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No Going Back ... The New Global Supply Chain

Kim Phelan

The pre-pandemic supply chain can never return to its previous form. It can’t, says Dennis Unkovic, a partner with Pittsburg-based Meyer, Unkovic & Scott LLP, who advises companies on matters of foreign direct investment, trade secrets, M&As, and technology transfer. Frequently interviewed on CNN, he is also the author of the new book, “Transforming the Global Supply Chain … Cyber Warfare, Technology, and Politics.” 
While holiday merry-making was just getting started, Unkovic, also an acclaimed Santa in his firm, met up with Casting Source for a conversation about all things supply chain. Excerpts from that Q&A follow. 

Casting Source: If you could put your finger on the pulse of the global supply chain, where are we at on the threshold of 2023? 
Dennis Unkovic: Number one, things look better than they actually are. Why do I say that? Because I believe the global economy is in a recession. Over the last three or four months, demand for products appears to have dropped, which means the supply chain looks a little better than it is. Some companies have caught up since the COVID problems. Some box stores like Walmart say they have too much inventory. That’s true. 

So inventory, to a certain extent, is there, but I believe the U.S. unfortunately has a 19th century infrastructure to support products. All right, we’re in the 21st century. If you look at Long Beach Harbor, the ships are still backed up, they’re just further out. But there are not enough train tracks serving the port. There are not enough truck drivers to pick up the freight. Most importantly, there are not enough warehouses there to store things until the truck drivers or the trains can show up. 

The train system in the U.S. is very antiquated. I think the U.S. is fooling itself by depending on this kind of awful infrastructure. The one smart thing is that we’re going to spend a trillion dollars building up our infrastructure over the next five years. That will help the supply chain on a domestic basis. 

CS: What should every company in America that depends on foreign-sourced goods be doing to protect itself?
Unkovic: Risk mitigation. Every CEO and every board of directors should be fired for not serving the best interest of their company unless they’ve done a true deep dive to understand their unique supply chain, understand where their products are sourced, and what impact it has upon their customers and ultimately their ability to meet customers’ demands. 

And I would guess half of the companies in the United States have not done that. Of those that have, this has likely been done by insiders. The problem is, if you’re a bad cook, you’re not going to be able to give me an evaluation on whether you can cook me a meal next week. Or, if you have a heart problem, don’t diagnose it yourself—go to somebody else. I’ve gone into a couple of companies and sat for two weeks and said, ‘You have serious problems.’ They say, ‘Well, we talked to Joe who’s been doing this for over 20 years.’ If you’re really serious, don’t go to the guy who’s done a lousy job for 20 years and say, ‘Is there a problem?’

CS: What trends in China have bearing on supply chains right now? 
Unkovic: Xi Jinping is now the next emperor of China. His rulings, his power is essentially unchecked. Xi could be the head of China for the next 10 or 15 years. He implemented what’s called a “China First” policy. Let’s assume you’re making something in China and you have 100 made. There is demand for 150—half the demand is from China and half from overseas. What can the Chinese government do? Who’s going to get more of the product? China, because his priority now has to be to keep the Chinese people happy. 

Another thing that’s equally important now is Xi Jinping and the Chinese government have the power to influence what foreign companies do in their country. As a result, foreign direct investment will be increasingly difficult in China. China is now putting their own people on boards of directors and overseeing the operations of foreign companies in China. If you have technology there or a major investment, there should be a concern. How does that affect the global supply chain? Well, if they tell you to send something to one person rather than another, it can affect the supply chain. You don’t have the control doing business in China that you did in the past, because the Chinese government’s involved.

CS: What about China’s COVID-free policy? Is it creating labor stability?
Unkovic: The Chinese rejected the West’s vaccines and came up with their own, which really were not very good—they’re less than 60% effective. Xi Jinping doubled down because he didn’t want to look like he was taking Western technology. So he created the COVID-free policy, which you’ve read about. It says: If no one gets COVID, well, then we won’t have a problem. But that’s like saying, if I’m never hungry I won’t have to eat. 
Xi’s policy failed. He just reversed it in December 2022. China is now reopening its borders. And so I expect there will be millions of Chinese affected by flus and viruses that wouldn’t have been otherwise. China will find more of its workers are going to be ill. I think many people are going to die in the next year. This is going to affect the country. 

CS: Let’s turn our gaze northwest of China—can you sum up the current toll Russia’s war against Ukraine is having on the supply chains of the world?
Unkovic: Most of the European car manufacturers, who have outsourced a lot of their parts throughout the European community and Ukraine for good economic reasons, are now finding their supply chains disrupted. 
Palladium is one example. Something like 40% to 50% is sourced from Russia and the Ukraine. Every catalytic converter in the world for a car that runs on gasoline needs palladium, and there’s going to be a shortage of it. And so the metals business is underestimated because people don’t see it. But its importance is oversized, in my opinion, and isn’t fully appreciated.

