Japan Crisis Renews Concerns About Global Sourcing

March 24, 2011
Blog: Production setbacks 'emblematic of a broader decline in American industrial self-sufficiency.'

The Wall Street Journal reported on March 24 that domestic auto production is being disrupted by a shortage of electronic parts from quake-ravaged Japan.

It turns out that Hitachi has 60% of the global market for automobile airflow sensors, and another company operating in Japan called Renesas is the dominant supplier of microcontroller chips for cars. The latter company has seven plants in the area hit hardest by the earthquake. So of course that is creating problems for a global auto industry based on the principle of just-in-time manufacturing. But there's a bigger issue here for America's manufacturers, because the day before that story appeared, the Journal contained a report about how the price of China's rare-earth exports have nearly doubled in recent months, and it has run several stories concerning the potential impact of the Libyan military operation on oil prices. Higher oil prices don't just raise the cost of manufacturing operations. They also suppress demand for goods by depriving buyers of money that might have otherwise been spent on everything from capital equipment to appliances. Is it just me, or is the underlying theme in all these stories how dependent the U.S. economy has become on offshore sources for vital production inputs? China and India Supply Critical Items I've written before about how economic globalization has denuded America's industrial landscape of sources for many such items -- to a point where the intelligence community is now worried about the security implications of foreign dependency. But defense analysts usually focus on high-end finished products like flat-panel displays when they discuss the dangers of dependency, and what we're finding now is that there are numerous mundane but necessary items for which indigenous sources have disappeared. Take steel. It's bad enough that China is out-producing America 10-to-one, and that there wasn't enough domestic output of high-strength steel to meet military needs when the Pentagon decided to surge production of armored trucks for the Iraq war. But that's just the tip of the iceberg. The New York Times reports nobody in the United States makes "rebar" anymore -- the steel rods used in reinforced concrete. The same paper reported previously that there were no longer any domestic sources for the precursor materials used in making antibiotics. If a pharmaceutical company in New Jersey wants to make penicillin, it has to get the necessary supplies from China or India. Too Dependent on Offshore Sources So although the production setbacks caused by earthquake-induced shortages of parts from Japan are just a passing story, the story is emblematic of a broader decline in American industrial self-sufficiency. Simply stated, we have become too dependent on offshore sources subject to disruption or deliberate manipulation. I guess the first time I realized that was the day I walked into a Wal-Mart in Massachusetts to buy 35-pound cast iron hand-weights, and discovered America's biggest retailer had bypassed Indiana and Ohio to buy the weights in China -- 10,000 miles away. Then my brother-in-law, who lives four blocks from a closed sawmill in the midst of southern Georgia's pine forests, sent my kids a pine easel for Christmas. It was made in China too. What kind of economic system could make such sourcing strategies sensible? And what kind of government oversight would allow a country with global military commitments to become totally dependent on offshore sources for penicillin supplies or rare earths? Industrial Strategy Needed Boeing Chairman James McNerney got it right several months ago when he told an audience that this nation needs an industrial strategy -- not a policy, but a strategy for assuring we do not become too vulnerable to offshore sources of supply for essential production inputs or end-tems. And the place to start in implementing such a strategy is to determine whether our ongoing deindustrialization is being driven by Adam Smith's invisible hand, or by the invisible thumb of mercantilist governments overseas depressing the scales in their own favor. Loren B. Thompson, Ph.D., is chief operating officer of Arlington, Va.-based non profit Lexington Institute and chief executive officer of Source Associates, a for-profit consultancy. Prior to holding his present positions, he was deputy director of the Security Studies Program at Georgetown University and taught graduate-level courses in strategy, technology and media affairs at Georgetown. He also has taught at Harvard University's Kennedy School of Government. See Also:

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