COVID-19 Fallout Convincing Companies to Regionalize Supply Chains, Panel Says

Industry is finding it can move components out of China, and it's still affordable to produce those components closer to final assembly plants, especially with more automation, said Peter Anderson, vice president of global supply chain at Cummins, an Indiana-based Fortune 500 company that makes engines for heavy equipment and heavy-duty trucks. The sections 301 and 232 tariffs made Cummins start “to think about what we could do differently,” and he said many Cummins suppliers have “started to take things out of China to mitigate those tariffs.” Anderson was one of several voices on a webinar on how manufacturing will change after the COVID-19 pandemic response, hosted by the Hudson Institute on April 22.

Sridhar Kota, a mechanical engineering professor at the University of Michigan and the director of a group analyzing manufacturing innovation, said: “This pandemic has revealed the weakness and dependency of the U.S. industrial base.” Kota said that for scholars like himself, this was known -- he noted that none of the 150 hardware startups that came out of MIT in the last decade ended up manufacturing in the U.S., and that 70% scaled up production in China.

Policymakers thought the free market should determine what is manufactured where, he said, and he thinks nothing will change about that attitude unless the federal government takes a much more purposeful approach to industrial policy.

“We create millions of jobs in other countries,” he said, pointing out that American inventions in solar cells, lithium ion batteries, flat-panel TVs and semiconductors all led to manufacturing in Asia.

He said it's not that the U.S. has too high taxes, regulations or high wages. He said that Germany and Japan have all those, and they have weathered Chinese competition better than the U.S. He said it's because German and Japanese companies take a longer view and are not driven by shareholder demands.

He said Congress should pass a law that if a product's intellectual property came from federally funded research dollars, that product “must be manufactured in the United States,” with at least 75% domestic content, “without any exceptions or waivers.”

Kota said that even with such a law, manufacturing will not rebound in 2021. Anderson agreed. “It would take a long time for things to come back, but what we can do now is stop migrating.”