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Supply-chain bottlenecks

The transformational impact of labor shortages and supply-chain disruptions for future business models cannot be overstated. The situation is leading companies to rethink and reinforce their supply chains.

There is no quick fix, but we expect technology to be a big part of the long-term solution

Drastic times call for drastic measures

Global semiconductor shortages forced Toyota to cut auto production by as much as 40%.

Neal E. Boudette, "Toyota to cut production 40% in October because of the chip shortage," The New York Times, September 20, 2021. 

Some companies are making short-term sacrifices to their bottom lines

Confronted by shipping delays, Peloton invested $100 million to pivot to air transport of its bicycles. 

The World Bank Group, “Air Freight: A Market Study with Implications for Landlocked Countries,” Transport Papers, August 2009; according to the study, air freight typically costs 4-5 times that of road transport and 12-16 times that of sea transport.

Others are investing in automation tech

Combining cloud-computing, 3D printing, AI, and autonomous robotics allowed rocket manufacturer Relativity to continue production with all but one employee working remotely.

Darrell Etherington, “Relativity Space’s focus on 3D printing and cloud-based software helps it weather the COVID-19 storm,” TechCrunch, April 7, 2020.

The biggest supply-chain disruption, but not the last

Technology and globalization have improved supply-chain efficiency in recent years. However, this has come at the expense of durability. Just-in-time supply-chain management is not going away but is being complemented by just-in-case inventory models to forestall extreme product shortfalls. In the future, supply-chain optimization will involve minimizing disruption as much as minimizing cost through the use of technologies like automation, 5G deployment, and blockchain.

Global Supply Chain Disruption and Future Strategies, Foley & Lardner LLP blog, September 29, 2020

Businesses starting to look elsewhere

The pandemic has exposed the world’s dangerous overreliance upon China, which is motivating companies to diversify their supply-chain risk. Currently, the world’s second-largest economy:

  • Provides 70%–77% of the world’s rare earth elements
  • Produces 70% of the acetaminophen and 80% of the blood anticoagulant used in the U.S.
  • Is a top source of foreign goods for more than 60 economies
  • Accounted for 28.7% of global manufacturing output in 2019

However, expectations for a mass exodus from China are misguided. Instead, we anticipate most companies with a presence in the country will remain, while also diversifying toward countries like Vietnam, India, Turkey, and Bangladesh.

Source: United Nations.

Apple: Go to the head of the class

While few firms are Apple, there are lessons to be learned, including the ability to leverage:

Heft – Apple’s enormity has enabled it to cut to the front of many lines when it comes to the inputs for their phones and tablets. They also have exclusivity arrangements for certain inputs and the ability to own key parts of its supply chain.

Local focus – Apple recognizes the importance of taking a local approach to the region’s culture and regulations. It has been operating in China for years and enjoys a mutual dependency.

Apple isn’t immune to the semiconductor, transportation, or China-related risks that plague many firms, but it's been able to thus far navigate them better than most.

MEGHAN SHUE
Head of Investment Strategy

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