Remember six weeks ago, when that container ship blocked the Suez Canal and everyone interpreted it as a sign of excessive globalization? Turns out everything sorted itself out. It worked out so well that I bet you cannot even remember the name of the ship that got stuck. As I noted at the time, “This is not an all-or-nothing crisis, but rather one in which prices react to real-world shocks and private-sector actors will respond to shifting incentives.”

I bring this up because those concerns about excessive globalization have again gravitated toward global supply chains, particularly in semiconductor chips. This has been a running theme of the past year of pandemic. Throughout 2020, consultants and business publications were banging on about the need to think about supply chain integrity in response to shocks like covid-19.

This concern has increased in recent weeks. Manufacturing output growth in the United States slowed last month because automakers face semiconductor chip shortages. “60 Minutes” did a big story this past weekend on the problem, with Lesley Stahl asserting in her voiceover, “Covid showed that the global supply chain of chips is fragile and unable to react quickly to changes in demand.” Stahl’s report also raises the specter of geopolitical risks posed by Taiwan’s dominance of the semiconductor industry.

This is a cudgel that CNN and other outlets have also wielded. The thing is, Stahl’s own reporting undercuts her hyperbole about fragile global supply chains. As Kevin Drum noted:

Why is there a shortage of chips? Is it because we’ve outsourced everything to the wily Chinese folks on Taiwan? You’d think so after inhaling Lesley Stahl’s inane reporting, except for the fact that she inadvertently allowed the chairman of Taiwanese chipmaker TSMC a brief moment to give the game away: “In March 2020, as COVID paralyzed the U.S., car sales tumbled, leading automakers to cancel their chip orders. So TSMC stopped making them.”
Oh. So it has nothing to do with Taiwanese fabs vs. American fabs or global supply constraints or any of that. Nor is it related to a possible invasion of Taiwan or the fact that Intel may or may not have made good decisions about its future business. It’s because American car companies canceled their chip orders and never bothered to reinstate them. Then in December, when car sales “unexpectedly” began to rebound, they panicked and realized what they had done. You’d think these guys had never done an economic forecast or used an MRP system before in their lives.

Fortunately, contra to Drum’s fears, it would seem that the car manufacturers might have been the outlier. According to one recent survey of supply chain decision-makers, 91 percent of respondents expressed confidence in their own supply chain. Eighty percent said they were investing in inventory capacity in 2021 to improve resiliency.

That last point is important. While “just in time” management cut costs for final producers, it redistributed some of those costs to intermediate producers, who wound up either holding extra stock or finding other ways to cope with demand-side fluctuations. The Financial Times’ David Keohane, Claire Bushey and Joe Miller report that the latest surge in demand for chips has triggered a debate about whether suppliers or final producers will shoulder the costs of carrying inventory:

Jean-Marc Chéry, chief executive of STMicroelectronics, said that his customers, whether carmakers or car part suppliers, will need to hold more inventory or agree to more non-cancellable contracts to make supply more predictable and reduce the risk of shortages.
That would mark a shift from the current system where chipmakers hold excess inventory to accommodate the sector’s just-in-time supply chain.
“If they expect the semiconductor [suppliers] to be the bank, to keep having a big working capital to support them, they can forget it,” said Chéry.

Fortunately, the Wall Street Journal’s Sean McLain reports that auto manufacturers are coming around to a similar view, deciding it is worth stockpiling some inventory:

Executives say they don’t want to replace just in time entirely, because the savings are too great. But they are moving to undo it to some degree, focusing on areas of greatest vulnerability. They are seeking to stockpile more critical parts, especially if they are light and relatively inexpensive yet irreplaceable like semiconductors.
Ford’s chief executive, Jim Farley, said he was looking at keeping more inventory. “Most other industries use safety stock for critical components like chips,” he said at an event hosted by Automotive News. “And many of these companies pay for chips upfront, years and years ahead of the capacity requirements.”
Three decades in the car business hadn’t prepared Mr. Farley for this year. “It’s shocking to me how much I’ve learned about the supply base,” he said.

Much like the complaints about the Ever Given blocking the Suez Canal, this is a “bad news caused by good news” kind of story. The FT story confirms the “60 Minutes” point: “The chip shortage was caused by an unexpected rebound in demand for cars that coincided with a booming consumer electronics market.” Demand surged in the last quarter of 2020 and the first quarter of 2021. As vaccines spread across the developed world, demand will likely spike even further. Still, much like the recent Suez crisis, firms are responding to shifts in prices. In other words, this is a problem that is sorting itself out.

It is worth noting the dogs that are not barking in any of the detailed reporting on global supply chains. There are no issues with importing goods from the Pacific Rim. There are no reports of concerns about disruption due to geopolitical risks. Indeed, despite all the hyperbole surveys of firms do not show geopolitical risk anywhere near the top of the concern queue.

To repeat a theme: global supply chains are not fragile and the geopolitical risks to them have been exaggerated. The current shortages are caused by producers underestimating demand and lacking the immediate inventory to respond. One lasting effect of covid-19 will likely be the increase of buffer stocks by final producers to ensure this problem does not recur.

The hard-working staff here at Spoiler Alerts is well aware of the problems associated with weaponized interdependence. That does not mean that every supply chain hiccup is reason for hyperventilation. This problem is sorting itself out.