White House issues executive order focused on securing critical U.S. supply chains

With a sharp focus on helping to create more resilient and secure supply chains for critical and essential goods, the White House yesterday issued an executive order that calls for a 100-day review to identify near-term steps it can take, including with Congress, “to address vulnerabilities in the supply chain” for four groups of critical goods.

The four groups of critical goods cited by the White House include:

• APIs, the part of a pharmaceutical ingredient that contains the active drug, with more than 70% of API production facilitators supplying the U.S now offshore and the work through this executive order will complement the ongoing work to secure supply chains needed to combat the COVID-19 pandemic;
• critical minerals for defense, high-tech, and other products ranging from rare earths in electric motors and generators to carbon fiber for airplanes, with a focus on ensuring the U.S. is not dependent;
• semiconductors and advanced packaging, areas in which the U.S. established these technologies, and have since underinvested in production and subsequently hurt its innovative edge, as other nations have upped their investments; and
• large capacity batteries, like those used in electric vehicles, as the U.S. takes action to handle the climate crisis it expects to lead to large demand for new energy technologies, with a focus on identifying supply chain risks, and also focus on leading the electric vehicle production supply chain

In the executive order, the White House explained that over the past few years, American households, workers, and companies have been dealing with the strain of shortages of essential products, ranging from medicine to food to computer chips.

“Last year’s shortages of personal protective equipment (PPE) for front-line healthcare workers at the beginning of the COVID-19 pandemic were unacceptable,” the White House said in a statement. “Recent shortages of automotive semiconductor chips have forced slowdowns at car manufacturing plants, highlighting how shortages can hurt U.S. workers. While we cannot predict what crisis will hit us, we should have the capacity to respond quickly in the face of challenges. The United States must ensure that production shortages, trade disruptions, natural disasters and potential actions by foreign competitors and adversaries never leave the United States vulnerable again. Today’s action delivers on the President’s campaign commitment to direct his Administration to comprehensively address supply chain risks. The task of making our supply chains more secure can also be a source of well-paid jobs for communities across our country, including in communities of color, and steps will be taken to ensure that the benefits of this work flow to all Americans.”

And it also noted that the executive order will include a comprehensive review of U.S. supply chains, directing federal departments and agencies to identify ways to “secure U.S. supply chains against a wide range of risks and vulnerabilities” and protect the U.S. from dealing with critical product shortages, as well as address investments needed to maintain the nation’s competitive edge and augment national security efforts. It will also include a one-year review focused on what the White House called a broader set of U.S. supply chains, including: a focus on six key sectors—the defense industrial base, the information and communications technology industrial base, the energy sector industrial base, the transportation industrial base, and agricultural commodities and food production supply chains; risks for agencies to consider in assessing supply chain vulnerabilities; recommendations on actions to take to improve resiliency; a sustained commitment to supply chain resiliency; and consultation with external stakeholders.

In an interview, Kamala Raman, Senior Director for Research and Supply Chain at Gartner, told LM that this executive order on its own does little but put people on alert that there is more to come.

“You cannot just put an executive order out and change the fact that we are very competitive with a few countries, when it comes to our pharmaceutical supply, for example,” she said.

Taking that a step further, she explained that, for the pharmaceutical sector, countries like the U.S. and the other wealthiest global nations used to make the APIs locally, or at least had a fair number of local capabilities, as recently back as the 1990s. And slowly since then, much of that has moved to China, with some estimates indicating around up to 40% of global pharmaceutical APIs come from China, with China and India together accounting for 75% or more of U.S.-bound APIs.   

“India is all about generic drugs and volume,” she said. “They take APIs from China, mix it into a syrup, or whatever the liquid medium is, which then becomes a pill that becomes Tylenol or Advil for us. India also depends on China for these APIs. We don’t make the final Tylenol or Advil product here, and the active ingredient for it depends on China. An executive order cannot change this. We don’t have the capabilities to make these APIs in the U.S., and we don’t have the ability to formulate it into our Tylenol or Advil here.”  

As for how United States-based supply chains should be viewing the executive order, Raman noted that final assembly of many products happens regionally.

Using the automotive sector as an example, she said a large percentage of automobiles sold in the U.S. are manufactured in North America, with very gray lines between the U.S. and Mexico, as some components go back and forth across the border a handful of times before the production of an automobile is complete.

“But, in general, a lot of [production] happens regionally,” she said. “As the semiconductor issue points out, these inexpensive semiconductor components, the further back you go into the supply chain ecosystem, the more concentrated it gets. Like the pharmaceutical APIs, all roads go back to China, the semiconductor chips go back to a few locations in Asia. When the slump first hit, everybody—out of choice or because they were forced to, shut production down or may have let workers go or might not have had raw materials supplies or COVID running through their workforce. But then demand started coming back and everybody is buying technology goods for their homes or cars….as disposable income went up for many in wealthier nations. All of this demand hit at the same time, and over the last several decades supply chains have become focused on being as cost-efficient as possible. Buy your components where it is cheapest, make the products where your labor costs are lowest, efficiently ship goods across the world—what that does it, when a big disruption hits, you don’t have the bandwidth to have extra supplies and be OK for the next few months. You might have supplies for a few days or a couple weeks at most. In the semiconductor industry, everybody depends on the same sources for chips, and that is why auto lines are shut down.”

Raman labeled it as a classic scenario of if something is the most critical component in a vehicle and if a vehicle can be shipped without it, with the answer being no on both fronts. And this leads to companies assessing their risk appetite based on their size or level of regulation in their respective industries and their ability to shift suppliers, profitability, and ability to invest in resilience.

“Shippers then look into their supplier ecosystem to see who their critical partners are,” she said. “If a Merck or a Pfizer says it needs to be able to formulate its final drugs in the U.S., they need to figure out if there are partners, they can use for formulation or are they going to set up their own plants. If they set up their own plants, where are they going to get the APIs from? You cannot just turn on a switch and start doing that yourself. Who are those partners? Or do you need investment to grow these capabilities back from a stage of dormancy? This comes down to cost efficiency versus resilience. We all know how good China is at manufacturing and how many sources it has for sophisticated components. If you are going to source from another location and it is going to cost you 30% more, are you willing to take that cost on?”

This is where the U.S. executive order comes in, with a focus for large global companies to be a little less dependent on one country and instead diversify, she said. But, for smaller companies, they often lack the industry influence or needed capital to do so.

“I think this presents a situation in which the U.S. government is going to have to come in with [lots of money] and a big regulatory focus, to have some teeth be put on the executive order,” said Raman. “It will come in and support starting or reinvigorating certain industries. To me, the key lesson is you cannot do this broadly across all manufacturing…even within pharma or semiconductors, we will have to focus on key clusters and make those clusters a success with monetary help and regulatory help within an industry and then you can scale it up over several years to other areas across an entire industry.”  

Ben Gordon, Managing Partner of Cambridge Capital, an investor in niche supply chain leaders and also Managing Partner of BGSA Holdings, a leading mergers and acquisitions advisory firm focused on the transportation, logistics, and supply chain technology sectors, observed that this executive order highlights various threats to American supply chains that raises various questions.

“One key question is whether the output will be a blueprint for change, as opposed to a series of reports,” he explained. “Another key question is whether the Biden Administration will seek to nearshore these supply chains, by shifting from overseas sources back to the U.S. This is easier said than done. For instance, you can’t source meaningful quantities of rare earth elements in the U.S. And a third question is whether the Biden Administration will invest in supply chain technologies that can help the U.S. government to monitor, analyze, and solve these challenges.”