Podcast: The Ghosts of Supply Chains Past, Present, and Future, With Chris Caine

Global supply chains are cracking up. Even before the pandemic, a confluence of economic and geopolitical factors were accelerating the trend—from rising wages in China to nationalist sentiments sweeping the West, to the beginnings of a U.S.-China decoupling. Rob and Jackie sat down with Chris Caine, president of the Center for Global Enterprise, to break down the reasons for the massive disruption, discuss how different industry sectors are making different strategic calculations, and consider what the future might hold.

Related:

• “Global Supply Chains Under Pressure, With Willy Shih,” ITIF Innovation Files podcast, May 2020.
• Stephen Ezell, “Digital Trade Growth, Rule-Making, and Supply Chain Resiliency: U.S. and Global Perspectives” (ITIF, October 2021).
• “Biden Officials Discuss White House Supply Chain Report,” ITIF event, June 2021.

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Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, founder and president of the Information Technology and Innovation Foundation. We’re a DC-based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman, I handle outreach at ITIF, which I’m proud to say is the world’s top-ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. But today we’re talking about a very timely topic, supply chains.

Jackie Whisman: Our guest is Chris Caine, who’s the president of the Center for Global Enterprise, a New York-based nonprofit dedicated to the study of the contemporary corporation and management excellence. He’s also a longtime member of ITIF’s board. Good to see you, Chris, thanks for being here.

Chris Caine: Thanks Jackie. Thanks Rob. Good to see you both.

Jackie Whisman: So, as Rob said, we’re hearing more about supply chains than ever before. I gave in and started my holiday shopping in August because Twitter told me there would be no toys left for my child by Christmas. Can you explain the reason for this massive disruption and how we’re going to bounce back?

Chris Caine: Sure. Well, I think buying your holiday gifts early is always a good idea, but I don’t do it. So I’m going to wait till the end, just like I usually do. But an answer to your question about why have we found ourselves in this position? First of all, it’s not a new thing that has just come home to roost. I think there are four factors for how we got here. And the first is in 2012–2015 timeframe people started to rethink the benefits of globalization and the benefits of scale and integration. This is from a business community standpoint. And what some of the reasons for that were that China’s wage rates were increasing, over-concentration of supply chain assets were now present in China and a couple of other Asian countries. And so people started to think about how can I diversify my assets, my supply chain assets and footprint. Also, there was a tightening of the constraints on foreign investment in foreign exchange.

And then lastly, the political developments in Hong Kong that had prior to this time been talking about one country, two systems started to go away. So the investments that people made in China and in other Asian countries about scale and integration started to look very different. The second thing, a factor is, was really around the rise of nationalism and kind of the waning of multilateralism. Now, when President Trump came in and he pursued his US disengagement from the world’s strategy that accelerated the atrophying of economic integration that had been starting a couple of years before. So he didn’t create this problem, but he certainly accelerated the economic disengagement that we are dealing with today in supply chain matters.

The third area, the factor that I think gives a lot of cause to this is that the US and China are going through an economic decoupling. So you have the first and second largest economies in the world decoupling from each other, where 40 years prior to this, we were integrating with each other, and this is politically driven. It’s just no way about it, no other way of explain it. It’s been politically driven. You could argue that there are good reasons and bad reasons for it. But I think for what we see is that people interpret the decoupling and the way it’s going about... It’s a blunt instrument approach versus a sharp instrument approach. So decoupling is the third factor.

The last factor is the pandemic. The pandemic lockdowns, and shocks to especially convening industry business models. And I just think we should give some time to talk about convening industries because they’re so prevalent. And not all the impacts that we’re seeing from the pandemic are the same. They’re uneven, regulatory and health protocols and practices across the world. So if you have a supply chain and your assets are distributed in various countries, those countries and how they have chosen to deal with the pandemic through lockdowns, regulatory and health and safety practices are uneven. And it’s not just about infection rates and or vaccines. It’s really about the policy choices governments are making or not making out how to allow economic movement within their country.

And I think there are just kind of two things that dramatize this for me. One is a convening industry business model, let’s take entertainment, let’s take sports, let’s take amusement, right? Bringing people together, hospitality industry, bringing people together. Those business models were disrupted by the pandemic and the shocks to their ability to execute their business model in a typical way. Correlate that with business models that use digital assets, Zoom, online commerce, those business models have sky-rocketed where physical convening business models have been hurt badly because of the pandemic lockdowns and shocks to their business models and industries that by definition have historically brought people together.

