国际战略研究中心-制造商的困境：大流行世界中的再就业和恢复力（英）-2021.11-36正式版

NOVEMBER2021

TheManufacturer’sDilemma

ReshoringandResiliencyinaPandemicWorld

AUTHORS

WilliamReinsch

EmilyBenson

JasmineLim

AnthonyHokayem

SarahMortensen

AReportoftheCSISSchollChairinInternationalBusiness

NOVEMBER2021

TheManufacturer’sDilemma

ReshoringandResiliencyinaPandemicWorld

AUTHORS

WilliamReinsch

EmilyBenson

JasmineLim

AnthonyHokayem

SarahMortensen

AReportoftheCSISSchollChairinInternationalBusiness

AboutCSIS

TheCenterforStrategicandInternationalStudies(CSIS)isabipartisan,nonprofitpolicyresearchorganizationdedicatedtoadvancingpracticalideastoaddresstheworld’sgreatestchallenges.

ThomasJ.PritzkerwasnamedchairmanoftheCSISBoardofTrusteesin2015,succeedingformerU.S.senatorSamNunn(D-GA).Foundedin1962,CSISisledbyJohnJ.Hamre,whohasservedaspresidentandchiefexecutiveofficersince2000.

CSIS’spurposeistodefinethefutureofnationalsecurity.Weareguidedbyadistinctsetofvalues—nonpartisanship,independentthought,innovativethinking,cross-disciplinaryscholarship,integrityandprofessionalism,andtalentdevelopment.CSIS’svaluesworkinconcerttowardthegoalofmakingreal-worldimpact.

CSISscholarsbringtheirpolicyexpertise,judgment,androbustnetworkstotheirresearch,analysis,andrecommendations.Weorganizeconferences,publish,lecture,andmakemediaappearancesthataimtoincreasetheknowledge,awareness,andsalienceofpolicyissueswithrelevantstakeholdersandtheinterestedpublic.

CSIShasimpactwhenourresearchhelpstoinformthedecisionmakingofkeypolicymakersandthethinkingofkeyinfluencers.Weworktowardavisionofasaferandmoreprosperousworld.

CSISdoesnottakespecificpolicypositions;accordingly,allviewsexpressedhereinshouldbeunderstoodtobesolelythoseoftheauthor(s).

©2021bytheCenterforStrategicandInternationalStudies.Allrightsreserved.

Acknowledgments

TheauthorswouldliketothankSeanArrieta-KennaandWillO’Neil,formerresearchinternswiththeSchollChair,fortheirresearchsupportandcontributions.

ThisreportwasfundedbygeneroussupportfromtheAlcoaFoundation.

CenterforStrategic&InternationalStudies

1616RhodeIslandAvenue,NW

Washington,D.C.20036

202-887-0200|

II|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

Contents

Introduction

1

1

|Resiliency,Reshoring,andNearshoring

3

2

|IndustryPrimers:TransformersandHVACs

6

WhatAreTransformers?

6

WhatAreHVACs?

8

3

|IndustrySupplyChains

10

Transformers

10

HVACs

11

4

|Covid-19SupplyChainChallenges

13

LaborShortages

13

ReducedAccesstoConsumers

14

RisingPricesandShortagesofSteel,Copper,andOtherRawMaterials

15

TransportationComplicationsandBottlenecks

16

ChangingDemand

16

5

|GovernmentApproachesandPolicies

18

CleanEnergyInitiatives:ExecutiveBranch

18

LegislativeBranch

19

NationalSecurityandTradeBarriers

20

Conclusion

23

AbouttheAuthors

26

III|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

Introduction

FromtheRustBelttotheWhiteHouse,policymakers,manufacturers,andconsumersaredebatingthemeritsofreshoring,nearshoring,andbuildingmoreresilientsupplychains.1ThepreviousadministrationmaintainedasharpfocusonstrengtheningmanufacturingintheUnitedStates

throughtraderemedies,tariffprotection,andreshoringmeasures.PresidentJoeBidenhaslargelyfollowedsuit,maintainingmanyofthepreviousadministration’stradepolicieswhileoutlininghisownadministration’scommitmentto“BuyAmerican”andbuildmoreresilientsupplychains.2

