Supply Chain and Manufacturing in the US

I will simplify this to a manner in which I have worked in for almost 50 years. The big issues around manufacturing are the Infrastructure (bldg., machinery, etc.), Overhead, and Labor. All of which is a part of the cost of manufacturing. Typically, you will find the infrastructure to be a onetime price. Overhead has to do with the costs of operation (electricity, etc.) plus insurance, permits, licensing, healthcare insurance and other employee benefits such as vacation. Labor is input to the actual manufacturing of a part or product. There is also indirect Labor which I would categorize as Overhead if not directly involved in manufacturing.

Labor input has been reducing due to advances in manufacturing, CNC equipment can do the work of more than one employee in manufacturing parts and product. Manufacturing Cells can employ one person (if needed). Multiple operations can occur using CNC equipment. Labor may feed the cell, stack the product, and occasionally check the quality of the product. Briefly and without taking you on a tour of a factory, this is how one station may be a part of the plant manufacturing cycle.

One of the biggest costs of Labor is healthcare. For a single employee, it may be as high as $7,000 annually. For a family it will go into the $Twenties. There are other costs such as Social Security, life insurance, vacation, etc. This has been creeping up for years. Healthcare costs in the US are nationalized in Europe which is something the US has not achieved yet. You can purchase additional coverage in Europe for a low cost. To put this into perspective, Mexico and Canada have healthcare plans too. That in itself is a major cost to manufacturing in the US.

Lets read what Matt Stoller has to say about manufacturing in the US. Has he says, this is going to take a while to return manufacturing to the US. Read on . . .

“How to Prepare for the Coming Supply Chain Shock,” from the site BIG, Matt Stoller

This piece has a very simple point. While there are a lot of things we can only source from China right now, America can build. And we can get a lot, though not all, production up and running much faster than most of us assume.

I am writing this piece because we’re going to hit some rocky shoals in the next few months, when the ships from China stop coming and the inventories of key materials draw down. It’s not clear how bad the damage will be. It could be gradual enshittification, like worse selections of consumer goods, no more spare parts for air conditioning units and industrial systems, and higher prices for everything from baby gear to packaging materials. Or it could be much worse, like rolling black-outs as vital utility systems break down. We just don’t know. As Mike Beckham, the CEO of Simple Modern, an Oklahoma-based consumer products company said,

“The trade war is setting up a supply chain disaster that could dwarf the chaos during COVID.”

And yet, in such a breakdown, a lot of things that seem improbable happen, and the political contours of what is possible change.

For instance, in the early months of the pandemic, America was facing a shortage of cotton swabs to test for Covid, and the only factory that made FDA approved swabs was located in Maine and run by two cousins who hated each other. Eleven months later, that company was churning out 15 times as many. How? The government provided capital and had machine tooling specialists from a major military contractor expand production facilities.

In April 2020 the Department of Defense announced it was investing $75.5 million in Puritan to double its production of the foam-tip swabs used for rapid antigen testing. The company renovated a dormant 95,000-square-foot factory in Pittsfield in eight weeks, with government contractor Bath Iron Works building proprietary swab-wrapping machines in a quarter of the time normally required. This facility is now making about 100 million swabs a month.

This episode wasn’t the only illustration that a lot of the difficulties in building stuff are just self-imposed rules we can toss aside. As a different example, auto companies repurposed their factories to make ventilators. GM gave aptitude tests to all its employees and sent some of them on this new project. Here’s what one of them, Kelly Willis Rice, said about it.

“It was amazing because I started about a week or two into it and they were still converting floors from an abandoned plant, putting in new wiring, putting in a new ceiling, learning to do this themselves while teaching you and while hiring a thousand people,” she said. “It was insane.”

The production worked, even though ventilators, it turns out, weren’t necessary. We saw the same thing with Operation Warp Speed, developing a vaccine from scratch and deploying it in 11 months. Shared urgency fosters a lot of innovation. And interestingly, we saw the first Trump administration quietly use some New Deal-style tools. The government, of course, offered guaranteed contracts for vaccine-makers, which meant that it simply created a market and justified investment. But beyond that, it actually cut real barriers, like patents. Moderna got the ability to cut through the patent rights of others using march-in rights, so that they could produce their vaccines.

There are clear physical constraints, limits on what we can do and what we know how to do based a foolish legacy of offshoring. But some restraints, as we saw during Covid, were self-imposed. In Jonathan Swift’s 18th century novel Gulliver’s Travels, Gulliver awakens tied up by a race of six inch people called Lilliputians. The legal restraints we have put on our engineers, workers, business people, farmers, and so forth, are like those ropes tying us down.

