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[Tim Culpan, Noah Smith] Securing supply chains doesn’t mean bringing them home

By Bloomberg

Published : Dec. 21, 2020 - 05:31

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While much of Joe Biden’s first term in office will involve digging out from the COVID-19 pandemic and recession, the incoming president has also vowed to change the way the US manages its supply chains. This is framed as a way to make America more resilient in the face of crises after struggling to secure much-needed protective and medical materials in the early days of the coronavirus.

But it’s obvious that his supply-chain policy centers on weaning the US and its allies off China. Already dashed is the old theory that free trade would induce Beijing to peacefully democratize and integrate itself smoothly into existing global institutions.

The escalating technological, geopolitical and economic rivalry between the superpowers gives greater urgency to a plan for diversification. But this requires that Biden focus on making supply chains more efficient, rather than merely bringing masses of manufacturing jobs back to American shores.

Diversification isn’t the same as reshoring. The model of distributed production that multinational companies have built over the past three decades will not revert to a world of doing things within a single country’s borders.

The comparative US advantages -- advanced technology, a good business climate, and a wealthy consumer base, rather than cheap wages and lax regulations -- won’t change. The Biden team should focus not on the return of low-end assembly work, but on capturing the highest-value segments of the production chain as it shifts the rest away from its chief competitor and toward allies.

President Donald Trump already tried to force reshoring, and failed spectacularly. He lured Taiwanese manufacturer Foxconn Technology Group to open a plant in Wisconsin, only to see the project shrink massively as it became apparent there was actually no plan at all. The problem is that Apple’s iPhone and Sony’s PlayStation simply aren‘t meant to be Made in America. Beyond the difference in labor costs, companies like Foxconn rely on the ability to hire hundreds of thousands of workers for short periods, unencumbered by unions or long-term contracts.

Foxconn executives have already told us they don’t foresee American workers actually wanting to stand on a production line to assemble delicate items like iPhones and iPads. Even in China, where the workforce is five times larger, fewer people desire such jobs. Companies have had to move factories further toward the interior of the country just to be closer to the labor pool.

And this work doesn‘t add a lot of value, anyway. A look at the gross margins of Foxconn’s Hon Hai unit tells the story. It squeezed out just $5.91 for each $100 of production that churned through its factories last year. Apple, by contrast, gets to keep a $38.23 markup per $100 from the array of devices, software and services.

A plan to bring Foxconn compatriot Taiwan Semiconductor Manufacturing to Arizona makes more sense, but semiconductors are capital intensive and labor light. The Biden administration will need to manage expectations on the number and types of jobs to be created.

A majority of these positions will be in advanced roles – 75 percent of TSMC’s staff have finished college, and half its workforce have postgraduate degrees -- which will be a boon for American engineers and universities. That kind of value-add work generates a lot more dollars than low-margin assembly. But it won’t be a source of mass employment. To create lots of jobs, the US will need to leverage local services instead -- something the incoming administration fortunately grasps.

That leaves the question of where to put supply chains. Washington should sit down with industry to map out what does and doesn‘t make sense to build in the US.

Electric vehicles, for example, increasingly include sophisticated components and modules that rely on high-tech manufacturing rather than cheap labor and command high prices in global markets. Servers, communications equipment and electronics weapons systems are likewise low-volume, high-priced products that can be made in the US cost-effectively.

But other parts of the puzzle should go to current and prospective US allies.

Future Secretary of State Antony Blinken should embark on a world tour to arrange investment deals, with an eye to getting manufacturing out of China as fast as possible. The administration’s to-do list should include formulating a Silicon Road policy to compete with China, and securing technology within the borders of trusted allies.

By helping relocate production that doesn’t make sense for the US to places like Taiwan, Vietnam, Indonesia, India, the Philippines, Bangladesh and Mexico, then Washington can move to secure their allegiance through job creation, investment and controlled technology transfers.

Vietnam has shown particular potential as an alternative to China, as evidenced by Samsung Electronics’ employment of more than 100,000 people there. Its recent infrastructure upgrades, including the construction of new highways, was financed in part by loans from the Asian Development Bank. This kind of funding is exactly where the US could step in, offering an alternative to Beijing’s Belt and Road Initiative.

All this requires a big change from Trump’s belligerent approach to trade -- which largely involved tariffs and other barriers -- and goes beyond the current US policy of doling out incentives and bellowing threats.

Globalized overseas supply chains are here to stay, but what a Biden administration can really do is ensure that they move to more stable and advantageous locations.

Tim Culpan, Noah Smith
Tim Culpan is a Bloomberg Opinion columnist covering technology. Noah Smith is a Bloomberg Opinion columnist and formerly an assistant professor of finance at Stony Brook University. -- Ed.