As the global community struggles with supply chain shortages, clogged ports, and now the war in Ukraine, corporations, governments, and investors are scrambling to figure out how to stabilize and strengthen access to critical industries and resources. Eclipse Partners Lior Susan and Aidan Madigan-Curtis recently joined the Bridgewater Daily Observations Podcast to discuss the renewed push for making our critical supply chains more resilient and how this process is likely to play out. Below are a few highlights from their conversation.
Bridgewater: The last time you both joined us in October of 2021, we were talking about the surge in demand and the bottlenecks that were created with ports, labor, and semiconductors. Now, with the Ukraine war, we’ve added a new issue, which is the actual supply shock and a lot of uncertainty in terms of supply chains in general. Can you start by giving your perspective on how things have changed on the supply front since we last spoke?
Aidan: The major shift I see is that in the last six months, companies and countries alike are no longer thinking of these disruptions as just something to get through until things are ”back to normal”. We’re seeing entities realize that disruption is the new normal. Every single company we’ve talked to up and down the chain from OEMs, to the manufacturers and logistic companies that supply them, are rethinking the vulnerabilities in their chain — i.e. which components are single-sourced, where and how companies manufacture end goods, and how companies think about their labor and labor practices. Supply chains always required resilience and redundancy in their designs — companies are now better quantifying and beginning to plan for the capex investment, R&D spend, and gross margin adjustments to mitigate these inevitable issues.
Lior: We are seeing a couple of fascinating trends besides disruption being the new normal. By and large, the big headline is deglobalization. Post World War II to today, the world basically was focused on cost and we became very global. I think in my lifetime, there’s going to be an understanding that food supply, automotive assembly, semiconductor manufacturing, supply chain, etc., are greater and more important to national security than weapons or hypersonic missiles. If I shut down one of your supply chains, I can influence the way that an economy or society can survive. It’s like going back in time — if you cut the supply of your enemy a long time ago, that’s how you won. It’s pretty scary in some ways to think that deglobalization is happening and the pace at which it is happening.
Bridgewater: The last time you were here, you both spoke about deglobalization and the move to reshore critical supply lines. Are you seeing more movement on that front following the Russian invasion and the disruptions that have followed?
Lior: In general, if you zoom out on the war between Russia and Ukraine, the impact on the overall supply chain is not that big. I say that cautiously because there are a couple of industries — especially around semiconductor materials and the automotive space — where you had quite a lot of resources coming from Ukraine, but the reality is the overall impact is not that dramatic. We are seeing a considerable reaction, however. I think we are seeing this reaction because there is still scarcity in the market and investors and different leaders are now thinking to themselves, “If we see this movie in Taiwan, it will be a different story.” If a similar scenario happens in Taiwan, it’ll be a whole new ball game because the core aspects of the world of electrification that is driving our economy across different industries is relyant on a supply chain coming from there. So if Covid, trade wars, climate change, baby boomers retiring and leaving physical industries were all not enough, incidents like Ukraine and potentially Taiwan are all coming to create a new paradigm.
Aidan: When you evaluate sector by sector, the US has many core supply chain vulnerabilities. 79% of our active pharmaceutical ingredients are actually generated elsewhere in the world. To Lior’s point about China and Taiwan, China dominates 80% of our lithium iron cell manufacturing. To put it in perspective, the US only generates 13%. When we think about these key inputs to our electronics, medical devices, automotive capabilities, and things like pharmaceuticals, it’s not to say we’re going to rush to create everything back in the US, but we certainly need to take a very solid look up and down the chain to see where we’re most vulnerable, and we need to think about generating some portion of them here at home. We’ve also lost much of our core manufacturing capacity and know-how over the last several decades. Copy-pasting raw materials extraction and manufacturing processes from overseas back at home won’t meet our needs — we need innovation to unlock the supply chain resilience we’re looking for.
Bridgewater: Can you give us more of a sense of what you are seeing that makes you think this time action is real and on what dimensions? At some level the challenge seems insurmountable. We’re so reliant on so many things. The supply chains are so complex and you can’t be scared of everything or say, “Mexico is a problem, China’s a problem, and everything is a problem,” because we’re not really on a path to make our country an island. If China’s been discussed for years and that didn’t lead to much action to replace them out of the supply chain, what is really going to catalyze new change? Who’s going to do what spending, in response to what today?
