Peter Goodman: Exploding Pagers Deliver a Supply Chain Warning

This piece is by WWSG exclusive thought leader, Peter Goodman.

The lethal detonation of hand-held pagers and walkie-talkies used by Hezbollah militants this week in Lebanon demonstrated powerful spycraft, but it also raised questions about a gaping vulnerability in the global supply chain.

That chain is astonishingly complex. So complex that it is probably beyond the powers of governments, corporations and other interested institutions to police. Even the most sophisticated participants are often unclear on who they are relying on for critical parts and raw materials, or where the risks lie.

The clear lesson of the supply chain upheavals that accompanied the pandemic was that the longer the journey entailed in making any product, the greater the chance that something might go awry, inflicting delay and higher costs.

Now there’s a potent yet related concern: The more complicated the journey, the greater the exposure to mischief.

Every movement along the way, and every additional company brought into the manufacturing process represents an opportunity for those pursuing violent agendas to insinuate themselves into the works and weaponize the product.

“Companies must decide which level of security must be implemented in their supply chains,” Hannah Kain, the chief executive of ALOM, a global supply chain company, told DealBook. “We just moved several notches out on the paranoia scale.”

The Lebanon attacks will most likely accelerate supply chain changes. In recent years, a growing group of labor activists, politicians and critics of liberalized trade has urged American companies to move production back home, or at least closer to the domestic market. So-called reshoring and nearshoring have been advanced as a means of limiting reliance on faraway factories — especially those in China — while insuring against the perils of international shipping.

The reality that international supply chains are susceptible to being penetrated by those waging war is bound to boost it further.

Concerns over national security risks have in recent years been focused on specific high-risk situations:

• Much of the world is dependent on factories in China for critical items like face masks, ingredients for critical medicines and parts for ventilators and other medical devices.

• China might attack Taiwan, menacing the stocks of advanced computer chips concentrated on the self-governing island.

• Faced with international sanctions following its attacks on Ukraine, Russia has cut shipments of energy to Europe.

• In the United States, those who view China as a threat to national security have warned that Chinese-made telecommunications and electrical gear could be a Trojan Horse for crippling attacks on basic American infrastructure.

But the recent attacks reveal how even less strategic and lower-profile areas of commercial life entail grave security risks. At ports around the globe, the volume of goods being moved in shipping containers is so vast that no authority can possibly inspect more than a fraction.

In the wake of the Lebanon attacks, politicians are likely to face pressure to extend the push for reshoring and nearshoring beyond the most strategically vital goods like computer chips and electric vehicles. New policies may broaden the drive to concentrate industry in the United States and in friendly countries that can offer assurances of armoring supply chains against outside intervention.

Both the Trump and Biden administrations urged companies to move supply chains closer to home. President Trump affixed across-the-board tariffs on Chinese goods, a policy extended by the Biden administration. And the Biden administration has lavished tens of billions of dollars in subsidies on companies that are constructing computer chip plants and electric vehicle factories in the United States. The government has also looked to spur the production of active ingredients for pharmaceuticals.

Many U.S. companies have already started to reel in production. Product shortages and spiking shipping costs during the pandemic caused major companies like Walmart and Columbia Sportswear to shift some of their production from Asia to countries like Mexico and Guatemala. The land port at Laredo, Texas — a hub of trade between the United States and Mexico — eclipsed the docks of Southern California, long the gateway for Asian-made factory goods.

Faced with the uncomfortable possibility that their foreign factories could be susceptible to rogue actors, American multinational companies may move more aggressively to shift production to countries where the risks are less. In the cost-benefit analysis that has long propelled factory jobs out of the United States to countries where labor is cheaper and regulations lighter, the value of making goods at home just went up.

Yet contrary to some premature obituaries, globalization is not dying. Abandoning international trade would be expensive and fraught with disturbance. Instead, globalization is being reconfigured, with new value placed on cutting the distance between factories and markets.

All of this has come in response to the growing sense that the United States must make sure it has ample stocks of critical elements, rather than entrusting its fate to supply chains spanning oceans. For those inclined to this view, the exploding pagers ultimately delivered a flashing alert.

— Peter S. Goodman