Cracks in medical equipment and semiconductor supply chains have materialized during the COVID-19 pandemic, triggering President Joe Biden to call for their review.
Biden signed an executive order Feb. 24 directing federal agencies to conduct a 100-day review of the global supply chains of four product categories: semiconductors, pharmaceuticals and their active ingredients, key minerals and materials like rare earths, and advanced batteries. The EO also includes a yearlong review of supply chains for six sectors of the American economy.
Kamala Raman, a senior director analyst at Gartner, said she's happy to see supply chains elevated beyond the back office. But, as she talks about in this Q&A, she also recommends reviewers proceed with open eyes, realizing that the "the backbone of a functioning economy," as she puts it, is both complex yet delicate.
Biden ordered a 100-day review of the global supply chains of four product categories, including semiconductors, and a year-long review of the supply chains for six specific economic sectors. Is it good to start small like this? What do you foresee as being some sticking points?
Kamala Raman: These are complicated problems to delve into. Like every industry, the deeper you go, the more tangled the networks get.
It's good to start with some critical industries, as opposed to a broad sweep, because you need time and effort to delve deep -- to make any meaningful recommendations and to implement those recommendations can take years. I agree we need to start with a few areas.
However, we're not sure how willing companies are to open up their kimonos, so to speak, and show where they're sourcing what products from, what their cost structures are so that not just the government is aware of this, but also their competition. That piece is hard to figure out exactly how this will be done.
The second piece is, compared to even 20 years ago, global supply chains are much more tightly integrated. We're used to getting all kinds of goods at much lower costs adjusted for inflation than we did 20 years ago. Having any sort of change imposed on companies by a government, let alone markets, that lead to increases in cost or complexity, I'm not sure how that will be borne.
How will change imposed by the government add to global supply chain complexity?
Raman: Take the semiconductor shortage. There are only a small number of companies that have fabs -- the factories where semiconductor chips are made. The more sophisticated the chips, the more expensive [they are] -- we're talking multi-billion [dollar] investments go into setting up new fabs. Consequently, almost every single fab for new technologies is in Asia.
So, how are we going to set up a fab in the U.S.? Will we be able to set something up again for cutting-edge products? Or will we do something for more commodity chips? Will we depend upon the global leaders, typically Taiwanese companies, to do this? Are we just going to say, 'Intel, we're giving you a few billion dollars, go ahead and set up a new fab with the newest technology?' And are they going to work with someone like TSMC [Taiwan Semiconductor Manufacturing Company] to get the technology?
It isn't just a question of companies wanting to do it or the government wanting to do it. It's a question of who has the technology and how easy it will be to find the bits and bobs and widgets needed to make this fab function. Your whole supplier ecosystem, if that's in Asia, does it help to just have the fab alone here? And if that makes the cost of each chip go up five times, is anybody going to buy from that fab?
How will the government get recommendations coming out of these reviews to stick? And, as a secondary question, do you believe the executive order will have an effect on offshoring?
Raman: The executive order doesn't on its own do anything. But companies will expect one or both of the following to happen:
First is some sort of carrot. I mentioned how expensive and complicated it is to bring back some capabilities to the U.S., and maybe those capabilities don't even exist anymore -- they may have been here five or 20 years ago but completely don't exist today. So incentive or carrots could be subsidies or monetary incentives to help make this transition happen. Maybe there is one-time support for companies reshoring these capabilities, or one-time support for companies to set something up from scratch.
The other side, of course, as the tariffs pointed out to us, is the stick. Will there be other regulatory hurdles that are put in place, which push products sold in U.S. to have a larger component or percentage sourced in U.S.?
But it remains to be seen what the 100-day evaluation is going to unearth. Since the Biden administration has committed itself to multilateralism, we can't just go ahead and do things on our own. Because at the end of the day, we make a lot of goods that we sell to many countries around the world -- whether it's heavy engineered goods or agricultural products. We don't want our companies to be stopped from selling goods elsewhere either.
Plus, it's not like we have a lot of spare people lying around without jobs when it comes to skilled labor.
Those are not problems we can solve overnight. These are problems that will take years of investment to rebuild. Whether the government is committed to those kinds of deep and long-term efforts remains to be seen.
The EO was vague about who will conduct these global supply chain reviews. Did you have some advice on who should be included?
Raman: It should involve representatives from industry in order to be effective. Companies respond to market incentives. Whoever is conducting these reviews, if they are supposed to identify what the weak points are and come up with solutions to fix them … you will need industry reps to be part of this conversation.
It's not clear how this will happen or what we can be done in 100 days, or what sorts of actions will follow after the 100 days. Clearly, we have to take into consideration whether companies will be willing to share details of their networks with other competitors in industry. It could be anti-competitive type activity. There are all kinds of elements to take into effect.
Editor's note: This Q&A has been edited for clarity and brevity.