This is the sixth post in a series examining the supply chain resilience reports released by the White House on Thursday, February 24.
The Departments of Commerce and Homeland Security collaborated on an Assessment of the Critical Supply Chain Supporting the US Information and Communications Technology Industry. Particular attention is given to 1) Printed Circuit Boards (PCB), 2) Fiber Optic Cable, 3) PCB Assemblies and Electronic Assemblies, 4) Routers, Switches, and Servers, and 5) LCDs/Displays.
The report includes this explanation of strategic context:
Over the past 30 years, the ICT [Information and Communications Technology] industrial base has evolved from being vertically integrated to being one that is highly outsourced, with most major brand companies outsourcing nearly every step of and input into the manufacturing process. Beginning in the mid-1980s, original equipment manufacturers (OEMs) in the computer industry, such as IBM and Cisco, that traditionally managed end-to-production services, began outsourcing manufacturing and software development to specialized technology companies, such as Intel (microprocessor chips) and Microsoft (operating software), and to contract manufacturers. Contract manufacturers are companies that perform manufacturing services for other companies on a contractual basis. To produce a computer, these OEM companies could no longer design and manufacture their own computer chips or develop operating system software, but instead, so that their equipment was compatible with everyone else’s, outsourced these needs to companies specializing in those products, such as Intel and Microsoft. This process, called vertical specialization, led ICT OEMs to focus on design and innovation of new and improved technologies. Over time, OEMs have increasingly adopted this business model with many companies eliminating all manufacturing capabilities. These OEMs now add value primarily through research and development, product design, and marketing new technologies to their customer base. By 2006, leading computer companies, including Dell, HP Inc. (formerly Hewlett Packard), Acer, and Apple, had completely outsourced their notebook manufacturing operations. The U.S. ICT industry reflects this evolution of the OEMs. The United States is the world’s leader in technology innovation, but most hardware manufacturing takes place in other countries. (Page 15)
The authors argue that as a result of this evolution, the ICT industrial base in the United States is not an ecosystem. The United States is an important source of downstream ICT demand and upstream intellectual/financial investment in ICT. But this domestic push and pull depends almost entirely on sourcing, processing, manufacturing, and transportation capacity outside the United States. If I am accurately reading between-the-lines, the authors may even be skeptical that the global ICT network of demand and supply fits the definition of an ecosystem. ICT manufacturing capacity is, potentially, so specialized by function, consolidated by enterprise, and concentrated by geography that it is much more an engineered network than a complex adaptive system. This is a provocative possibility. The February 24 report implies much more than it claims in this regard.
Even if the ICT industrial base better reflects the physics of the factory than the ebb and flow of watersheds, it is a huge and fantastically complicated factory. The report outlines:
A large multinational organization can have hundreds of tier one suppliers from which it purchases components directly. In turn, each of those tier one suppliers relies on hundreds of tier two suppliers. The whole supplier network for a large company can include tens of thousands of companies around the world when the deepest tiers are included in the network. For many companies, especially small -and medium-sized businesses, it is very difficult, if not impossible, and costly to obtain an accurate and complete picture of an organization’s entire supplier network. Making this effort even more difficult is the fact that a company’s suppliers can change on very frequent basis. Communications Equipment companies are one of the industries that have the largest number of tier one suppliers, with 2.2 times the industry median. (Page 60)
Eight recommendations are offered to increase the supply chain resilience of the ICT industrial base. I perceive that at least five of the eight (and potentially all eight recommendations) are intended to, first, reduce the current geographic concentration of ICT production capacity and, second, re-shore significant production capacity to the United States. There is a particular concern for reshoring manufacturing of PCBs and related assemblies. I do not recognize much emphasis on reclaiming a global or domestic ecosystem featuring significant diversity and independent self-organization.
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This series of posts started with acknowledging my bias regarding Supply Chain Resilience. For my principal purposes, the ICT sector is fundamental to how digital transactions and inventory management — and related network pulls — are organized and communicated to reflect demand. The Departments of Commerce and Homeland Security — appropriately — are concerned about other purposes. I am concerned mostly with facilitating downstream demand. They are concerned (mostly) with ensuring upstream supply of ICT capacity for my purposes and other purposes. These are complementary, not competitive angles. But it is also worth noting the strategic expanse extending between these two priorities.