Testimony of Sridhar Kota, MForesight, on the Supply Chain Crisis — March 30, 2022

Summary

Written testimony of Sridhar Kota, Executive Director of MForesight: Alliance for Manufacturing Foresight and Herrick Professor Emeritus of Engineering at the University of Michigan, dated March 30, 2022 and addressed to Chairman Cardin, Ranking Member Paul and committee members. The testimony addresses the supply chain crisis and preparing for the next crisis, focusing on small and medium sized manufacturers. It argues that the crisis stems from decades of offshoring and calls for a national strategy and a whole of government approach. It cites figures including FDA drug shortages rising from 90 drugs in 2018 to 119 in September 2020 and 58 manufacturing programs across 11 agencies. It proposes support for small manufacturers through grants, low-interest loans, training vouchers and partnerships, and a new federal entity focused on U.S. manufacturing competitiveness.

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Sridhar Kota
Executive Director – MForesight: Alliance for Manufacturing Foresight
Herrick Professor Emeritus of Engineering, University of Michigan.
Founder & CEO, FlexSys Inc., Inspire Rx LLC.


Chairman Cardin, Ranking Member Paul, distinguished Committee Members—thank you for the
opportunity to appear before you today to discuss the supply chain crisis and how to better
prepare for the next crisis.

I would like to focus my testimony on small manufacturers who are the economic engines of
our local communities, and backbone to the entire manufacturing sector. Challenges facing
manufactures are broad, deep and systemic. We need government action that is
commensurate with the challenge to prepare for the next crisis. No single federal agency can
truly fix the supply chain crisis by itself, and SBA is no exception. The supply chain crisis has its
roots in gradual erosion of our manufacturing sector over four decades. Therefore, creating yet
another federal program or increasing funding for an existing program might give some
satisfaction but it will not fix the underlying problem. It takes a whole of government approach.
It demands an effective national strategy to create industries of the future. It needs sustained
investment, not spending, by the federal government.

To highlight the nature of this challenge, I quote Akio Morita, co-founder and Chairman of Sony
Corp. “American companies have either shifted output to low-wage countries or come to buy
parts and assembled products from countries like Japan that can make quality products at low
prices. The result is a hollowing of American industry. The U.S. is abandoning its status as an
industrial power.” This was said in 1986. The slippery slope we have been for the past 4
decades has only made matters much worse. It is not surprising that we did not have adequate
masks and ventilators that we desperately needed during the Covid-19 crisis. To ensure that we
will be better prepared for the next crisis, be it health, military or natural, it is crucial that the
federal government takes a holistic approach to develop a real solution, not a piecemeal
approach that is likely to fail.

The pandemic is new but the gross inadequacies in our domestic supply chains across almost
every manufacturing sector are, unfortunately, not new. With heavy reliance on global supply
chains and foreign manufacturers, the pandemic has interrupted shipping of parts and
materials to nearly 75% of U.S. companies. Modernizing our ports and distribution channels will
streamline the flow of goods from other countries the next time we face crisis. But that will
only provide a false sense of security when faced with a different type of crisis. Already, our
new normal celebrates when an Amazon Warehouse moves to town, but the nation simply
cannot maintain its living standards based on low-paying jobs in warehousing, distribution, and
sales of American innovations made in offshore factories.

For decades, we have steadily offshored manufacturing to low-wage countries. That strategy
has worked and continues to work well for private sector companies that remain focused on


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short-term profits. For too many companies, manufacturing could be done cheaper abroad,
avoiding the capital costs and operational expenses of building and running factories while
destroying good-paying domestic jobs resulting in stagnant incomes for nearly 50 years. By
offshoring manufacturing, we have slowly but surely eroded our manufacturing know-how,
infrastructure, precision machinery and engineering skills – all of them collectively called
“industrial commons” or what we used to call American ingenuity. As a result, we also eroded
our military preparedness with growing dependence on other countries for critical military
components and systems. For instance, a report by the Senate Armed Services Committee in
2012 documented the vast number of counterfeit parts in defense supply chains, typically
imported by third and fourth tier suppliers. There were several other reports and studies since,
but the downward trajectory has only intensified. More recently, we all realized our
vulnerabilities in health security during the Covid crisis.

Personally, I had a frustrating experience in 2020 when I tried to identify U.S.-based
manufacturers of electric motors for a device I co-invented to treat Covid-19 patients while
preventing virus transmission to health care workers. After over a month of failed attempts, I
reluctantly entertained offers from China. I found them to be technically thorough with very
attractive delivery options and pricing (unit and volume), which, understandably, would have
been enough for most customers to place the order. But I was determined to keep
manufacturing here, and, fortunately, after additional efforts, I was able to identify a
manufacturer based in Kentucky. Such lack of domestic producers is a common phenomenon in
almost every manufacturing sector for over two decades, but only aggravated by the Covid
crisis.

