By Madan Sabnavis
Today, there is a lot of talk on India becoming part of global supply chains where countries are dependent on us for intermediate as well as finished goods. The concept of outsourcing is based on the premise that countries follow the principle of comparative advantage where they buy goods that they are not efficient in producing and sell those where they do better. This was the model which led the USA as well as other countries to make China their primary source for production.
Several top manufacturers had their production facilities in China where labour was cheap and environment favourable. This helped in bringing about high growth in China. But what if China suddenly stops producing goods? This is the starting point of the book, How the World Ran Out of Everything by Peter Goodman. Covid had closed the doors of China as there was a total lockdown. Production exported as the shipping industry came to a halt. America, which is the world’s economic superpower, ran out of ventilators, medicines, toys and even toilet paper; and the talk of scarcity exacerbated the shortages.
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Goodman discusses several issues that confront the world economy today. The overdependence on China on account of cost advantage turned out to be the bane for all producers. Interestingly, he shows that the American allegation of China robbing jobs is not a phenomenon created by the nation but by domestic companies. In order to cut costs, they set up facilities in a foreign investor-friendly country and made their shareholders happy. Hence the job losses were not because of Chinese immigrants, but shift in production overseas. The American companies were responsible for hiring fewer people.
No one could ever expect that something like Covid would strike the world and when it originated from China, the repercussions reverberated globally. Goodman also discusses in detail how the logistics industry was pushed back. The world ran short of empty containers that were required for transporting goods. Even if goods were shipped to the USA there was no docking space in the ports that had hundreds of ships lined up. For the ships which docked, there were no people to unload the goods. When this was managed, trucks and drivers were missing to take them into the country. All this contributed to wide-scale scarcity of goods that were earlier produced in USA, but now were being manufactured by Americans in China and shipped to these ports.
The author gives several examples of the auto industry, which also worked on the principle of ‘just in time’, which meant that inventories could be kept to the minimum to save on costs as production could be upped when required. An order for parts to the Chinese manufacturing unit would ensure that they were shipped immediately which obviated the need to store these products. Tim Cook of Apple had termed inventories as being ‘fundamentally evil’. This worked also for the mobile phones industries, which never expected there could be large-scale shortages of microchips that were used in their production. Taiwan Semiconductor Manufacturing Company had become indispensable to the global automobile industry manufacturing 80-90% of the chips going into cars across the world. Management consultants in their wisdom also had advised on cutting of labour costs; and hiring people part time when production had to be ramped up. Toyota was a very good example of a company that felt that too many employees on the permanent payroll was not the best option.
Covid showed how all these approaches were flawed. The world ran short of semi-conductors which affected both the auto and mobile industries. With fewer people on their rolls, companies could not get trained staff to their factories. All this inhibited production and led to severe shortages all over with the logistics crisis ensuring that there were no ships to move goods. This problem became global with the developed countries being affected more as they were the ones that off-shored production facilities to China.
Hence while the anti-China fervour was always there, Covid has raised the issue of companies using others’ territories for producing goods. In fact, given the rich natural resources in Africa, several companies are considering this option. Earlier it was case of political risk where any disruption could spiral the crisis. Russia is a good example where it has become a pariah and countries which have facilities here could face problems. This also means that there is a practical issue when it comes to globalisation which also has the principle of comparative advantage operating.
Goodman’s book will make both countries and companies to think their strategies harder.
Outsourcing can raise serious issues for any country or company. In that case how does the approach to become part of global supply chains fit in? Similarly for companies an issue to be sorted out is on inventory stocking and employee force. The tryst to enhance shareholder value worked very well for several decades. But when it came to crunch time, these policies flopped badly. Clearly a reset is required when nothing can be taken for granted.
The author concludes on a sombre note because by 2023 the supply chains had gone back to normal and there seemed to be no problem as such. There were hiccups when there was a problem for freight carriers on the Red Sea, but was only temporary. Companies are looking at using more of robots and AI for their production processes. Will this make labour more redundant? There is no clear answer right now because he shows that the ATM did not quite lower the need for tellers. But one can never tell.
This book surely will keep the reader engaged and spark internal debate in the mind as it takes her on the journey starting from Covid till 2023 with several throwbacks on how companies changed strategies to tailor-make them to the demands of shareholder. The ‘just in time’ and ‘lean and mean’ strategies, if persevered with, will be tested continuously, given that geo-political tensions are rife and erupting more often than before even though on a smaller scale.
Madan Sabnavis is chief economist, Bank of Baroda.