A few days ago, I wrote about the pricing games monopolists are going to play in this crisis, and ways to prevent that from happening. And the reason they can operate this way is because we’ve structured a political environment where America is dedicated to consumption and finance, while China does the production. Given we are no longer going to be able to get what we need from China, we’re going to have to reverse these choices, to make it easier for the builders again. That means creating the freedom to tinker, to explore, and to collaborate. This occurring without being sued by big firms.

There are a bunch of business practices that bloat our operational environment and make it harder for businesses to adjust to shocks. For instance, John Deere makes billions of dollars making it harder to fix agricultural equipment, using copyright, contract, trade secrets, and patent law. That’s not great in a normal business world, but when we can’t get new stuff and have to repair the old stuff, it’s a catastrophe.

This dynamic can be fixed without any physical changes. For instance, there are contracts that prohibit the ability of people to repair their own equipment, or copyright prohibitions on being able to modify software to fix a piece of hardware. Additionally, there are rules saying it’s illegal to reengineer products without permission from their software provider. Ford, not exactly a small company, is caught up in that problem, because it doesn’t have the right to modify the software of the subcontractors who sell components that go into its cars. These barriers can easily be voided with either courts or legislative changes.

Additionally, we have a bunch of exclusivity or tying arrangements forcing firms to buy or work with a particular buyer or supplier. That makes collaboration with others who might be more appropriate impossible, purely because of foolish laws. Broadly speaking these arrangements are known as “vertical restraints,” and most of them used to be illegal. It’s not that patents or copyright are bad, it’s just that you shouldn’t be able to license them in ways that prevent others from building on top of them or tinkering with them. It’s the vertical restraints on top of IP that makes it hard to produce. We can make them illegal again. And that will free the builders. It will hurt the monopolists who exploit intellectual property and monopolization to control industries.

Let me try to rephrase the problem, because it’s not about corruption, exactly. American strategy for 50 years has been designed to create financial assets, which we then traded to China and foreign countries for physical goods. Laws that strengthen the control of a financier over an industry, through stronger patent rules, monopolization, whatever, are good in this context, because they make it easier to create more financial assets. And lest people still fall under the delusion that production is some old hokey thing that service economies don’t need to do, let’s be clear that increasingly we can’t even grow food or do real services anymore. We’ve gone into pure rent extraction mode, and that’s bad for everyone.

Take Qualcomm, which has patents on key processes in networking equipment, and uses its ‘intellectual property’ to drive licensing revenue. Intellectual property is really a misnomer, because knowledge has fundamentally different characteristics than physical goods like land, factories, and so forth. Knowledge is what is known as a “non-rivalrous” good, which means that I can use the knowledge and you can use the knowledge, and the stock of knowledge doesn’t go down. It’s different from a physical good, which is “rivalrous.” If I use, say, a car you can’t use it at the same time.

But the non-rivalrous nature of knowledge doesn’t mean it doesn’t have value. It is immensely valuable in two ways. First, it can be socially valuable. Knowing things helps a society, individual or company build more and better stuff. Second, it can be a store of direct financial value, if laws allow its codification into patents, copyright, and trade secrets that generate licensing revenue. These often work together; patents can create an incentive to invent, and can protect the inventor against a financier trying to take their idea. As Abraham Lincoln put it, patenting “added the fuel of interest to the fire of genius.” But too much control over knowledge, particularly by dominant firms, can mean that its value as a financial asset limits its broad social value.

Let’s go back to Qualcomm. If that company offered a licensing fee to all comers for its stock of key patents, it would make money, and the patents would then lead to flourishing innovation. But if Qualcomm said you can only license its key patents if you don’t compete against it in other areas, then that patent has a lot more financial value, but the amount of value for society in terms of what everyone can make using that knowledge is much diminished. If that sounds, by the way, like an antitrust violation, there was in fact a lawsuit around it. Initially Qualcomm lost and was forced to license their patents on a non-discriminatory basis. But then a California appeals court, citing Qualcomm funded research on antitrust whose funding origin wasn’t disclosed, overturned the district court.

So Qualcomm’s choice to leverage its intellectual property for financial asset appreciation instead of allowing more production and innovation was legalized. For 50 years, such court decisions and legislation have been the norm, promoting everything from semiconductor blueprint designs to patenting of bacteria, all so that we wouldn’t have to make things here but could skim on licensing fees. America has structured our laws to facilitate more and more financial asset creation over actual production. And it seemed to deliver something. Foreigners would hoover up our dollar assets, like the stock of companies like Qualcomm, pay our licensing fees, and give us physical goods in return.

