COVID-19: A case for re-industrializing the West?

Last Easter weekend I was riding my bike through the blossoming tulip fields of Hillegom in the Netherlands, a few miles south of my place. I was mostly alone; the flowers were at their peak and it was a wonderful sight. I spoke with one of the farmers, who complained about the inability to export her products because of COVID-19. Borders are closed and grocery stores have replaced flower bulbs for - more essential - food items, responding to changes in demand. Garden centers only allow a limited number of customers into their stores to avoid contamination. Sad to see a literally beautiful sector of the Dutch economy in such deep distress.

It made me think about the crisis we are facing with COVID.

At its core we are trying to match the demand caused through sick patients with the supply of Intensive Care Units (‘ICUs’), by ‘flattening the curve’ below the maximum amount of ICU’s available in the country. Thankfully, due to the relentless efforts of our medical professionals, we see the first promising signs in my country that we are able to manage demand below the curve. This has been a truly heroic effort, but we are not in the clear yet.

Whilst the virus has a profound impact on the health of many of us, it’s not necessarily a medical problem we are trying to manage:

Whilst treatments and vaccines are unfortunately still months - if not years – away, there is a tremedous shortage of basic products like ventilators, face masks, protective clothing and disinfectant, which is a supply chain problem.

For now, every nation-state is scrambling to get their hands on the same - limited – supply. Some local manufacturers have pivoted to temporarily produce these goods, which is very laudable, but what can governments do strategically in the coming years to address the next ‘COVID-like’ crisis?

One of my observations throughout all this, is the need for governments to rethink their nation’s supply chain for critical goods ánd services. This is certainly not a blunt call for autarky, but the current supply chains clearly don’t suit the needs of the nation during a pandemic. By outsourcing to low-cost-countries, our supply chains have been optimized for the lowest cost. This has been to the benefit of consumers but has gone at the expense of our lower-middle class and made our medical system more vulnerable to the disruptive forces.

Build larger strategic reserves of non-perishable, but crisis-critical products

For those crisis-critical, but non-perishable products that are not manufactured locally, Governments can consider building larger strategic reserves of goods like face masks and other protective gear. They already do so for another commodity: petroleum. The strategic petroleum reserve (‘SPR’) is a supply of petroleum held by the US Department of Energy for emergency fuel. It is the largest emergency supply in the world, and its underground tanks in Louisiana and Texas have capacity for almost 800 million barrels (130 million cubic feet)(1). I am not convinced that domestic manufacturing of face masks outweighs the cost of holding larger inventories. ICU equipment may be an exception to this rule, also as technology advances over time, making this a ‘perishable’ good.

We will probably need to stockpile crisis-critical commodities when those markets – and prices - have normalized again to affordable levels.

Re-industrialize the manufacturing of crisis-critical and perishable products

For those crisis-critical products that are perishable and not produced domestically, governments could consider stimulating durable local manufacturing. Many countries are not, but the Netherlands is already blessed with a vibrant agricultural and food industry, making it the second largest food exporting country in the world. From that perspective, it’s certainly not a bad place to be during a pandemic like COVID. (Even so, with warehouses full, many of the Dutch were still hoarding food during the first two weeks of the outbreak…I never knew toilet-paper was crisis-critical until I ran out..).

However, think of critical medication with a limited shelf-life, whose supply chains can really get disrupted as a result of a pandemic, not just those medicines treating the pandemic. For example, there are roughly 500,000 thyroid patients in the Netherlands that depend on a daily dose of medication to function properly. In 2016, 350.000 patients in The Netherlands ran out of Thyrax, and that was only because Aspen, the manufacturer, moved their plant from the Netherlands to Germany, not overseas. Even small upsets in these critical supply chains can have a truly destabilizing impact on a nation.

Through tax incentives and long-term offtake agreements, government could mobilize private investors to bring back the manufacturing of perishable, crisis-critical goods to the country. Today’s digitally- and robotics-enabled technologies can make decentralized manufacturing compete with low-cost labor in Asian countries. But governments have a key role to play, as supporting domestically manufactured supplies will require significant policy shifts. Re-industrialization happens through the tax codes and offtakes, not through expressing noble intentions.

Re-thinking social service

We are at war. Not with a rogue state, but with a virus. In this fight, we are short of trained personnel that can operate ventilators or provide general care to our patients. One thing that has been a positive outcome from COVID is the renewed social cohesion it has created in society. People genuinely care about others and try to help. Many try to contribute to society in creative- and commendable ways: Medical students becoming temporary nurses, company restaurants producing meals for the city’s needy, people walking the dog of their sick neighbor, etc. I love that part.

Can we keep some of that positive dynamic going and build a force of young people trained to operate critical equipment or who can take care of the sick. Maybe we can achieve this through re-introducing a 9-12-months ‘social’ service, replacing the draft for military service we had in the past? Hence, a reserve of prepared folks that can be mobilized and ‘hit the ground running’ when the next pandemic strikes. In many ways, the military is rather ideally positioned to train large groups of people in critical skills like logistics, project management, operational planning and (wartime-) medical services. Like no one else, they know how to swiftly mobilize trained experts and complex equipment under the most challenging circumstances. Building, equipping and manning a tented hospital in Amsterdam is a cakewalk for those guys.

Side benefit: Our kids will learn invaluable skills and become more rooted in our society, developing excellent social skills. I like Netflix too, but my kids are definitively over-binging these days…

Never waste a good crisis to improve the resiliency of our society!

I welcome any thoughts you may have on this topic

Geert

(1)WikipediA

#ShellVentures #Covid19 #supplychainmanagement #crisismanagement #Shell