On July 15, 2021, Duke University’s Emeritus Professor Gary Gereffi gave a testimony to the US Senate Commerce Commitee on “Implementing Supply Chain Resiliency.” The shortages of essential products experienced during the pandemic have brought to the forefront the need to strengthen U.S. supply chains, and the hearing aimed to inform the Senate Commerce Committee about supply-chain vulnerabilities and opportunities, as prompted by President Biden’s request last June for a 100-day review titled: “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-based Growth.”
In this interview, Professor Gereffi expands on his testimony to Congress, with recommendations for supply chain diversification and selective reshoring or nearshoring. He also advocates for a “bottom-up” approach to globalization, where states, local governments, universities and local companies could proactively map out opportunities for investment in emerging industries and markets, thus generating globally fueled local development paths.
Professor Gereffi is the Founding Director of the Duke Global Value Chain Center and a world-renowned expert on supply chains. He is a DUCIGS/Rethinking Diplomacy Program (RDP) affiliate. Together with DUCIGS Director, Giovanni Zanalda, Gereffi has been spearheading DUCIGS ongoing series: COVID-19 and Global Supply Chains.
Here is the interview:
In your testimony to the US Senate Commerce Committee, you said that “this is the first time that my neighbors and friends want to talk about (supply chains).” COVID-19 and the troubling shortages of basic products like surgical masks (in addition to technologically advanced ones, like ventilators) made everyone aware of the importance of supply chains and the need for them to be resilient to unexpected shocks. How do we build more resilient supply chains?
In the aftermath of the disruptions caused by COVID-19, there has been an intense debate on whether U.S. supply chains are too rigid and dependent on a small number of offshore locations in pursuit of cost-based global efficiency.[i] The notion of “resilience” is often proposed as an alternative principle to guide recovery from recurrent disruptions. However, resilience is not a one-dimensional concept. It has different meanings for companies, supply chains, and countries:
- For companies, resilience refers to the ability to adjust and respond to disruptions in their supply chains through strategies and capabilities that balance operational efficiency and flexibility via appropriate forms of risk management and redundancy.
- For supply chains that extend beyond individual firms, resilience entails adaptation via modes of governance established by lead firms that maximize system-level efficiencies and cushion against vulnerabilities, in the context of the organizational and geographic configurations of each supply chain.
- At the country level, building resilience in the face of supply-chain disruptions involves proposals for reshoring, and supplier diversification, near-shoring, and reliance on trusted partners, as well as the buildup and maintenance of national stockpiles and strategic reserves that will be driven by national security considerations as well as broader economic and social goals related to jobs, investment, trade, sustainability, and innovation.
Understanding resilience as a multidimensional concept means that coordination and tradeoffs are inevitable to develop robust and comprehensive supply chain policies. Resilience strategies may not easily align across these different levels, but awareness of the interdependencies is a necessary step to ameliorate disruptions in a more effective way.
A recent report by the McKinsey Global Institute on “Risk, resilience and rebalancing in global value chains”[ii] lists some operational steps firms can take to become more resilient, such as: reshoring production; strengthening risk-management capabilities; improving transparency; building redundancy in supplier and transportation networks; holding more inventory; reducing product complexity; and creating the capacity to flex production across sites. In principle, McKinsey claims that becoming more resilient does not mean sacrificing efficiency, but rather altering the structure and dynamics of the GVCs in question.
COVID-19 has disrupted many U.S. supply chains and led to acute product shortages. How does the GVC framework help us to understand this situation for critical sectors like medical supplies?
One of the most significant contributions of the global value chain (GVC) perspective, and its intellectual precursor, global commodity chains (GCCs), is the notion that global industries have “governance structures” led by different kinds of lead firms. These governance structures can be producer-driven (led by manufacturers in capital- and technology-intensive industries like automobiles, computers, or pharmaceuticals) or buyer-driven (led by retailers such as Walmart, Costco or JC Penney, or global brands such as Nike, Adidas, or Disney). Perhaps the most surprising finding about the wave of “global outsourcing” of American companies that led to the tsunami of U.S. imports of consumer goods products from East Asia, Mexico, the Caribbean and elsewhere in the 1980s and 1990s is that it was primarily buyer-driven – i.e., promoted by retailers and global brands. In contrast to prevailing models of supply-side economics, the outsourcing of most U.S. consumer goods industries was driven from the demand side of the economy by large-scale retailers and prestigious global brands.[iii] This was a new phenomenon most economic theories did not account for.