Well, now we’re at the end of that road. And with that, I’m going to relay some history that I wrote in 2019 and 2020, about how America used to work, and how China is actually operating in a policy environment very familiar to Americas in the 1950s.

From the 1950s to the 1970s, the U.S. had a fairly open patent regime, spurred not so much by changes to patent law as antitrust suits. Lawsuits against RCA, IBM, Dupont, AT&T, and others forced large dominant firms to license their technology to domestic firms.

I got a list of antitrust cases in 1952, and here are some of the industries where the DOJ antitrust division forced an end to anti-competitive uses of patents:

Electric lamps, glass bulbs, tubing, argon gas, machinery, electrical equipment, fluorescent lamps, soap and synthetic detergents, variable condensers (the tubing devices used on radios to select broadcasting stations), chlorinating equipment, braking systems, electrical equipment, powder, and paste for the detection of defects in metal parts, wrinkle finishes for paint, enamel, and varnish, latex, prismatic glassware and illuminating appliances, peach pitting machinery, fluorescent materials, metal abrasives industry, machine tools, dental impression powder, telescope grocery carts, sheet chargers used to feed sheets of metal materials to rolling mills, etc.

In my book Goliath: The 100-Year War Between Monopoly Power and Democracy, I go over how this regime worked. The short story is that the scientists at those giants developed great stuff, but the suits in those corporations didn’t get it. It took innovative small businesses to deploy what monopolists wouldn’t.

This open regime, along with government spending, is the origin of Silicon Valley, because small firms ended up commercializing the technology. But from the 1980s onward, we closed off innovation by tightening IP laws and enabling monopoly. This older regime disappeared, and even its memory evaporated. Open IP regimes and markets are now alien to American lawyers. I found a law review article written by a former FTC lawyer in the early 2000s on a suit antitrust suits with Xerox involving patent divestment. It was, he wrote, like finding a “previously undiscovered ancient culture.” He also found the suit unsettling, he argued, because the FTC’s remedy “seems to have done a world of good.”

Today, American intellectual property is locked into dominant firms, who spend large amounts of money making sure no one else can use it. Apple for instance spends $1 billion a year on its legal division, and Disney is right now suing people online for using Baby Yoda memes. China, however, has a way around our IP laws; it just hacks our corporations or legally forces technology transfer, and then moves this knowledge throughout its technology sector. Thus American know-how floods into China, while Americans are locked out of the wisdom we developed and paid for.

More than just the transfer is the ecosystem of business development and investment. China is innovating on top of our knowledge, which the America government has legally blocked Americans from using. Our venture capitalists and entrepreneurs shy away from competing with giants or accidentally stepping on patents. In other words, China is de facto living in the incredibly productive legal environment America had for our own technology sector from the 1950s to the 1970s. Their ability to innovate on top of our technology, combined with our inability to deploy that same technology, is now a huge national security vulnerability.

There are two ways to address this problem. The first is to try and stop Chinese tech development. The Commerce Department is rolling out new rules to engage in far more granular examination of supply chains, which is probably good. But U.S. tech giants are already moving key facilities to Switzerland so they can evade American jurisdiction. The reality is that our strategy of blocking the diffusion of knowledge will require a large number of policy choices, from finance to trade, for which we are unprepared. We’ll have to take those steps, but it’ll take a lot of time and political battling to do so. It’s also not clear that we can stop the development of Chinese technology, nor is it necessarily desirable to do so. If the Chinese come up with a cure for cancer, that’s a good thing for humanity.

The second strategy is to encourage more innovation here. And that means addressing extreme financialization of our intellectual sector that has locked Americans out while allowing the Chinese to innovate on our own knowledge and know-how. That’s what the FTC did when it sued Qualcomm, but we’ll need a much more aggressive attack on concentration in American markets. The idea is that if our markets are flexible enough and we have enough government financing of basic research, we can unlock the remarkable wisdom in our corporations and deploy and development technology much faster than we do today, and faster than China does with its autocratic state capital framework.

Readers of BIG know that we’ve been pushing for America to refocus on making things instead of pricing games, and while we’ve made progress, it hasn’t been enough. Well now we’re in a lot of trouble. There are many things we won’t be able to do, at least for awhile. But fortunately, America still has immense capacity in our millions of companies and hundreds of millions of people. It’s just that it’s siloed by a nest of financiers and paper restraints.

It’s time for our lawmakers to start knocking some of them down.