlying causes and their impacts were exacerbated by the 2007 recession and then again by the pandemic, affecting consumers wallets and pinching the middle class. A shrinking middle class is apt to result in larger economic disparities. A greater gap between economic levels along with a polarized political landscape, racial tensions, COVID-19 pandemic — and a presidential election that’s but two years away — are all vulnerabilities that foreign adversaries are apt to exploit.