Between 2007 and 2019, manufacturing output fell 1.3 percent, a worse performance than
during the Great Depression. Productivity rose only 0.4 percent per year compared to 3.7
percent in the prior 20 years. In 2018 the Food and Drug Administration (FDA) listed 90 drugs in
short supply; in September 2020, the number had jumped to 119. Output from a key industry
during the pandemic, medical equipment and supplies, fell 10 percent. A more granular analysis
of 40 manufacturing industries found that only one—wood containers and pallets—increased
employment between 2002 and 2018, but only by 1.2 percent. Every other industry examined,
including advanced industries like semiconductors, communications equipment, and
computers, experienced large drops in the number of establishments and employment.
Meanwhile, production in China continued to grow, to roughly double U.S. output.

Covid-19 has aggravated and surfaced the underlying systemic challenges in our manufacturing
supply chains. Domestic manufacturers of all sizes have experienced shortages of raw materials,
components, sub-systems or machinery and tools that are routinely imported from other
countries, particularly from Asia. Additionally, the shortage of skilled workers at all levels
continue to plague the manufacturing sector. These challenges are intertwined – fixing one or
the other will not improve our resiliency when the next crisis arises. An effective way to prepare
for the next crisis is to take a holistic approach that begins with a national strategy to
strengthen not only emerging technologies and industries of the future but also the
foundational industries and capabilities that are critical to our national security, as well as


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economic, health security and energy security. It is the federal government’s role, not the role
of the private sector, to secure and advance our national interests.

A good example of such a federal initiative is the current bipartisan efforts to strengthen
domestic manufacturing of semiconductors and electric vehicles. Likewise, if we have a national
strategy that identifies other critical sectors, we can identify specific technologies, both
emerging and foundational technologies, that we must develop to ensure robust and cost-
effective supply chains on-shore and/or near-shore to minimize the impact of future shortages.
Such a strategy could direct federal investment and public-private partnerships in building
knowledge and physical infrastructure just as we are witnessing in electric vehicles and
semiconductors.

Although the U.S. remains a large manufacturer, accounting for nearly 17 percent of global
output, over two-thirds of revenue is generated in just three industries: Chemicals (including oil
and gas products), Food & Beverages, and Transportation. It’s no coincidence that the first two
are anchored here by their dependence on local raw materials and agriculture production. The
silver lining is the Auto industry, accounting for over 20 percent of U.S. manufacturing. That is
because it still has the installed base of talent, infrastructure and supply chains built over a
hundred-year history. Once supply chains move away it is very difficult to lure them back
quickly even with tax incentives or tariffs.

But contrary to the Washington consensus, it is not high wages, taxes, unfair trade, regulations,
or automation that have decimated American manufacturing. Consider Germany, Japan, and
South Korea: these advanced nations continue to have strong manufacturing and innovation
ecosystems despite having higher wages, higher taxes, higher energy costs, strict regulations,
and more automation than in the United States. Governments and the private sector in these
advanced nations invest with a long-term strategy. In fact, foreign multinationals, German and
Japanese in particular, continue to invest in manufacturing facilities in the U.S.

Small and medium sized manufacturers (SMMs) serve as the backbone to the entire
manufacturing sector. Most SMMs have never had a “China strategy” and are less likely to shift
production abroad. They produce key components and sub-systems that OEMs integrate into
finished products and systems. They are severely constrained in resources to make necessary
investments in R&D or to upgrade their machinery and equipment to be globally competitive.
With the spread of lean manufacturing, they also tend to have limited inventory, so the supply
chain crisis has affected them even more severely. SMMs face significantly more challenges in
attracting and retaining skilled workforce at all levels.

Government has an important role to play in building a strong and globally competitive
manufacturing sector by supporting SMMs in a meaningful way. This may include: grants and
low-interest loans to upgrade equipment; federal vouchers to subsidize training on the use of
Industry 4.0 technologies, hire talented workers including veterans, semi-retired or retired
engineers and managers; partnerships with vocational training programs for talent



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development; partnerships with R&D institutions to bring inventions to production and access
to capital, government procurement and export markets.

Rather than continue to fund programs that have not yielded desirable results in decades,
government needs to launch a series of Listening Tours across the nation, rather than heeding
lobbyists in DC, to understand the real-world challenges faced by SMMs and entrepreneurs.
This will help identify gaps in our innovation pipeline and supply chains. In 2018, MForesight did
just that. We convened diverse groups of experts via numerous round table discussions in
various cities across the country which informed us, among other insights, the need for
investment in translational R&D, and scaling up 4-yr polytechnic universities that provide both
education and training.

