Tuesday, August 11, 2020

Bringing the Manufacturing Back Home

Onshoring… it’s the word of the hour. To our general dismay we have recently discovered that most pharmaceuticals and Lord know what else, are now being produced almost exclusively in China. This makes us dependent on China. It undermines the benefits of free trade and open markets. Besides, we are going to war against China, and we cannot fight effectively unless we bring the drugs and the rare earth minerals and the defense technologies home.

The Wall Street Journal has the report:

President Trump signed an executive order on Thursday to help increase production of essential medicines, medical equipment and protective gear in the U.S., his trade adviser Peter Navarro said.

“We will bring our pharmaceutical and medical supply chains home -- we’re going to bring them home where they belong -- and we will end reliance on China,” Mr. Trump said during a visit to the Whirlpool Corp. manufacturing plant in Ohio, a key presidential election battleground state. “We’ll be making our product here -- safely, beautifully and inexpensively. We’re reasserting American economic independence.”

The order includes a “buy American” requirement for government agencies such as the Department of Health and Human Services, Department of Veterans Affairs and the Defense Department, said Peter Navarro, Mr. Trump’s trade adviser. He also said the requirement would help establish demand for investment in the manufacturing process.

And yet, it’s not quite as easy as issuing an executive decree. Among the realties that our political leaders have been ignoring are these:

A U.S. manufacturing revival of drugs cannot happen overnight, experts say. Building new facilities takes years of planning, billions of investment, regulatory approvals, and they still face higher labor costs than other countries. For example, sourcing ingredients in India can lower costs for U.S. and European companies by as much 40%, according to the FDA.

Still, government intervention may entice companies.

The CEO of Teva Pharmaceuticals said this:

“If there’s preferential treatment given to products manufactured in the U.S., then of course we will move more of our manufacturing to the U.S.,” Kare Schultz, chief executive of Teva Pharmaceutical Industries Ltd., which closed about two dozen plants in recent years as part of a restructuring, said in an interview earlier this year. “If there’s no preferential treatment, then the basic economics will keep it the way it is right now.”

And he also said this:

“Borrowing money to start up manufacturing in itself does not make manufacturing sustainable,” Mr. Schultz said in an interview. “Even if you get the capital at zero interest, that does not mean that you can be cross competitive…I don’t see how it’s plausible.”

Mr. Schultz said his company has been in discussions with the White House about how to make U.S. manufacturing of drug ingredients, known as active pharmaceutical ingredients or API, more sustainable.

Well, it’s a political season and the administration is selling nationalism. Naturally, we all want this to happen. Yet, wishing does not make it so. And railing against China is not going to make it easier for a company that had lost out in the competition over photographic equipment to instantly become a world class producer of pharmaceuticals. 


David Foster said...

Kodak's failure in the photo market was largely a matter of a lack of strategic vision; it says nothing about their abilities or lack of same in chemical manufacturing. Kodak has been in the chemicals business for a long time, much of this was spun off as in 1994 Eastman Chemicals, but some product lines and associated manufacturing capabilities were retained.

See the web page for Kodak Specialty Chemicals:


Stuart Schneiderman said...

I was relying on the opinion of the CEO of Teva Pharm, who, I assume, has real knowledge about the production of pharmaceuticals.

David Foster said...

Two separate but related issues: (1) Can Kodak quickly being to produce the ingredients required, and (2) can they do it on a cost-competitive basis? I suspect the answer to (1) is 'yes', and if it's not, there are other speciality-chemical companies in the US.

I don't know the labor vs capital vs energy mix of inputs required to make these products, but it does seem likely that US manufacturing will have a cost premium...although this premium will like decline over time due to improved automation. The question for the US as a country is, are we willing to see some increase in costs, and hence in prices, to purchase improved national security and supply-chain resilience? If the answer is 'yes', then there are many possible mechanisms for doing so, not only tariffs, but, say, a ruling that Medicare reimbursement applies only to drugs made with a certain % and type of US ingredients.

Ignatius Acton Chesterton OCD said...

David Foster, I am a firm YES to the U.S. making those moves as a country. This is a clear national security issue.