So I think that’s how we’ve gotten here. And I don’t know that it’s going to bounce back anytime soon. I do know that there are fundamental changes taking place, and it’s going to take time for some of these readjustments to models to work through. But it’s also a number of these are being decided by policy choices that politicians are making.

Rob Atkinson: Chris, that was super interesting and I think you covered all the factors there. I guess one question I would have for you, companies I think see these disruptions are not just about one time pandemic. They’re not just about Trump. They’re more systemic. I guess my question for you, because you follow and talk to a lot of global corporations in this space. What are the lessons you think that most globally integrated corporations are taking from all this now? Are they moving over from kind of just in time, are they diversifying supply chains? Are they trying to reshore? What are they really trying to do?

Chris Caine: Rob, I think they have realized for a number of the reasons, the factors that I pointed to that they can do things today that they couldn’t do 10 years ago, 20 years ago. What does that mean? Almost every corporation’s business model now is a combination of physical and digital assets. And those digital assets provide tremendous agility and flexibility to running a business. In most cases, those business leaders are not going to be running their enterprise just on digital assets. There are clearly digital natives, but most businesses and enterprises are a hybrid model between physical and digital assets. What they realized is that the digital assets give them great reach and dexterity in times of disruption or in times of chaos, either imposed by governments or imposed by natural disasters like pandemics and climate impacts.

So what they’ve been able to do is to maximize the dexterity that comes with their digital asset approach, become more asset light in the physical sense and be able to accelerate their transformation. And what we’ve really seen is so go back to this concept of supply chain assets being over concentrated in a particular geography or country. When you have digital assets, you have the ability to rebalance that concentration and to do so faster. In some cases you’re not going to be able to go very fast because it takes time to build a semiconductor grab and it takes a lot of money to do that, right? And those are all going to be physical things that they’re dealing with.

But on the other hand, the ability to relocate data in service-oriented industries to be closer to the customer and then to invest in technology tools such as advanced manufacturing, such as AI to better understand what we call the new customer. The new customer is driving change through every enterprise because the new customer is more informed and more capable of making choices instantaneously than the old customer that had to wait for the supply side to get their service or their product to them.

Jackie Whisman: So it’s making it easier for companies to diversify out of China and Asia or is it making it more complicated?

Chris Caine: Well, it’s making it more possible to diversify. It is making, in some respects, transformation more complex. But the complexity of transformation and the enterprise has always been there. Now you can just do it faster. And as importantly or more importantly, you have greater visibility into both your interaction with customers, whether they’re B2B or B2C and the ability to track your progress in transformation.

Rob Atkinson: I remember a few years ago when Jeff Immelt was the CEO of General Electric, he made to me at the time, one of the most striking statements and almost nobody picked up on. And he said, “The days of global corporations making in one or two markets, one or two locations and selling around the world are gone because of the pressures of government to localize. And he said, obviously he’s not CEO anymore but he said, he envisioned GE as having many more locations around the world, just because countries are saying, Hey, want to sell something here, you got to make something here. Do you see that going on as well? That’s a sort of forced localization barriers to trade and forcing companies to be in more place. I mean, we potentially see that now in the US with some of the buy American provisions.

Chris Caine: Yeah. I think it’s always been there, but I think it’s actually easier to locate locally with digital asset and digital tools than when you were merely a physical asset business model. So let’s take GE for example, since you brought it up, what percentage of their not now, but what percentage of their business when Jeff was CEO would be considered physical businesses versus digital businesses and probably a pretty high percentage, right? Appliances, light bulbs, aircraft, healthcare, they were known as the manufacturer, the global manufacturer. But even within their physical footprint they invested tremendous amounts of time and energy to accelerate their digital capabilities within those physical business models.

Now they could argue that they didn’t do it as quickly or as, as focused as they needed to, but they pursued it aggressively because of the visibility and the dexterity it gave them to execute.

Rob Atkinson: Yeah, no, that’s interesting. And you obviously see a lot of companies in manufacturing who are doing that with digital twins and what they call industry 4.0, et cetera. I want to go back to this China issue I read in the today is different than when we’re publishing this... But I read in the Wall Street Journal this morning an op-ed by the former national security, not the national security advisor, but a national security advisor to President Trump, and he had a really interesting book out which I think is something around deterrence or something like that, after I’m halfway through the book. But the op-ed in the Wall Street Journal said, “He thought that the risk of armed invasion of Taiwan by China was actually high, because he thought just like in World War I and World War II, where the Germans attacked before the Allies could get strong. He’s worried that the US is building up, helping with Taiwan.”

Anyway, whether that’s going to happen or not clearly I have no idea, but here’s my question, if we were to go to a war with China and there’s maybe a blockade of Taiwan, what happens to global supply chains? I mean, it’s a hard question to answer Chris I know that, but maybe some scenarios.

Chris Caine: No, it actually was the basis of a conversation I was having with 50 students at my Alma Mater couple weeks of ago. And it was about really about tradeoffs that the next generation is going to have to make about the US interests and US strategies. So I think it depends on the sector, Rob. Semiconductors, going to be a big world of hurt, right? Taiwan Semiconductor Corporation is right now the biggest founder in the world that is supplying all kinds of semiconductor companies who over the same last 20 years decided the business model made sense to go fabulous and so they were design... At one point in time everybody in the semiconductor industry felt they needed a FAB or they needed a partner who had a FAB and then they decided they didn’t need that they just could be a design house and create value. And they did. And many of them did.

So an invasion of Taiwan semiconductor disruption, deep and probably lasting for a while because it takes so long to stand up a semiconductor FAB. Now that being said, those FABs in the United States, GlobalFoundries, Intel, et cetera, they are going to be invested in aggressively because we don’t need production capability in scale. Does an invasion of Taiwan do much for the meat industry? I don’t know. Probably doesn’t seem like it to me. Doesn’t do much to disrupt the paper industry, doesn’t sound like it to me. And so the same way, new roots of commerce were drawn during other times of conflict or does faster, I guess, as new roots of coming out of Asia to meet supply chains requirements would be redrawn or diverted in such a way.

Rob Atkinson: Yeah. I mean, we all should be praying and fingers crossed that that doesn’t happen. It would be it total catastrophe, but I do think it’s something that is in the realm of possibility where it really wasn’t five years ago and could have serious implications. And that’s clearly what the Chips Act is trying to do, which hopefully will get funded to help support foundry development in the US. Chris, I want to switch gears slightly.

Jackie Whisman: Yeah. Can we make things a little happier than a war with China to close this?

Rob Atkinson: No.

Chris Caine: That would be a good idea. Let’s do that.

Rob Atkinson: No, we can’t. All right. We’ll make it happier. So-

Jackie Whisman: Thank you.

Rob Atkinson: ... one of the things that is happening and interesting about supply chains now is that there’s more technology applied to the entire supply chains system, tracking devices, better software. I know, for example, your former company, IBM was and is doing work using AI. Can you tell a little bit about what leading companies are doing in this whole area around tracking and resiliency?

Chris Caine: Sure. In fact, in the Center for Global Enterprise, we have an institute called the Digital Supply Chain Institute, which brings together companies from around the world in different sectors to look at exactly what are the leading edge strategies for supply chain transformation in a digital environment. And our members or companies like Colgate, Pall Mall and Dell and Under Armor et cetera. And so it’s multi-sector and multi-geography where we bring people together.

In direct answer to your question, so companies are investing in management process transformation, number one. And number two in technologies that increase visibility, security and talent dexterity. Talent has really become a major operational priority for supply chain executives for a couple of reasons. One, the technological environment has changed within how a supply chain operates and the technology skills needed by supply chain functions don’t exist in a forward-leaning way. They exist in what was more typical of an industrial supply chain skillset. So there is both a skill requirement to refresh talent. There’s also an availability problem.

There are a number of companies need more supply chain talent to select from, and they need women in their supply chain leadership and supply chain talent pools. And the percentage of women in supply chains compared to other parts of the business environment is very low. And so we’ve been trying to work on expansion of mentorship and the expansion of women into supply chain as a career in supply chain leadership positions. So visibility, security, and talent have been the three areas of added investment in supply chain transformation. I’ll give you two examples of something else that’s happening.

