How to Survive and Win in New Markets
World War II-Style Mobilization Order May Carry Legal Risks
Automaker General Motors Co. and Elon Musk, the CEO of Tesla Inc. and SpaceX, have offered to make hospital ventilators, and other manufacturers are being called upon by the Trump administration to quickly make 500 million N95 air-filtering respirator masks.
But as companies help government fight the coronavirus pandemic in a potential World War II-style mobilization, they are venturing into a legal minefield over patents.
“I don’t want to be the jerk saying people shouldn’t do things to save people’s lives,” but potential contractors “should have eyes wide open,” said Ranga Sudarshan of Covington & Burling, a Washington lawyer, who represents government contractors in intellectual property disputes at the U.S. Court of Federal Claims.
There are more than 1,000 patents in the U.S. alone that mention the N95 standard used for respirators important to protect health-care workers from transmission, according to data compiled by Bloomberg. Among the owners of patents on respirators are the U.S. government, 3M Co., Bristol-Myers Squibb Co., individuals and various banks that own them as collateral, the data show.
Yet public pushback against lawsuits in a time of crisis can be swift.
Earlier this month, Labrador Diagnostic LLC, a patent-licensing firm owned by SoftBank Group Corp.’s Fortress Investment Group, filed a patent-infringement suit against bioMerieux SA, a French company developing coronavirus tests. Even though Labrador later said the suit wasn’t over Covid-19 tests but infectious disease diagnostic tests that predate discovery of the virus, it was blasted in news articles and on Twitter as being “pure evil” and as “greed in the apocalypse.”
Labrador later announced it would offer its patents royalty-free for any company developing a coronavirus test. Gordon Runte, managing director of Fortress, said in an interview that he took 50 threatening calls.
“I don’t know what else to do here to prove we weren’t aware of the Covid-19 testing plans,” he said. “We’re not Satan. We’re good human beings here, and still we’re being thrown under a freight train.”
Patent wars have been waged in nearly every industry yet there are questions about whether litigators will take a break as coronavirus ravages Americans and the economy.
President Donald Trump signed an executive order Wednesday that cites the Defense Production Act, which can force companies to break or delay other contracts to satisfy the prioritized orders, said Christoph Mlinarchik, a government contracts expert.
Trump, in a tweet after signing the order, said he would invoke the act only as a “worst case scenario in the future,” but some Democrats are calling on him to invoke it now, saying time was lost while Trump downplayed the threat of the virus in January and February.
Such orders, Mlinarchik said, “may cause short-term havoc for business relationships,” but “what company would be foolish enough to stain themselves with the long-term stigma of refusing to prioritize or allocate medical supplies during a national emergency and pandemic?”
Concerns that patent-infringement claims would deter contractors in a time of national emergency goes back more than a century. In April 1918, Acting Secretary of the Navy Franklin D. Roosevelt warned that the exposure of patent suits made manufacturers “reluctant to take contracts that may bring such severe consequences.”As a result, federal law ensures that patent owners can’t block the use of any patented invention for something made on behalf of the government.But it doesn’t stop them from pursuing royalty payments in lawsuits against the government at the U.S. Court of Federal Claims in Washington. In some instances, the contractors have to indemnify the government, which puts the contractors on the hook for any royalty demands.
Pandemic Profits?
A recent trial in Delaware revealed how even tangential connections to the pandemic can roil legal teams. Pacific Biosciences of California Inc. contends a federal jury in Delaware invalidated its patents for a hand-held DNA sequencer because the defendant falsely claimed tests to learn how coronavirus works would be unavailable if the patent owner won. In a statement, PacBio accused its rival of trying “to profit from the current coronavirus pandemic.”
The dire health situation can lead to an “act now, worry later” attitude. An Italian company used its 3-D printer to make copies of a needed valve for ventilators that was patented by another company. The original designer refused to release design files, so they had to be reverse-engineered, the Verge reported.
Citizen groups have been vocal in demanding that patents not get in the way of a vaccine or treatment being widely -- and cheaply -- available.
“We need to set aside outdated ideas about monopolies and exclusivities and focus on sharing knowledge and solidarity,” Robert Weissman, president of the nonprofit group Public Citizen, wrote Monday.
Drugmakers are aware of the public relations issues. AbbVie said it wouldn’t stand in the way of others making generic versions of its patent-protected drug Kaletra as an experimental treatment for coronavirus.
There are already hints that there may be patent fights over future drug treatments. Gilead Sciences Inc., which has been criticized for the high price of its HIV drugs, is developing an experimental drug called remdesivir and the Chinese government has said it’s seeking a patent on the treatment.
Sometimes the smallest thing can bring an entire ecosystem to its knees. Whether it’s a microscopic virus or the common computer chip, we’re learning the hard lessons of underestimating risk. We’re also being forced to acknowledge that some problems don’t have a quick fix. If we’re going to avoid catastrophe in the future, we should challenge some of the foundational systems and processes we’ve taken for granted.
The global semiconductor shortage has been driving automotive original equipment manufacturers (OEMs) to make large production cuts that are likely to persist for the remainder of the year. Along with significant near-term financial pressures, this situation has been a call to action for stakeholders to identify and manage risks through advanced collaboration, multi-tier visibility and predictive threat response. In fact, many companies are beginning to recognize that rebuilding supply networks around the core principles of efficiency and resiliency is not only possible, but overdue and important to remaining viable in a transforming global automotive sector.
How Did We End Up Here?
The COVID-19 pandemic, of course, had a swift and severe impact on the globally integrated automotive industry. Manufacturers shuttered assembly plants and drastically reduced their forecast projections to suppliers. Months later, as OEMs restarted operations, sales rebounded with high growth led by pent-up consumer demand in the second half of 2020. The strength of the rebound caught the industry largely by surprise and the need for semiconductors returned. However, restarting the automotive supply channel was severely affected by the reality of semiconductor manufacturing lead times—which can be three, four, or even six months for advanced chips. There was also a knock-on effect of one to two months to restart electronic module production at the Tier 1 and 2 supplier level. In addition, exogenous factors such as U.S.-China trade tensions, implications of the recent severe weather in Texas and the unfortunate fire at the Renesas factory in Japan exacerbated the situation.
You Can’t Avoid What You Can’t See Coming
Traditionally, it has been very difficult to create a line of sight through an entire automotive supply chain for a variety of reasons, including a lack of trust and communication between stakeholders, reliance on poor volume forecasts and outmoded data management systems. The result is an unknown number of potentially disastrous threat vectors that remain buried until it’s too late to avoid them.
This lack of visibility is also insufficient to uncover structural bottlenecks that exist at sub-tier levels of supply. For example, the global semiconductor supply chain is governed by a consolidated and cost-effective but ultimately brittle “diamond-shaped” structure where global vehicle manufacturers are wholly dependent on a larger number of Tier 1 component integrators who are, in turn, supplied by a small number of global semiconductor providers who rely on a handful of Tier 3 wafer manufacturers.
In addition, most OEMs have not yet adopted systems or processes to enable a real-time exchange of information with their suppliers. Hence, large fluctuations in production planning volumes happen at sub-tier levels in response to even small shifts in customer demand. This is typically known as a “bullwhip effect” where delayed communication between stakeholders at each tier in the supply chain are often amplified by judgements placed on the demand signals received.
To their credit, OEMs have responded to the crisis by employing a variety of tactics to minimize near-term damage, including directly engaging with Tier 2 and 3 suppliers, shifting assembly to more in-demand products, bypassing the installation of some modules until a later date and securing alternate sources of semiconductor supply. The U.S. government is also actively looking to review the current state of the semiconductor supply chain in order to identify policy recommendations and investments to improve resiliency moving forward.
Making Supply Chains More Resilient
Most OEMs have strong capabilities and knowledge within their own organizations. But they are often hampered by existing contractual obligations, functional silos, limited technology investment, and conventional ways of working that allow embedded supply chain risks to go unnoticed. Here are four critical business capabilities global automotive enterprises should consider in order to manage a similar crisis in future:
1. Establish an ongoing supplier risk management organization.
Industry-leading OEMs have centralized five to 10 dedicated global supplier risk management resources within purchasing and supply chain functions. Their focus is combining greater visibility into financial and geopolitical risks with supplier performance metrics to enable better sourcing decisions. These capabilities are also being augmented by the application of tools such as artificial intelligence and machine learning with a goal to identify supplier risks on a real-time basis.
2. Improve multi-tier visibility to identify “bottleneck” suppliers.
Multi-tier supply-chain mapping can bring transparency to each supplier tier within an integrated network. If OEMs are able to successfully map sub-tier relationships, they are better able to identify issues and work with affected stakeholders proactively.
3. Recalibrate supplier collaboration.
Some OEMs are sharing both short- and long-term forecasts with suppliers to help them model their capacity and identify constraints early. More importantly, they are trying to ensure that the entire supply chain for a given set of commodities is operating off the same synchronized demand signals. In return, they get visibility into critical operational metrics such as cycle times, shifts, capacities and lead times. The intent is to try and stabilize any demand variability and better manage supply requirements.
4. Develop a dedicated crisis response capability.
In case of a supply crisis, OEMs can deploy cross functional teams (CFTs) to identify potential impacts and plan mitigation steps. CFTs have experts from multiple disciplines such as planning, engineering, purchasing, legal, supplier risk management and supply chain management. Some OEMs have created “war rooms” where the CFT, led by the supplier risk management function, coordinates the company’s crisis response. CFTs also conduct frequent supplier visits to identify issues at the ground level. This team can also provide financial liquidity and manufacturing expertise to help bolster supplier operations.
Creating Long-Term Rewards
The semiconductor shortage has already caused a great deal of damage to the global automotive sector. Having said that, it has also been an agent of positive change. It has caused every OEM to rethink their global supply network in terms of where critical risks might still be buried. It has resurfaced the need to create direct contracting relationships with suppliers much further upstream. It has also reinforced the need for better, more timely data to replace a disjointed patchwork of information that is often inaccurate and out of date.
The current crisis also represents a unique opportunity for automakers to rewrite the rules of engagement to increase the amount of visibility they have across their entire supply base. Simply put, working to create a more collaborative value chain built on trust among stakeholders is a critical imperative for OEMs and suppliers going forward.
Aref Khwaja is a principal in Deloitte's Strategy & Operations practice with deep manufacturing and supply chain expertise.
