What's Causing the Supply Chain Shortages?

Published by North Shore Components on

In its new Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth” report, the Biden Administration has pledged to help “unkink” the supply chain bottlenecks that started in 2020 and then gained significant momentum in 2021. As part of the president’s 100-day administration review, the report discussed how the COVID-19 pandemic and resulting economic dislocation revealed long-standing vulnerabilities in the nation’s supply chains.

The pandemic’s drastic impacts on demand patterns for a range of medical products including essential medicines wreaked havoc on the U.S. healthcare system, the report states. “As the world shifted to work and learn from home,” it continues, “it created a global semiconductor chip shortage impacting automotive, industrial, and communications products, among others.”

In February, extreme weather events—exacerbated by climate change—contributed to the shortages. “In recent months the strong U.S. economic rebound and shifting demand patterns have strained supply chains in other key products, such as lumber,” the report states, “and increased strain on U.S. transportation and shipping networks.”

Also in February, President Biden signed the “America’s Supply Chains” executive order, effectively directing the U.S. government to undertake a comprehensive review of critical, national supply chains to identify risks, address vulnerabilities and develop a strategy to promote resilience.

What’s Causing the Supply Chain Disruption?

In the report, the Biden Administration breaks its priorities down into four segments: semiconductor manufacturing and advanced packaging; large-capacity batteries; critical minerals and materials; and pharmaceuticals. It says the key drivers of supply chain vulnerability within these segments include:

  1. Insufficient U.S. manufacturing capacity. The shortages may have seemed like they cropped up overnight, but the reality is that they’ve been a long time in the making. U.S. manufacturing capabilities have declined over the last several decades. The first decade of the century was particularly devastating for U.S. manufacturing, with the loss of one-third of manufacturing jobs between 2000 and 2010. The report says some of this decline can be attributed to competition from low-wage nations—economists have estimated that about 25% of the job losses can be attributed to the rise of China, particularly following its entrance into the World Trade Organization. However, the U.S. has also seen productivity growth stagnate internally and compared to economic peers, for example, trailing Germany on average and in most industries.
  2. Misaligned incentives and short-termism in private markets. According to the Biden Administration, current U.S. market structures fail to reward firms for investing in quality, sustainability or long-term productivity. A lower-wage and lower-skilled workforce may increase a firm’s quarterly earnings, it adds, but research suggests that “high-road’ strategies can improve wages without harming profits. Other kinds of investments—in capabilities for continuous improvement or in reducing lead time—incur an upfront cost, but lead to improved performance in both normal and crisis periods.
  3. Industrial policies adopted by other nations. As U.S. investment in the domestic industrial base has declined, the report notes, “our allies, partners, and competitors have adopted strategic programs to advance their own domestic competitiveness.” For example, Taiwan—the global leader in production of the most advanced semiconductor chips—provides subsidies for fabrication facilities including 50% for land costs, 45% for construction and facilities, 25% for semiconductor, plus research and development (R&D) investments and other incentives. In addition, South Korea’s and Singapore’s semiconductor subsidies reduce the cost of facility ownership by 25-30%.
  4. Geographic concentration in global sourcing. To be resilient, supply chain must be globalized. However, the search for low-cost production, combined with the effective industrial policy of key nations, has led to geographic concentrations of key supply chains in a few nations, increasing vulnerabilities for U.S. and global producers, the report states. “Such concentration leaves companies vulnerable to disruption, whether caused by a natural disaster, a geopolitical event or indeed, a global pandemic,” it adds.
  5. Limited international coordination. “Prior to the COVID-19 pandemic, the U.S. government under-invested in international diplomatic efforts to develop collective approaches to supply chain security,” the report states. “While expanded domestic production of critical goods must be part of the solution to America’s supply chain vulnerabilities, the U.S. cannot manufacture all needed products at home.”

A Concentrated Effort

Admitting that the currently level of supply chain disruption can’t be fixed overnight, the Biden Administration says it will take a concerted effort over the short-, medium- and long-term to adequately address these issues and put U.S. supply chains on stronger footing. Among its key recommendations for fixing the problem include rebuilding U.S. production and innovation capabilities; enacting new federal legislation that will strengthen critical supply chains and rebuild the nation’s industrial base; and establishing a new Supply Chain Resilience Program.

“We recommend that Congress enact the proposed Supply Chain Resilience Program at the Department of Commerce, to monitor, analyze, and forecast supply chain vulnerabilities and partner with industry, labor, and other stakeholders to strengthen resilience,” the report’s authors write, “[and that it] back this program with $50 billion in funding [to] give the federal government the tools necessary to make transformative investments in strengthening U.S. supply chains across a range of critical products.”

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