Lior: In 2019, China contributed 28.7% of the world’s manufacturing. As a result of globalization in the last couple of decades, it’s very hard to move manufacturing back because it’s not only the factory itself you’re moving, but the process knowledge — the actual expertise that has been built there over the course of several decades. The Infrastructure Bill that President Biden is pushing hard on is actually a pretty big catalyst. Regardless of the impact you believe this bill will have, they government is looking at each of the layers of the economy regarding energy, manufacturing, industrial, and semiconductors — basically the pieces that contribute the most to things we almost lost as a country. The question now is how do you kickstart the change? My advice to them is that everything should be technology led versus just throwing money at the problem. Money will not solve the issues we are facing. The relationship with NATO is something I’m very encouraged to see. I do think we need Mexico big time. Mexico’s manufacturing is running at 110-120% capacity. That’s a long way to answer your question, but I think it shouldn’t be all doom and gloom — we are seeing some signs that the government is taking some action. We’ll see how these steps will actually affect the economy or not.
Aidan: We work closely with our portfolio companies and hear from their end customers, so we have a decent sense of what the market is looking for and what technologies are in-demand. We’re seeing companies become more cognisant of the costs of supply chain risks and are looking to reshore component procurement and end assemblies, especially in cases where technical innovation can enable the desired unit economics from an onshore supplier. A few examples from our portfolio: Bright Machines, which provides a software-configurable, modular manufacturing solution that meets onshore manufacturing expectations and VulcanForms, which provides high-accuracy, expeditious 3D printing of metal additives.
Bridgewater: Aidan, earlier you mentioned some of the US supply vulnerabilities and you’ve written recently on that subject outlining those areas and some potential solutions. Can you give an overview of the things the US and other countries can do to shore up their supply lines to be more cognizant of security issues, whether it’s a war, pandemic, or something else we don’t foresee?
Aidan: One thing that’s really key is the ability to make better use of the US’ renewable energy resources. Currently, there are technical challenges to taking advantage of the US’s vast renewable energy resources (wind, solar and hydro). For example, we lack the storage capacity and life-cycle expectation of batteries that can act as infrastructure for renewables output. Nor do we have transmission or gridification that can actually get the energy where it needs to be and/or distributed in an efficient way. Government spending towards cross-country gridification, as well as more private investment in longer-duration, greater life-cycle battery chemistries are required to make use of our renewable energy resources. There are several new nickel-based battery chemistries that can expand battery life cycle expectancy to 30-40 years. And there are probably a few other pieces I touched on in that article that are really relevant to reducing some of these broader vulnerabilities. For example, there are new forms of agricultural technology that would enable greater agricultural resilience in the US — i.e. hydroponics and aeroponics technologies. Generally, we’re enthusiastic about vertical farming as an approach that should leverage new technologies to allow for both more productive agricultural outputs, as well as less reliance on ideal climate conditions, etc.
Lior: Anything that at its core contributes through the world GDP by and large employs baby boomers. Most of the workers in these industries — agricultural, construction, industrial manufacturing, transportation, energy, etc. — are in their late 50s or 60s and either have retired or on the verge of retiring. So you have less people, but as we all know, consumption is up to the right and these discrepancies are creating a massive gap. Some of that gap is being bridged by technology and automation. We also think there is an opportunity to retrain the modern blue collar workforce. I grew up growing bananas and farming then looks very different from what it looks like now. Farmers now need to know how to use sensors and automation. We are working to build companies that will be able to train and deploy modern blue collar employees in physical industries, as a result of the micro trends we have previously discussed.
Bridgewater: Let’s talk a second about timing in terms of all of these changes that are likely to happen in terms of where supply chains are sourced and bringing back some of these critical supplies and the access to them. Is this something that’s going to happen over the short term? How long will it take for the changes to be fully implemented?
Aidan: The new technologies we’ve described, new battery chemistries, different approaches to nuclear, etc., take time to finalize and to pass regulatory requirements, yet some technologies — like the agricultural technologies I mentioned — are reaching commercialization status now. What I think we will see for sure over the next few years is greater activity from companies looking to diversify their supply chains away from being single-sourced overseas. As more companies better quantify their supply chain risks, we believe we’ll see a shift towards highly-innovative and increasingly price-competitive domestic solutions.
For the full episode: