By now, most people have heard that a shortage of computer chips has significantly affected automobile production. What they might not know is that the shortage of semiconductors affects almost every industry. The news certainly caught the attention of the White House. As a result, last week President Joe Biden signed an executive order requiring a federal review of supply chain risks for chips and other critical items in the communication and pharmaceutical industries. When it became apparent that COVID-19 was going to become the largest health crisis in over a century, what also became apparent was America’s reliance on manufacturing in China. Tom Derry, CEO of the Institute for Supply Management, observes, “There’s almost no industry sector — and when I say that, I mean manufacturing and nonmanufacturing — that isn’t reliant on China in the United States. … If you don’t have a first-tier supplier who’s sourcing from China, then your supplier’s supplier is.”[1] President Biden indicated he signed the Executive Order because “the resilience and reliability of our critical supply chains” is essential for America’s “economic security, as well as [its] national security.”[2]

Biden’s Executive Order

The quick and dirty version of Biden’s Executive Order is this, “The executive order requires agencies to assess within the next year any risks or disruptions that might cause a shortage of supply or a security issue. It instructs the U.S. Commerce Department to conduct a review that will identify ‘risks in the semiconductor manufacturing and advanced packaging supply chains’ and offer policy recommendations to address these concerns.”[3] In part, the Executive Order reads:

“The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security. Pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition, and other conditions can reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services. Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs. They will also support small businesses, promote prosperity, advance the fight against climate change, and encourage economic growth in communities of color and economically distressed areas. More resilient supply chains are secure and diverse — facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce. Moreover, close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies.”[4]

The organizations and persons tasked with reviewing the resilience of America’s supply chains are the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) in consultation with “outside stakeholders — such as those in industry, academia, non-governmental organizations, communities, labor unions, and State, local, and Tribal governments.” The APNSA and the APEP are also tasked to coordinate with appropriate government agencies and, within 100 days of the date of the order, submit reports to the President. Reports are required from the Secretary of Commerce, the Secretary of Energy, the Secretary of Defense, the Secretary of Health and Human Services, the Secretary of Transportation, and the Secretary of Agriculture. Those reports are to include an assessment of:

• the manufacturing or other needed capacities of the United States, including the ability to modernize to meet future needs;
• gaps in domestic manufacturing capabilities, including nonexistent, extinct, threatened, or single-point-of-failure capabilities;
• supply chains with a single point of failure, single or dual suppliers, or limited resilience, especially for subcontractors;
• the location of key manufacturing and production assets, with any significant risks to them;
• exclusive or dominant supply of critical goods and materials and other essential goods and materials;
• the availability of substitutes or alternative sources for critical goods and materials and other essential goods and materials;
• current domestic education and manufacturing workforce skills for the relevant sector and identified gaps, opportunities, and potential best practices in meeting the future workforce needs for the relevant sector;
• the need for research and development capacity to sustain leadership in the development of critical goods and materials and other essential goods and materials;
• the role of transportation systems in supporting existing supply chains and risks associated with those transportation systems;
• and the risks posed by climate change to the availability, production, or transportation of critical goods and materials and other essential goods and materials.

The reports are also directed to consider how the U.S. should work with allies and suggest policies that will make American supply chains more resilient.

What the Executive Order Means for Supply Chains

For the most part, Biden’s Executive Order has been greeted enthusiastically. For example, Geoff Freeman, president and CEO of the Consumer Brands Association, released the following statement:

“The COVID-19 pandemic and recent winter storms have exposed severe vulnerabilities and a need for coordinated leadership on U.S. supply chains. As Consumer Brands identified in a recent memo to the Biden administration, supply chain vulnerabilities threaten the consumer packaged goods industry’s ability to keep shelves stocked with essential products that Americans depend on to stay home and stay safe.

“In signing this executive order, President Biden is assuring our industry that his administration takes seriously the foreign and domestic threats to supply chains and is committed to working with the private sector on this issue. Since the beginning of the COVID-19 pandemic, CPG essential workers have stepped up to ensure the availability, affordability and accessibility of essential products, and now we ask government to do the same. We are encouraged to see that the administration heard our concerns regarding the need to protect these critical product supply chains and has included consumer packaged goods in the year-long review phase.

“The need to address supply chain challenges has never been greater. Increasingly complex and interconnected supply chains need to be met with policy and leadership that recognizes that complexity and accounts for it through interagency collaboration and greater strategic direction. Yesterday, the Consumer Brands Association released its review of current supply chain policies, with more than a dozen recommendations to improve resiliency and national competitiveness, including the creation of a federal office of supply chain that would have greater visibility across agencies.

“[The] executive order confirms that the White House’s attention is on the issue. We look forward to working with the president on efforts to strengthen America’s supply chains and ensure their ability to deliver for consumers under any circumstance.”[5]

Many experts believe the federal government’s effort to assess supply chain risks is long overdue, including Phil Reitinger, a former director of the National Cyber Security Center within the Department of Homeland Security who’s now president and CEO of the Global Cyber Alliance. He states, “Clearly, supply chain security is essential from both a national and homeland security and economic perspective, and the executive order properly raises the government’s level of attention.”[6] Assessments are a good starting point; however, actions will reveal whether the assessments were meaningful. Sameera Fazili, deputy director of the National Economic Council, stated, “This problem was decades in the making. We can solve it by making smart investments that are long term in nature, that reach families and workers in all of America.”[7]

Concluding thoughts

Although most people agree that America’s supply chains need to be more resilient, making that happen won’t be easy. The unspoken truth about the Executive Order is that it is aimed at America’s over-reliance on China. If America is going to reduce its reliance on China, Boston Consulting Group analysts assert wrenching decisions will have to be made. “The deep and complex linkages between US and Chinese markets and industries took decades to build,” they write. “These ties will be costly and disruptive to transform, even in a gradual and phased manner. But companies that begin adapting now will mitigate the risks and be in the strongest position to capture competitive advantage however the US-China commercial relationship plays out.”[8] As the President concluded in his remarks, “Everyone has a role to play to strengthen our supply chains.”

Footnotes
[1] Lizzie O’Leary, “The Modern Supply Chain Is Snapping,” The Atlantic, 19 March 2020.
[2] Joseph R. Biden Jr., “Remarks by President Biden at Signing of an Executive Order on Supply Chains,” The White House, 24 February 2021.
[3] Scott Ferguson, “Executive Order Focuses on Supply Chain Risk Management,” Bank Info Security, 25 February 2021.
[4] Joseph R. Biden Jr., “Executive Order on America’s Supply Chains,” The White House, 24 February 2021.
[5] Staff, “Consumer Brands Applauds Biden’s Executive Order On Supply Chains,” The Shelby Report, 25 February 2021.
[6] Ferguson, op. cit.
[7] Alex Leary, “Biden Orders Broad Supply-Chain Review Amid Chip Shortages,” The Wall Street Journal, 24 February 2021.
[8] Raj Varadarajan, Antonio Varas, Marc Gilbert, Michael McAdoo, Fang Ruan, and Gary Wang, “What’s at Stake If the US and China Really Decouple,” Boston Consulting Group, 20 October 2020.