Earthquakes, monopoly and supply-chain risk

Barry C. Lynn, a senior fellow at the New America Foundation, says the Japanese tsunami shows the vulnerability of the global corporate economy.  The tsunami and earthquake destroyed factories that make a high proportion of essential components for the world’s industry – 60 percent of a resin used in making semiconductors, 90 percent of copper for lithium batteries, 50 percent of a microprocessor used to control automobile transmission and brakes.  The result is a domino effect that has hit not only Japanese industry, but industry worldwide.

Before globalization, he said, industry wasn’t this vulnerable.  Industrialists such as George Eastman and Henry Ford sought to make their corporations as self-sufficient as possible.  Eastman Kodak Co. processed the wood pulp for its photographic paper; Ford Motor Corp. operated rubber plantations to have raw material for tires.  Supply disruptions might affect one corporation, but not a whole nation, let alone the world.

Now companies are tightly linked to independent suppliers located all over the world.  To avoid the cost of maintaining inventory, they rely on just-in-time delivery.  So they are vulnerable to any interruption in the supply.

Lynn said the problem isn’t really globalization, outsourcing or just-in-time delivery.  The problem is monopoly.  Companies are not vulnerable if they have many suppliers, spread all over the world.  But when they come to depend on one company at one location, they are at risk.

The problem, Lynn said, began under the Reagan administration, which abandoned a commitment to promoting business competition, and adopted the philosophy that monopoly is all right if it promotes economic efficiency.  Lynn said the Reagan administration at least fought for the interests of American business against foreign monopolies.  He said it was the Clinton administration that abandoned economic nationalism and adopted the gospel of efficiency on a worldwide basis.

The problem is that economic efficiency increases risk.  If you squeeze all slack and duplication out of a system, you make it more efficient, you save money and time, but you have nothing to fall back on if the system fails.

The other problem with monopolistic bottlenecks in the supply chain is that certain companies and the governments of certain countries a whip hand over world industry.

Lynn’s ideas make sense to me.  He expressed them at greater length in a talk last fall.

Click on Associated Press and  Thomson Reuters for news reports of global supply problems following the Japanese tsunami.

Click on New America Foundation for that organization’s home page.

Click on Barry C. Lynn for links to more of his articles and videos.

Hat tip to Rortybomb.

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