Four years ago, Peter Navarro, then President Donald Trump’s economic adviser, summoned me to the White House to discuss a Report He launched an unobtrusive headline “Assessing and Strengthening the U.S. Manufacturing and Defense Industrial Base and Supply Chain Resilience.”

My initial (misguided) reaction was to joke that it “looks retro”. Navarro essentially argues that governments and companies must be aware of the risks of using non-U.S. supply chains — and coordinate quickly to create domestic alternatives. But given the spirit of post-Cold War Wall Street capitalism, such government intervention—with its anti-globalization stance—seemed almost outlandish at the time.

no longer. Last week, BlackRock head Larry Fink, warns “The Russian invasion of Ukraine ended the globalization we’ve experienced over the past three decades”.this week White House invokes Korean War-era powers to increase the supply of battery minerals such as lithium, nickel and cobalt.

At the same time, the US chip group Intel, are selling plans to increase German production and Ohio. Whether or not you support Navarro’s mercantilist creed (which I don’t), those ideas are now resurfaced in a Biden administration, and retaliatory.

So what does this mean for investors? Judging from recent conversations with top management, there are at least three practical implications.

The first is that a radical “what-if” mentality is reshaping scenario planning around supply chains.No, that doesn’t mean the company moved all of its production abroad; as economic historian Adam Tootz debate, Fink’s predictions about the end of globalization still seem to be overblown. But boards are now envisioning once unimaginable tail risks and repositioning.

Consider chips. For years, American executives have known in theory that modern industry is highly — dangerously — dependent on Taiwan.TSMC has 53% share in the global semiconductor foundry market and 92% for advanced chips. Until recently, however, few companies had actively developed contingency plans in the event that Taiwanese supplies could collapse due to a Chinese invasion.

“But now we’re actively thinking about it [Taiwan risk],” the chief financial officer of a major U.S. company told me. That’s partly because the pandemic’s disruptions have highlighted vulnerabilities when chip shortages forced some auto industries in the U.S. and Europe to halt production.

Meanwhile, the Russian invasion makes an attack on Taiwan easier to imagine. That seems unlikely in the short term, as Putin’s problems in Ukraine teach Beijing a useful lesson about the risk of military attack. However, it remains a medium-term risk that China will refine its plans to avoid Russia’s mistakes, said David Sachs of the Council on Foreign Relations. “While the world relies on Taiwan for semiconductors, there is currently no practical plan or option to diversify chip purchases,” he noted.

This sparked a second shift: hoarding. A decade ago, words like “efficiency” and “simplification” were all the rage. There is now a new realization that resilience requires redundancy, i.e. slack and larger inventories. It won’t be easy for companies to do this given tight warehousing and supply. U.S. Department of Commerce data Indicates that the company currently has only five days of chip inventory, down from 40 days in 2019.But the inventory desire exists, so the fact that the inventory increases 4.9 percent U.S. growth late last year.

The third shift is that companies are now looking at supply chains horizontally rather than tunnelling. A decade ago, purchasing managers typically formulated strategies based on the principles of individual rational self-interest, profit maximization, and efficiency. But the 2008 financial crisis showed that what seems “rational” to individuals can be irrational to groups. This creates a single point of failure — and greater risk — when investors are all trying to mitigate risk by hedging with AIG. Now supply chains have learned the same lesson: if every company uses the same shipping nodes to find “efficiencies,” this creates new bottlenecks. Group dynamics are important.

This has prompted government intervention in the chip field: the White House has created a “Early Warning System” arrive”[bring] Industry unites and encourages greater transparency across the supply chain. In fact, it’s not particularly good (yet). But the message is clear: Supply chain data is no longer just a matter of proprietary interests. And the initiative may expand beyond chips or metals; Navarro 2018 The report details many high- and low-tech products facing supply chain vulnerabilities, from carbon fiber to chaff.

There are inevitably big downsides to these three shifts: As Fink points out, even a modest return to a world of corporate repatriation, layoffs, and government intervention can lead to inflation. That’s pretty retro too. But the point now is that events in Ukraine show that ignoring “what if” scenarios is more costly. America’s top management won’t forget this again anytime soon. Neither should investors.

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