If domestic pharmaceutical production is yet another victim of labor arbitrage, then we need to set our priorities as a nation -- from a healthcare security standpoint. China has shown itself to be an irresponsible global actor with the SARS-CoV-2 scandal. Why we would want them producing our pharmaceuticals is beyond me. Because it's cheaper? Everything from China is cheaper, until Americans don't have jobs and cannot afford the pharmaceuticals being produced.

These American CEOs really tick me off. Just because you CAN do something doesn't make it wise. If they want Marines to go rescue personnel from threatened offshore plants/offices, or to negotiate favorable trade deals, or to have the State Department exercise some muscle to get concessions from the host country, then they are a U.S. company, not an independent globalist actor. It reminds me of CNN's Bernard Shaw in Baghdad saying he wasn't bound by loyalty to the U.S. while exercising his freedom of speech. Get lost!

I'm getting tired of privatization of profits while socializing losses/risks. The American middle class is getting screwed in all this. Cheaper goods? Sure, until you don't have a job. But I think it's high time that we acknowledged that some manufactured goods need to be domestically produced. There's a big difference between cheap amusements and life necessities. These aren't Elmo dolls, they're drugs! If China ever chose to embargo drugs to the U.S., it would be a public health disaster.

Many of the companies I talk to do not want to send their production overseas. Instead, they have to do it or they'll cease to exist. Labor arbitrage is a serious competitive advantage. We've not really thought this through. Mr. Shultz says they've shuttered 24 plants in recent years. What changed? The competitive landscape. How many manufacturing jobs is that? One would imagine that pharmaceutical manufacturing is a high-skill job. We're told to invest in education so we can get high-skill jobs. If labor arbitrage is the name of the game, then the education carrot is a ruse, and we're in a race to the bottom without even realizing it.

The U.S. has watched this all happen. We are building the Chinese economy and it is NOT a win-win. The CCP is a mercantilist, klepto-communist machine. Adam Smith's normal rules of economics do not apply. We'd better wake up before our wealth is gone.

Giordano Bruno said...

I cannot make a decision because the market makes the decision for me. I cannot choose a greater degree of autarky because the market disagrees with it. If the market told me to commit suicide, I would reluctantly oblige because the markets must be respected. The market will choose the elect, and the market has elected China, we must abide by that decision.

Start looking at the market as a mystical cult of wealthy people who have been trained their entire lives to follow its dictates like an ancient oracle and you'll begin to see the power of suggestion. It's a cornerstone of the globalist cathedral.

Anonymous said...

I can say with a high degree of confidence that this is never going to happen. Offshoring in the modern economy is 99% driven by regulatory and wage arbitrage. You can't keep the Democrats out of power for long, and they will continue to load crushing regulatory burdens onto the backs of manufacturers. In the meantime, establishment Republicans like Mittens will gleefully strip mine the industrial base of America to make a buck. Manufacturers as a constituency simply have no representation in Congress.

The best chance for pharma and medical device manufacturing is to restore the tax benefits to Puerto Rico that Republicans killed in the '90s. There's some small chance we can keep these industries in PR because their wages are low and the reach of US regulations is somewhat limited. Otherwise, forget about it.

Giordano Bruno said...

Anon is correct. We cannot get there from here with the existing incentives and penalties. The alternative is the arrival of another form of power, one we haven't seen in a while. Power that compels. It's OK, these cycles cycle around; they have for centuries. Besides, they have that in China now, and they seem to be getting along with it.

John henry said...

I've lived in Puerto Rico since 1971.worked in a pharma mfg plant from 76-85, have sold mfg machy and consulted to manufacturing, esp pharma ever since.

Wages for skilled labor are a bit lower here than in us. But when you factor in govt mandates (double time for overtime instead of time and a half. 30 Mandatory paid vacation, holidays, sick days, Xmas bonus and more) compensation costs are similar. All us labor laws apply. Same minimum wage as elsewhere.

Federal Regulations in pr are identical to upper 50.

One thing too many people do is equate manufacturing activity with manufactruing jobs. The US, for its offshoring has increased manufacturing output by a lot. 2-3 times in the past 25 years or so. At the same time jobs have decreased due to more productivity and automation.

Labor costs, as a proportion of total costs, are less important every year. The more sophisticated the industry, like pharma, the less important the cost.

The real problem in us manufacturing is availability and quality of labor. Most of my mfg clients in the upper 50 have 5-10% of their positions currently unfilled. They can't find people at any price.

John Henry