Because of the disruptions, whether you’re in a B2B or a B2C business model. And this primary is we see a lot of change happening in the B2B community. B2B businesses are now going direct-to-consumer, D2C. So alcohol companies, spirits companies who traditionally go through distributors or any other kind of B2B enterprise that traditionally has gone through distributors now are going direct to consumer and they’re investing in the technologies and the capabilities to do that because the customer is now equipped to both express themselves and receive the product in a way that they never were able to do so before. So companies going direct to consumer is a very large investment area right now.

Secondly, companies are using AI and ML to create dynamic supplier profiles to assess those suppliers’ reliability, security, and resilience. So if you think about what Dun & Bradstreet did decades ago for financial profiles of a company, make it more holistic, make it more complete. You have companies like Kraft out of San Francisco that have focused on supply chain and being able to tell a supply chain owner a full and holistic picture about how their supplier or their suppliers are operating. Are they going to be around? Do they have resilience? Are people leave that company to go work for someplace else? Do they have security in their operational processes? So that’s another example of taking the technology tools that exist, Rob, that have been around for a while and applying them to supply chain requirements in a way that’s faster and has not really been done before.

Rob Atkinson: That’s really interesting. We should get tracked by that company because we’re in the idea supply chain business and we’re very stable.

Jackie Whisman: One, I want to make sure before we close that we get to one key piece of this, which is the deployment of blockchain. Can you talk a little bit about its relevance to supply chains?

Chris Caine: Yeah, I’d be happy to, we have done a lot of work with supply chains and blockchain for the last four years and here’s what has transpired. Four years ago, people were excited about blockchain, companies were looking at how could it be applied to increase supply chain traceability and accountability, or let’s put it this way, integrity. There were a lot of proof of concepts that were being tried applying blockchain to the supply chain and most of them failed. Most of them failed for a number of reasons, one it wasn’t and isn’t today, the magic bullet. It is the piece of a solution, not the solution in and of itself for supply chain visibility and traceability.

Two, it delivers tremendous benefits to a company relative to traceability, but it is very hard to implement across the supply chain in a scaling way and the ease of adoption to components or partners in your supply chain of becoming engaged with a blockchain is not easy. So you have traceability, which is a real benefit, and you have scalability, which is a real problem or a negative a barrier, and you have ease of adoption, which is a barrier or not a necessarily a positive. Those three variables in an equation meant that blockchains utilization within supply chains, especially global supply chains was oversold.

And now if there’s a sense of sobriety about blockchain, its value. Does it have value? Yes, it has value. Does it have value in supply chains? Yes, it does. Is it your magic bullet? No, it isn’t. Is it a part of an advanced supply chain ecosystem that will deliver accountability, visibility and integrity faster than what exists today in supply chains? Yes, but it’s going to start with a point project and then expand. It’s not going to be applied across the enterprise from the beginning.

Rob Atkinson: Yeah. That’s really interesting, Chris, you know that’s so true. So many past technology and I think you certainly know and a lot of the listeners know the Gartner Hype Cycle, which is they trace technologies from what they call the Peak of Inflated Expectations, which was probably blockchain three, four years ago at the Trough of Disillusionment. “This is terrible, it’s never going to work.” And then it comes back up to some it’s used in interesting, useful areas, but it’s not the end of all and be all. I feel like AI is still at the Peak of Inflated Expectations and everything’s going to be AI. It’s going to do everything and solve everything and eventually we’ll come to back to some realization on it.

Well, Chris, this is super helpful, really interesting. You know, we could certainly do another session on this because it’s so interesting what’s happening today and we’re in the midst of an evolution that’s happening and it’s hard to see it because you don’t see it directly in front of you as a citizen, but it’s all there in the background and that evolution is happening and reshaping the world that we live in.

Chris Caine: Yeah. I 100% agree. We’re in a period of readjustment for business operations and procedures. And supply chains are now on stage being seen by the average person who never knew a supply chain existed nor knew what it was like. And so we’re going to have a period of readjustment, a lot of investments going into different areas of what those models should be for reassessment. But I would agree with you, Rob, we’re not going back to the way supply chains used to operate. A whole new environment of operational excellence and in some cases inefficiency is in front of us.

Rob Atkinson: Great. Chris, thank you so much.

Chris Caine: You’re welcome.

Jackie Whisman: And that’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website itif.org and follow us on Twitter, Facebook and LinkedIn @ITIFdc.

Rob Atkinson: And we have more episodes and great guest lined up, new episodes drop every other Monday. So we hope you continue to tune in.

Jackie Whisman: Talk to you soon.