And we haven’t even talked about food. More than 30% of global wheat in the world comes from the Ukraine and from Russia. The sad result is that the people who are suffering the most are the folks in Africa because that’s where the agricultural products are consumed. You can only grow one or two times a year and they have to be in certain seasons—but do we think there’s going to be anything grown in the Ukraine in 2023? 

CS: The manufacturing sector has a heightened awareness of the risks associated with cyberattacks. Does this have any bearing on global supply chains?
Unkovic: I foresee cyberattacks are going to increase both here, in China, and everywhere. The cyber criminals go in and say, ‘I’m shutting you down, I’m taking over your network unless you pay $10,000 or 15,000 or $25,000.’ That’s going to increasingly happen. The really big companies are pretty well protected against cyber, but the companies that are suppliers to them, I think, are very at risk for cyberattack. It’s an under-appreciated problem. And what happens if your key supplier is shut down? 

CS: The Supply Chain Initiative recently announced a record 300,000+ jobs were brought back to the U.S. due to reshoring, which is clearly on the rise. What’s your take on localization as a supply chain strategy for manufacturers?
Unkovic: I believe the ‘Just in Time’ manufacturing theory is fatally flawed, because it assumes everything works perfectly. In my life, I don’t know about yours, nothing is perfect. And once it breaks, it doesn’t work. When you add to that the cost of making things—which was supposed to be cheap in China—and now it’s too expensive to make in China, and you can’t deliver things on time. All of which is going to force manufacturers and/or foundry folks to do things closer to where their major customers are, which I think leads to reshoring or onshoring, whichever you want to call it—or finding other multiple sources. 

Here’s an example: Apple had 90% of their iPhone 14s being made in one city in China; because they shut down for a month, there won’t be enough iPhone 14s to sell at Christmas—who cares. The point is, that will affect the profitability of Apple for the next year.

There is no short-term answer. The long-term answer is, if companies are smart, and I know some who are, they are reshoring or taking apart their supply system. It depends on what they need. Many were single-source, now they’re looking for multiple sources. Companies have realized that sole sourcing is dumb. You can’t sole source anything, and if you do sole source you’re not going to stay in business.

Secondly, they’re looking to be closer to home, whether it’s Kansas City or Colorado or Chicago, or somewhere in the USMCA [United States, Canada, and Mexico], and that will ultimately be of benefit. 
The U.S. is going to benefit from the global supply chain problems, because a lot of companies are going to figure out it’s better to source closer to home or to where you need it—you can’t rely on these ships. 

CS: Will the global supply chain we once knew ever return to business as usual? 
Unkovic: It can’t. Supply chain was driven by the cheapest countries in the world to produce things. Labor moves like a daisy chain around the world. Japan was cheap in the 60s, then Korea was cheap. Then you had Taiwan and you had Southeast Asia. Then it went to China, and now it’s going to India, which is going to be the big winner here—I think there’s going to be a lot more manufacturing in India, because they’re a democracy. Modi recognizes the importance of changing their economy so it’s more industrialized rather than agricultural. 

But it’s a daisy chain. I don’t think in the past the U.S. has recognized carefully enough the things that are most essential to its national security, but I think they are now. From Trump to Biden, I think we have a U.S. government that at long last has recognized the national security interest of protecting our economy. 

CS: Protecting our economy from whom?
Unkovic: China is looking at becoming the dominant military and economic power in the world by 2049, 100 years after the beginning of the Chinese Communist Party. I understand that; if I were the Chinese, I’d want to do the same thing. But I think the West has to recognize that this isn’t just an economic problem related to the supply chain—it’s about who controls the global technologies. And how do you most efficiently produce things for the better of the world? I think if China runs the world in 20 or 25 years from now, it’ll be because the West let them do it. 

America has to accept that China is a serious economic competitor. 

CS: What’s your take on global inflation—better or worse in 2023?
Unkovic: I’m not an economist, but I do not see a major change in the global economic situation in the next 18 months.

CS: Are there some upsides for the U.S.?
Unkovic: First, 3D manufacturing is extraordinary—this is a world-changing technology, and we’re developing it here in America. That’s good news. Manufacturers don’t need to make a million of a particular part; they can make 50 of them or 100 of them. It’s more expensive, but you can do almost anything with 3D manufacturing.

And there’s robotics. Robots don’t eat, sleep, or have a fight with their significant other—they go 24 hours. So I think there will be fewer people in the supply chain, but the supply chain itself will be more roboticized. I work with a company that supplies BMW and Amazon and others—they have a robot that can see 360 degrees, can go over a factory, pick something up and bring it down; you push the button and it brings it back to you. And it won’t run you over because if it sees you it stops. They cost $150,000, but they’ll run forever. You can pay a worker $75,000 a year plus benefits—that’s $80,000. In two years, it’s cheaper to have a robot. Robots are good news. 

The other thing is, America has great access to capital. There is an unlimited amount of money available to American companies, and if they’re smart, they’re going to use it.
Sixty percent of the world’s technology is Western; 30% to 40% of it is Chinese. The West still has the advantage. Are we going to keep it? I think so, but it’s not guaranteed. CS