Rebuilding and Reshoring: Is the United States Too Import-Dependent?
Category: Supply Chain • Nov 4, 2020
Harry Moser - Founder and President, Reshoring Initiative
The COVID-19 pandemic revealed 40 years of vulnerabilities from hollowing out U.S. manufacturing and overdependence on imports. Supply chain structure going forward will be measured relative to the COVID-19 crisis. Ecosystems for essential products will be laser focused on flexibility, shortened lead times, and stability.
Changing conditions are bringing an end to unconditional globalization. Hyper-connected global supply chains were designed based on Free on Board (FOB) price but not on total cost (including transparency and risk), leaving them vulnerable to unintended consequences.
An August 2020 report from McKinsey Global Institute (MGI) found that as much as 45% of one year’s EBITDA (earnings before interest, taxes, depreciation, and amortization) can be lost due to disruptions. Even before the pandemic-driven disruption, some companies were already trying to improve supply chain resiliency. A 2019 MGI survey found that 70% of respondents expected to change their global sourcing strategies with 32% planning to move in closer proximity to consumers. By May 2020, 93% of supply-chain leaders were planning to increase resilience with 44% willing to do so even at the expense of short-term earnings.
Bank of America (BofA) global analysts also found companies were shifting toward localization prior to the COVID-19 crisis due to supply network threats like trade disputes, national security and environmental concerns, and an increase in automation. Candace Browning, BofA Head of Global Research concluded, “While COVID has acted as a catalyst to accelerate this change, the underlying reasons are grounded in a shift to ‘stakeholder capitalism,’ concluding that relocation favors a broader community of shareholders, consumers, employees, and the state.” This view is perfectly aligned with the Business Roundtable’s August 2019 Statement on the Purpose of a Corporation.
The BofA study revealed that the pandemic caused 80% of global sectors to experience supply chain disruptions. As a result, 75% widened the scope of their existing reshoring plans. BofA analysts suggest that automation, digitization, and robotics would offset the more expensive labor costs and that policymakers were expected to assist via tax breaks, low cost loans, and other subsidies.
SKF Group, the world’s largest bearing manufacturer, is investing $60 million in their North American manufacturing footprint. They plan to expand and automate the manufacturing processes at their Sumter, S.C., facility and reshore/nearshore bearings from Sweden and China to North America. Automation, new technology and proximity to customers and the market made this investment attractive.
Pharmaceuticals and PPE
The COVID-19 outbreak has made Americans keenly aware of our overdependence on imports of medical devices and pharmaceuticals (Figure 1).
According to the Department of Commerce, 97% of all antibiotics in the United States come from China. U.S. manufacturers source 80% of their Active Pharmaceutical Ingredients (APIs) overseas, primarily from China. China is the chief supplier of APIs for producers in other countries as well. Eighty-six percent of U.S. hospitals and healthcare systems are concerned about PPE (personal protective equipment) shortages for frontline medical workers. However, about 80% of all PPE is manufactured in Asia.
The United States imports $22 billion of medical technology, including CT systems, patient monitors, and X-ray machines. Fitch Solutions, a global economic forecaster and solutions provider, found that U.S. medical device imports account for 30% of the U.S. medical device market, increasing in 2018 by 9.9% to $51.6 billion, a record high.
U.S. companies moving production offshore was deemed a “significant component” of the increase. The actual situation in some product categories is far worse than the average. Some high-value products, e.g. implants, are primarily sourced here. So, in other categories we are much more dependent than the 30% average.
The trade wars and the COVID-19 crisis caused disruptions of security-sensitive and critical components like computer chips and medical devices. For example, the United States is a world leader in semiconductor design and research and development but chip manufacturing occurs mostly in Asia. Only 12% of the world’s semiconductor chips are currently made in the United States, down from 37% in 1990.
When chip fabrication and packaging go offshore, U.S. intellectual property goes with it, leaving us vulnerable to national security threats. Total global semiconductor demand share by end use in 2019 was communications (33%), computer (28.5%), consumer (28.3%), automotive (12.2%), industrial (11.9%), and government (1.3%). Chips are used in devices like computers, tablets, and phones but also in medical equipment, wireless networks, cars, and manufacturing equipment.
Microelectronics is the foundation for new technologies like artificial intelligence, quantum computing, and 5G networks. Offshore production of microelectronics leaves the United States vulnerable to adversaries, malware, or “backdoors” that could render military defense systems unreliable, undermining U.S. national security.
The sum of all the dependencies is the $800 billion U.S. goods trade deficit. Figure 2.
The United States was producing approximately 10% of its 2019 PPE requirements of X units. Then in 2020 demand went to 3X and imports collapsed. Could U.S. factories increase output 3,000% in a few months? No. So, how dependent is too dependent? A reasonable answer is that, for most products, the United States should produce at least 50% of what it consumes. If foreign supply is cut off, a 100% increase is feasible by working 24/7. For products, like PPE, that might see a spike in demand, 10% dependence and a large inventory makes good sense. Another approach would be to cut our trade deficit to zero, which is the average condition of all countries. The resulting 40% increase in production would dramatically reduce dependencies.
Trade data shows a Chinese shipment decline that began in mid-February 2020 as the coronavirus outbreak caused Chinese factories to shutter. Key medical shipments to the United States from around the world slowed during the crisis. Hand sanitizer and swab imports from China dropped by 40% and N95 mask imports were down 55% in March 2020. As Chinese factories slowly reopened, export restrictions were enforced due to quality issues and China’s need to meet their own domestic demand. Critical medical supplies were stranded as suppliers and brokers were unable to receive official clearances for U.S. bound shipments. Airfreight capacity has been severely cut by the drastic reduction in passenger flights which normally also carry freight.
U.S. imports are about 60% higher than exports based on value, probably 100% higher based on tonnage since imports are less expensive. The dollar amount of imports and exports for the largest categories is shown in Figure 3. The risk of U.S. dependencies is far greater than our overall goods trade deficit of $800 billion would suggest. We have surpluses in a few product categories such as aircraft, petroleum products, and agricultural commodities, but severe deficits in a broad range of industrial and higher tech consumer items.
Updated data (July 2020) shows that the United States grew even more dependent on medical imports from China and other countries during the pandemic. U.S.-China and U.S.-world deficits for medical supplies increased through May 2020.
Ideas for reducing our dependencies
The time is right for companies to adapt to a world in which heavy dependence on worldwide supply chains is no longer the key to profitability, much less survival. The Reshoring Initiative’s resources can help you to prepare.
Let’s work together to make the United States more self-sufficient. Send the Reshoring Initiative information on products you cannot find made domestically. We will work with companies, state economic developers, and the Department of Commerce to fill the gaps. Contact Harry Moser, Reshoring Initiative for more information at firstname.lastname@example.org.
Rebuilding the Supply Chain: Whether you are an advanced manufacturer, job shop owner, or OEM, you are in the midst of your own supply chain challenges, uncertainties, and questions. Visit www.IMTS.com/SupplyChain to learn more!
To read more in Harry Moser's Rebuilding & Reshoring series, click here.