In our Austin roundtable, we learned that nano-electronics technology developed by UT-Austin
researchers, is now being scaled in Japan by Canon. The research was initially funded by NSF
and later by NIST’s ATP program. Despite demonstrating the potential of the technology,
federal funding dried up and no U.S. companies showed interest. Canon saw the long-term
potential, took the risk, and invested $10 million in this nascent technology, only to make the
resulting products in Japan. Representatives from Canon who were at the roundtable explained
in detail how the United States lacks the manufacturing know-how, precision machinery, and
engineering skills needed to scale the technology, despite continued preeminence in research.
Therefore, all the production jobs, high-value product sales, capital investment, and supplier
contracts are captured in Japan, not to mention the tacit learning gained from actual
production.

Such transfer of technology, willingly, has only accelerated since China joined the WTO. Blaming
universities is not the answer. Government that invested taxpayer dollars in R&D should
institute proper metrics and policies to ensure a return on investment back to taxpayers. It also
must create programs to fund technologies beyond just basic research. Otherwise, we will
continue to silently witness other countries picking our winners. A study of 150 manufacturing
startups from MIT during the last decade found that of those startups that managed to scale,
70% of them scaled in China and none in the U.S. This is due to lack of capital, skills and
infrastructure. We may still be the most inventive country in the world but not the most
innovative – at least in hardware. Innovation is about transforming a promising invention into a
product manufactured at scale.

Current and pending legislation to create Regional Innovation Hubs, the new Directorate for
Technology, Innovation and Partnerships at the National Science Foundation and a new
Manufacturing Office in SBA are all very encouraging signs. However, if these programs, like
every other federal program and agency, act in silos, the results will be mediocre at best. For
instance, the SBA Manufacturing Office can play an effective role in not only helping current
SMMs but also helping entrepreneurs and small manufacturers advance technologies
developed by other agencies and helping initiate pilot production in the U.S.




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For some, the idea of the federal government even considering developing a strategy for
industrial competitiveness runs counter to free-market principles that we all believe in. The
private sector pursues what is in its best interest and, understandably, cannot be responsible
for national interests. The term “industrial policy” was derided by policymakers for decades.
Yet, Oil and gas, Telecommunications, and Aerospace have benefited from favorable tax
treatment, trade barriers, federal research, and defense procurement. Tesla got its start
through a government loan. The federal government has a long history of building strong
national industries through a combination of sustained R&D and procurement contracts.
Aviation, semiconductors, computers and the internet are obvious examples. The Department
of Defense helped create Silicon Valley. Government can make a positive impact again whether
we call it industrial policy or not.

Of all the manufacturing sectors, only aerospace has consistently generated a trade surplus,
and it is the only manufacturing sector that has enjoyed long-term, consistent government
support. Led primarily by defense, the federal government has invested in both basic and
translational research, engineering development, technology demonstrations, deployment,
procurement, policies and programs that have made sure that aerospace completes the
innovation cycle and wins in international markets. Regardless of the party in power, every
President helps this industry market and sell both defense and commercial products when they
visit other countries. This is successful, high-profile industrial policy we have enjoyed for nearly
a century even if we pretend it isn’t. We should replicate this policy boldly to other sectors
critical to national interests.

We can rebuild a strong manufacturing sector especially because we still have some of the core
ingredients such as basic research prowess and institutions, creativity, policies that attract the
best and the brightest to our shores and entrepreneurship in our collective DNA. But the longer
we delay, the greater the loss of industrial commons critical to robust and resilient supply
chains.

We have numerous well-established and well-funded federal agencies and institutions, but
each is focused on its own mission. It is like having a team of great players - but we don’t have a
coach. There is no entity in the federal government focused on U.S manufacturing
competitiveness. To ensure that the U.S establishes the industries of the future, let alone
prepare for the next crisis, we need a “coach” – that is a new entity in the federal government
whose sole focus is to strengthen U.S. manufacturing competitiveness and to ensure that what
is invented here is manufactured here. The goal is not to add another layer to the federal
bureaucracy but to streamline 58 different “manufacturing” programs across 11 agencies and
do so with a real national strategy and meaningful metrics which we currently lack. Federal
programs must identify proper metrics that capture what needs to be accomplished but not
how to accomplish it. For instance, in the context of R&D or entrepreneurship, patents, licenses
and even start-ups are necessary first steps to generate returns, but they are poor proxies at
best for economic impact because by themselves they do not create national wealth, jobs or
national security. We need to manufacture our inventions at scale just like other countries have
scaled our inventions.


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We had at least two “Sputnik moments” in the recent past – Covid-19 and China 2025. These
could be positive tipping points if we take the right steps to create a stronger, wealthier nation
that is better prepared to confront the next crisis, be it medical, military or a natural disaster.




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