A similar trend is at work in the medical supply industries and the well-known shortages of personal protective equipment (PPE) during COVID-19. Acute product shortages for PPE items like face masks, medical rubber gloves and ventilators were commonplace as COVID-19 sped across the globe in the first half of 2020; demand spikes were complicated by industry shutdowns as workers along with the rest of the population were asked to stay indoors to slow the spread of the virus. However, a byproduct of PPE product shortages was an awareness that the production of most PPE items was heavily concentrated in Asia: two-thirds of global rubber gloves production is concentrated in Malaysia and 60% of global supplies of face masks came from China. Up to 90% of the global supply of many pharmaceuticals and their active ingredients come from China and India.[iv] How do we explain these pre-crisis concentrations of medical supply production in Asia? Does this mean U.S. supply chains are broken?
Like many other consumer goods, PPE items are primarily buyer-driven supply chains. A major reason that production of face masks, rubber gloves, and basic pharmaceutical products are concentrated in China and elsewhere in Asia is because U.S. hospitals, and the large medical distributors that supply them (such as U.S.-based Cardinal Health and McKesson), have a strong preference for low-cost commodity items and just-in-time (JIT) purchasing systems that allow tight medical budgets to be stretched as far as possible. U.S. pharmaceutical companies and other large medical product manufacturers facilitate these preferences with JIT supply chains concentrated in the lowest cost countries to cut prices and reduce inventories.
Thus, after the COVID-19 crisis subsides, the supply of most PPE commodity items will probably revert to low-cost suppliers in developing regions of the world. However, one likely change will be to diversify suppliers beyond Asia to include more near-sourcing regional options (e.g., Mexico and Central America for the U.S.), with selective reshoring for a handful of high-priority items, including active pharmaceutical ingredients and key inputs like the non-woven, melt-blown fabric used in face masks.
The Duke GVC Center’s project on “North Carolina in the Global Economy” has shown the resilience of North Carolina’s industries to technological and economic changes. How can the value chain methodology help map and assess the growth potential of U.S. regions and industries?
North Carolina in the Global Economy (NC-Global Economy) was a project that evolved significantly over the last two decades at Duke University. In the early 2000s, I developed the initial versions of the NC-Global Economy website to supplement my lecture course on the global economy in Duke’s popular “Markets and Management Studies” undergraduate certificate program. The different country and industry examples used to illustrate the origins and spread of the global outsourcing of U.S. firms beginning in the 1960s and 1970s through the 1990s were fascinating as historical case studies, but the students were also interested in the impact of globalization on local jobs and industries. Thus, I asked students to use the tools of the newly emerging GVC framework[v] to map out how several of North Carolina’s main industries were being affected by changing trade patterns, investment flows and technology shifts in these industries.
In the early 2010s, the NC-Global Economy website was enhanced considerably and updated through the concerted efforts of a team of Duke GVC Center researchers, led by Stacey Frederick.[vi] The newest version of the website included a more standardized template to depict the value chains of the seven key industries we focused on,[vii] plus 20 years of economic statistics (1992-2012) on each industry, and comparisons with the other U.S. states that North Carolina competes with most directly in these industries. While carrying out this academic research, utilizing both publicly available statistics as well as proprietary databases and online research to document the specific activities of local companies in each industry, the Duke GVC Center was in close communication with North Carolina’s Department of Commerce and other state-level policymakers to increase both the policy and business relevance of this research.
In my written and oral testimony for the U.S. Senate Commerce Committee’s hearing on “Implementing Supply Chain Resiliency” on July 15, 2021, I discuss North Carolina in the Global Economy as an example of a “bottom up” approach to globalization, which focuses on how particular places (e.g., U.S. states or small countries) are affected by globalization, and how value chain mapping provides a very tangible, up-to-date and policy-relevant form of analysis that can be helpful to multiple industry stakeholders, including companies, workers, policymakers, training centers, research universities, environmental advocates, etc. Every state in the U.S. has its own set of priority industries that generate a large proportion of investments, jobs, trade opportunities, and broader social and environmental aspects of development. Thus, value chain mapping could be a highly useful approach that seeks to improve local competitiveness, but it is also scalable to national, regional and global levels.
The value-chain analysis allows the identification of critical gaps in supply chains that need to be addressed by investments. It sounds like governments should regularly support these kinds of studies, but from your testimony it seems this hasn’t happened. Why is this the case?
