President Joe Biden holds a chip in his hand before speaking in the State Dining Room of the White House in Washington, United States, on February 24, 2021, before signing an ordinance to remedy a global semiconductor shortage.
Jonathan Ernst | Reuters
As part of an ongoing review of critical supply chains, the Biden administration is considering requiring that supply chains be “stress-tested” on hypothetical scenarios and suggesting that companies hold certain critical inventory, according to two senior administrators and two people familiar with the review.
“The idea of making sure companies better understand their own supply chain vulnerabilities is clearly one of the things that are involved in the process,” said a senior administration official who refused to be identified because the review was neither complete nor was public.
Government agencies meet weekly to discuss the issue and have not yet drawn any final conclusions on what recommendations to make. A first report on semiconductors, critical minerals, high performance batteries and active pharmaceutical ingredients (APIs) is scheduled for June 4th. A broader review will be carried out in the following year.
A White House spokesman said the outcome of the review would be announced soon, referring to $ 50 billion in President Joe Biden’s infrastructure proposal related to monitoring and securing domestic industrial capacity.
“This administration is taking the first nationwide approach to building resilient, diverse and secure supply chains and fulfilling President Biden’s commitment to ensuring that all Americans have access to critical goods and services in times of crisis,” the spokesman said.
Officials on the issue have specifically noted the Toyota Motor Company’s ability to weather the current semiconductor shortages caused by companies that underestimated consumer demand for goods during the pandemic.
In early February, when automakers around the world announced that they were lowering targets and closing factories, Toyota Motor Company executives were surprising: In the short term, the shortage of available chips would have no impact on production volume.
“After the global financial crisis, we thought about bringing our supply chain to a standstill,” CEO Jun Nagata told investors, explaining the “rescue” program that was created to evaluate each stage of his supply chain. For each part considered critical, Toyota secured “four to six months of inventory as needed.”
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Any attempt by the US government to conduct similar stress tests could lead to legal hurdles, as Congress has given government agencies different powers to regulate activities in the respective industries.
In 2018, the Defense Ministry began planning to remove Turkey as a supplier for the F-35 after the country bought weapons from Russia. Working with aircraft manufacturer Lockheed Martin and engine manufacturer Pratt & Whitney, the Pentagon spent months identifying which parts could be in short supply in the event of a different geopolitical situation or a natural disaster.
“It’s a very useful exercise that can be used across government,” said Ellen Lord, who served as the Pentagon’s undersecretary of state for acquisitions and sustainability until January.
According to Lord, the Department of Defense recommended such scenario planning to all major contractors, but it was voluntary as it was not funded by the government.
At the start of the Covid pandemic, the Trump administration noted particular flaws in the Department of Homeland Security’s ability to regulate supply chains, according to a former task force official. Meanwhile, agencies overseeing the energy and financial sectors have tougher regulators.
The Federal Reserve is perhaps among the best known for running such tests, which require a bank to provide a detailed analysis of how its balance sheet would react to hypothetical economic scenarios of varying degrees of severity. Wall Street banks have collectively amassed thousands of compliance staff to help complete these reviews.
In the early days, several institutions were considered “failed”, which meant that they could not increase shareholder returns through dividends or share buybacks. In recent years, bank executives have praised the stress tests used to prepare their portfolios to weather the economic stalemate during the pandemic relatively seamlessly.
However, according to analysts, the global semiconductor shortage differs from a lack of bank liquidity. A company cannot reduce costs or use financial levers to increase the availability of the product. Production can sometimes take up to 120 days.
Roman Schorr, automotive analyst at Fitch Ratings, says policy action could help with long-term planning, but is unlikely to be a silver bullet for a crisis caused by extraordinary consumer demand for electronics and automobiles.
“Government intervention can be helpful for critical parts in the long run, but the imbalance between supply and demand for chips that we are seeing right now is really a market problem.”