Winners And Losers In The Global Supply Chain

(MENAFN- Asia Times)

The recent disruptions in international product flow are prompting a serious discussion about increasing US domestic manufacturing to improve the reliability of the supply chain.

How likely is it that a significant increase can occur in the foreseeable future? What is the future of US manufacturing?

Manufacturing continues to move offshore. Since 2000 alone, US manufacturing value has declined from 15 percent to 10 percent of GDP. This has occurred because manufacturing is generally capital intensive and increasingly dependent on sophisticated facilities that are hard to duplicate and staff.

Outsourcing production changes fixed costs to variable ones with better control. Specialist production plants working on contract give their customers a flexible supply chain with minimal capital commitment.

China has, of course, become the world's major manufacturing location. As production plants proliferated there, supporting production networks were established that enable the lowest possible product cost.

Once an important industry is established in China, products with high levels of sophistication are produced at world-leading cost structures. A good example is the production of smartphones.

With practically no domestic production of telephony before 2000, China became the world's leading producer – with the production of Apple phones as the best example. Not only were many of the components manufactured in China, but also the assembly technology was refined to the point where the country leads in low production cost.

Hundreds of companies emerged to supply the industry, including RDA, a startup funded by Warburg Pincus that reached $500 million of profitable semiconductor revenues making special chips for cell phones. Before RDA, such chips were all imported.

An example of a failed attempt to reverse offshoring is instructive: solar cell panels for electricity generation. A US company named Suniva attempted to compete with Chinese vendors once they established themselves in the 2010 period.

This example illustrates one of the cornerstone strengths of the Chinese manufacturing economy: a deep level of integrated local supply chains that enable the lowest possible costs. Industries that benefit from such infrastructure are hard to displace.

Solar cells were invented in the US and the production technology was developed largely with government funding in the US and Germany. The incentive for such development was the drive to produce carbon-free electricity.

The industry emerged after 2000 and large amounts of venture capital were invested to build large-scale solar panel production companies. The incentive for these investments was massive government subsidization to encourage solar-energy-based electricity production.

In parallel with efforts in the US and Germany, the Chinese government decided to make solar energy production a national priority. With imported technology and massive government financial support, large production companies emerged that quickly become international suppliers at ever-decreasing prices. The focus was on cutting costs.

The strategy was based on building vertically integrated companies producing all the key elements of panels from silicon to glass frames to deliver the lowest cost panels while maintaining quality.

It became a $30 billion industry as, one by one, international competitors went out of business – unable to compete on price.

Suniva, a US company with excellent technology, attempted to compete but found that its domestic suppliers of components had disappeared. Suniva had to import from China its key supplies. There was no profit margin. The company eventually closed despite the imposition of import duties by the US government.

This example illustrates the difficulty of reshoring established big industries. Without a strong infrastructure, reshored enterprises cannot compete. Rebuilding such infrastructure is costly and there is little private capital appetite for such programs.

What about the future? Industries with strong domestic innovation can support competitive manufacturing. Here are some examples of note:

• The semiconductor industry still has major resources in the country. Its production capacity and leading technology – much of it invented in the US – can be maintained with new private capital and government support. There is evidence that the industry, being vital to the future of defense systems and the US leadership in artificial intelligence and communications, will receive increasing government support.
• A new industry should be mentioned as a successful manufacturing example. The electric vehicle industry was both started and developed in the United States, with a novel high-volume manufacturing technology. Tesla has grown into an industry leader on the basis of outstanding technological leadership that combined vehicle design and manufacturing skills based on innovative technology. The company will expand overseas but its production will continue in the US.
• Another example of note is a Warburg Pincus portfolio company that has developed a new technology for producing carbon black – in an important multi-billion dollar industry – with practically no pollution, in contrast to current production technologies that produce high levels of carbon-related pollution. A big plant is being built in Nebraska based on proprietary technology.

Looking at the elements needed to sustain manufacturing supply chains, it is clear that building and sustaining competitive domestic in/dustries must be a national priority and must be based on innovative technologies from the start.

Also needed is the support of vocational training focused on new industries and robotics.

It means that industry networks must be built and sustained with continuing innovation.

If domestic supply chains are to prosper building them must be a national priority. Once industries are offshored, bringing them back is difficult and unlikely.

Henry Kressel is a technologist, inventor, and long term private equity investor at Warburg Pincus. His technical achievements while at the RCA Laboratories included pioneering the semiconductor laser that today enables all communications systems including the Internet.

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