Given the scale of disruptions the COVID-19 pandemic has triggered, the topic of supply chain resilience has become a strategic focus with significant policy implications for governments around the world. The United States offers a compelling example. In June 2021, the administration of President Joe Biden released a White House report entitled “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth.” Concerned that supply chain vulnerabilities in four critical industries – semiconductors, advanced batteries for electric vehicles and large-scale utilities, active pharmaceutical ingredients, and rare-earth minerals used in telecommunications and other strategic sectors – may threaten America’s economic and national security, various policy measures are proposed in the report to enhance supply chain resilience. Indeed, in the U.S. context, supply-chain resilience currently is a core pillar of an ambitious new “industrial policy” whose goal is nothing less than the revitalization of American manufacturing through a broad-based and sustainable development agenda that seeks to compete more effectively with the rise of China and address other challenges such as climate change in the emerging new geopolitical order.[viii]
How supply chain resilience should be viewed in relation to GVCs, and why resilience requires a multidimensional perspective were among the key messages delivered to the U.S. Senate Commerce Committee in the July 15, 2021 hearing that followed up the White House report. The link between the two concepts of supply chain resilience and GVC resilience goes back to the recent origins of supply-chain research and the rise of the GVC perspective in the early 2000s. The GVC framework added to earlier supply chain studies by making an explicit effort to understand and measure how and where value is created and captured along global supply chains, as well as the main trajectories of economic, social and environmental upgrading (or downgrading) associated with these changes at the global, national, regional and community levels.[ix]
While in principle GVC analysis and value-chain mapping could be essential tools for the U.S. government in dealing with supply-chain disruptions and identifying emerging opportunities for innovation and the revitalization of American manufacturing, in practice, there are several barriers to overcome. A significant, but manageable, challenge in value-chain mapping is technical – i.e., to develop “correspondence” matrices that link different kinds of economic statistics together at similar levels of detail.[x] These publicly available economic and commercial statistics include: data on international trade (imports and exports); national production statistics (output by firms producing goods and services in the U.S. market); industry statistics (using standardized industry classification schemes to indicate the economic activities of firms); and occupational and employment data (linked to companies and industries, located in particular U.S. states and zip codes).
Each variable (trade, production, industry, occupation, location, etc.) has different classification systems used by the U.S. government, and harmonized codes used by multilateral agencies, like the United Nations Statistics Office, the World Trade Organization (WTO), or the OECD. Integrating large-scale datasets is underway in different government and international agencies, and many of these new databases are now publicly available.[xi]
A potentially more difficult issue is determining how individual companies fit into U.S. and global supply chains, which involves tackling the supply-chain transparency problem at the level of both global industries as well as how and where supply chains touch down in various national and local settings. In terms of supply-chain transparency, many U.S. and other multinational corporations (MNCs) are becoming far more open about identifying the names and locations of the firms that make up their manufacturing supply chains. For example, Nike now publishes an interactive “manufacturing map” of where Nike products are made that includes the number of factories, countries and workers involved in making finished goods as well as material inputs. Patagonia is also a leader in mapping its supply chain footprint,[xii] and most large MNCs such as VF, H&M, Apple, and Adidas publish lists of global suppliers. In addition, U.S. multinationals are collaborating more explicitly with academic researchers by sharing supply-chain data on overseas plants to assess whether factory monitoring improves labor conditions and economic performance.[xiii]
What kind of value chain research could be most useful for U.S. policymakers today to complement the Biden administration’s focus on resilient supply chains, a revitalization of American manufacturing and sustainable development?
To be useful to policymakers, firms, and other industry stakeholders, high-quality value chain studies need to bring all these elements together in a national or local setting. An illustration of how to do this is the Duke GVC Center project on “Manufacturing Climate Solutions”[xiv] that focused on clean technologies and U.S. jobs, which was co-sponsored by the Environmental Defense Fund (EDF) and the AFL-CIO to show that a “Blue-Green Alliance” was possible between a broad array of green-economy, carbon-reducing technologies and blue-collar jobs in the U.S. manufacturing sector. For each of the five products analyzed in this study (e.g., LED lighting, high-performance energy-efficient windows, and U.S. concentrating solar power technology), a value-chain diagram was created to illustrate the core technology and its constituent parts, a geographic map identified the main factories in the United States that supplied manufactured inputs for these products, and a table estimated the number of U.S. jobs associated with current and projected demand for each of these technologies. By combining a variety of sources, including company websites and annual reports, interviews with company managers and industry experts, and public as well as private business databases, value chain studies can contribute to enhance U.S. competitiveness and also promote the related goals of a more sustainable economy and a large number of good high-quality jobs.
A supply-chain methodology can also prove very useful in tracking opportunities created by new high-tech sectors in the United States. For example, following a study on the U.S. smart grid (the “energy internet”) that assessed the potential of 125 leading smart grid firms to create clean energy-related jobs, the Research Triangle Region of North Carolina emerged as one of the U.S. “hot spots” for future growth.[xv] A separate study was commissioned by a local development agency to assess how this North Carolina cluster of smart grid firms could build on its competencies and expand its opportunities to invent, make and sell their products in the U.S. as well as abroad.[xvi] A main objective of both studies was to “map” the smart grid value chain to show more clearly the technological synergies linking the national and state-level economies.
[i] Lizzy O’Leary, “The modern supply chain is snapping,” The Atlantic, March 19, 2020; Willy C. Shih, “Bringing manufacturing back to the U.S. is easier said than done,” Harvard Business Review, April 15, 2020; Aaron Friedberg, “The United States needs to reshape global supply chains,” Foreign Policy, May 8, 2020.
[ii] McKinsey Global Institute, “Risks, resilience and rebalancing in global value chains,” August 6, 2020. Available at: https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains#.
[iii] For an introduction to the GCC and GVC paradigms and the rise of buyer-driven chains, see Gary Gereffi, Global Value Chains and Development: Redefining the Contours of 21st Century Capitalism (Cambridge University Press, 2018), Chapters 1 and 2.
[iv] See Gary Gereffi, “What does the COVID-19 pandemic teach us about global value chains? The case of medical supplies,” Journal of International Business Policy, 3 / 3 (September 2020): 287-301; and Gary Gereffi, “Increasing resilience of medical supply chains during the COVID-19 pandemic.” Industrial Analytics Platform@UNIDO.org. June 24, 2021.
[v] See Gary Gereffi and Karina Fernandez-Stark, “Global value chain analysis: A primer,” 2nd edition (Duke GVC Center, 2016), available at https://gvcc.duke.edu/wp-content/uploads/Duke_CGGC_Global_Value_Chain_GVC_Analysis_Primer_2nd_Ed_2016.pdf; and Gereffi (2018), op. cit.
[vi] For an overview of the methodology involved in value-chain mapping, which is one of the tools used in the NC-Global Economy website, see Stacey Frederick, “Global value chain mapping,” in Stefano Ponte, Gary Gereffi, and Gale Raj-Reichert (eds.), Handbook on Global Value Chains (Edward Elgar Publishing, 2019), pp. 29-53
[vii] The seven industries in NC-Global Economy include: Textiles and apparel; furniture; tobacco; hog farming; information technology; biotechnology; and banks and finance.
[viii] Greg Ip, “‘Industrial policy’ is back: The West dusts off old idea to counter China,” Wall Street Journal, July 29, 2021; Brian Deese, “The Biden White House plan for a new U.S. industrial policy,” speech by the National Economic Council Director to the Atlantic Council, June 23, 2021, available at https://www.atlanticcouncil.org/commentary/transcript/the-biden-white-house-plan-for-a-new-us-industrial-policy/.
[ix] Gary Gereffi, written testimony submitted to the Committee on Commerce, Science and Transportation United States Senate for the Legislative Hearing on “Implementing Supply Chain Resiliency”, 15 July 2021, available at https://www.commerce.senate.gov/services/files/67E02EA4-C400-4566-9D8B-4EE5F045BA73, p. 3.
[x] See U.S. Census Bureau, “Guidance for Industry and Occupation Data Users,” available at https://www.census.gov/topics/employment/industry-occupation/guidance.html.
[xi] For example, the OECD/WTO have collaborated on a Trade in Value Added database that permits a detailed trade mapping of how countries participate in GVCs by calculating the value-added of exports (domestic content minus imported inputs), and the World Bank has created the World Integrated Trade Solution software package that allows users to download detailed trade information on commodities and over 170 partner countries.
[xii] Patagonia, “Working with Factories,” https://www.patagonia.com/our-footprint/working-with-factories.html; Patagonia, “Supply Chain Environmental Responsibility Program,” https://www.patagonia.com/our-footprint/supply-chain-environmental-responsibility-program.html.
[xiii] Richard M. Locke, Fei Qin, and Alberto Brause, “Does monitoring improve labor standards? Lessons from Nike,” Industrial and Labor Relations Review (61, 1) (2007): 3-31; Greg Distelhorst, Jens Hainmueller, and Richard M. Locke, “Does lean improve labor standards? Management and social performance in the Nike supply chain,” Management Science (63, 3) (2016), https://doi.org/10.1287/mnsc.2015.2369.
[xiv] See Gary Gereffi, Kristen Dubay and Marcy Lowe, “Manufacturing climate solutions: Carbon-reducing technologies and U.S. jobs,” Duke CGGC (Center on Globalization, Governance & Competitiveness), Durham, N.C., November 2008, available at https://gvcc.duke.edu/wp-content/uploads/greeneconomy_Full_report.pdf. The name of Duke CGGC was changed to the Duke GVC Center in 2017.
[xv] Marcy Lowe, Hua Fan and Gary Gereffi, “U.S. smart grid: Finding new ways to cut carbon and create jobs,” Duke CGGC, Durham, N.C., April 19, 2011, available at https://gvcc.duke.edu/wp-content/uploads/Lowe_US_Smart_Grid_CGGC_04-19-2011.pdf.
[xvi] Marcy Lowe, Hua Fan and Gary Gereffi, “Smart grid: Core firms in the Research Triangle Region, NC,” Duke CGGC, Durham, N.C., May 11, 2011, available at https://gvcc.duke.edu/wp-content/uploads/Lowe_Research-Triangle-Smart-Grid_CGGC_05-24-2011.pdf.