IntheyearsbetweenWorldWarIandWorldWarII,theriseofnationalistideologiesandcrushingeconomicconditionsusheredinaneraoftradeprotectionism.Intheinterwaryears,tradeliberalizationthathadacceleratedthrough1913essentiallyhalted,dismantlingpreviouslyestablishedtradingnetworks.However,theseprotectionistdynamicsshiftedwiththesigningoftheReciprocalTradeActof1934,whichinstitutionalizedtariffreductionreforms.3Then,the1944BrettonWoodsAgreementattheendofWorldWarIIlaidthegroundworkforthepostwareconomicworldthroughtheestablishmentoftheWorldBank,theInternationalMonetaryFund,andeventuallytheGeneralAgreementonTariffsandTradeanditssuccessororganization,theWorldTradeOrganization,whichwasintendedtoserveastheglobalpromoteroftradeliberalization.Duringthistime,theworldtradingsystemwitnessedareductionintariffsandapushtowardregionalandmultilateraltradeagreements.Withnewlyrealizedaccesstoforeignmarkets,multinationalfirms—especiallythoseinthemanufacturingsector—initiatedatrendofoffshoring,whichallowedfirmstopursuelowercostsabroadandachievehigherproductivitygains.

Astradeliberalizationexpanded,companiesbegantoreexaminetheirproductionprocessesanddisaggregatetheminordertotakeadvantageoflowerrelativepricesandhighproductivityabroadinabidtoreducetheoverallcostsofgoodsproduction.Significantdeclinesintransportationand

1|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

communicationcostswereinstrumentalinthisdevelopment.Theyenabledcompaniestodevelopsupplychainsthattakeadvantageoflowcostsaroundtheworldtoproducepartsandcomponentsindifferentlocationsandthenassembletheminathirdlocation.Internationalcompanies,particularlywithinthemanufacturingsector,benefittedfromdecreasedproductioncostsandcheaperlabor,butnotwithoutacosttoU.S.workers.Followinga30-yeartrendof

offshoring,

somefirmshavebegunrenationalizingtheirproductionchains,particularlysincethe2008recession.Meanwhile,theeffectsofglobalizationonmanufacturingcapacityandtheU.S.tradedeficithavegrowntoplayamoreprominentroleinpublicdiscourse.4

TheCovid-19pandemiccauseduniquesupplychainchallengesanddemandshocksfornearlyeveryindustry.Quarantinesandborderclosuresconstrictedimportsfromforeignproducers,andmanufacturersfacedseverematerialandlaborshortages,lengthymanufacturingdelays,anddecreasesinconsumerdemand.Asthisdauntingconfluenceoffactorswasexposed,policymakersbegantosoundalarmbellsandwarnthatexistingsupplychainswouldbeunabletohandlethebottlenecksinproduction.Inresponse,twodifferentapproachestosupplychainshaveemerged:resiliencyandreshoring

Supplychainresiliencyisdefinedasthecapacityforasupplychaintoresistandrespondtodisruptions,minimizingthetimeneededtorecoveroperationalcapacity.Inotherwords,resiliencymeasuresasupplychain’sabilitytoreboundtoitspre-disruptionproductioncapacity.Reshoring,ontheotherhand,occurswhensuppliersreducetheirdependenceonglobalsupplychainsbymovingproductionwithindomesticborders.

Thesepandemic-induceddynamicshavecomplicatedindustries’responsestosupplychainissues.Shouldsupplychainsbebuiltforresiliencyorefficiency?Whatarethetrade-offsbetweenthetwoapproaches?Howarefirmsapproachingsupplychains?Toanswerthesequestions,thisreportconductstwocasestudiesinincreasinglycriticalindustries:transformersandheating,ventilation,andcoolingsystems(HVACs).Thisreportassesseshowtheseindustrieshavebeenaffectedbythepandemicandhowtheyhaveresponded,particularlywhetherfirmshavechosentoembraceresiliencyorpursuereshoring.Thisresearchisinformedbyinterviewswithfirmsdirectlyimpactedbythepandemicandpresentsbroaderthemesintheongoingdebateoverhowtorethinksupplychainsinapandemicworld.

2|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

1

Resiliency,Reshoring,andNearshoring

Asglobalvaluechainsinthemanufacturingsectorbecameincreasinglycomplex,debatesbegantoariseoverwhetherfirmsshouldprioritizeresiliencyorefficiency.ThisdebateintensifiedastheCovid-19pandemicupendedsupplychainsacrossthemanufacturingsector,highlightingclear

vulnerabilitiesofmanyvitalindustries.Now,inapost-pandemicera,firmsmustgrapplewithdifferingapproachestosupplychainmanagement,mostnotablyemployingstrategiesofresilience,reshoring,ornearshoring.

DEFININGASTRATEGYOFRESILIENCE

Resiliencyisashort-termeffortwithinafirm’scontroltorespondtosuddenshocks.Dependingoninternalanalysesorstresstests,firmscandeterminethemostefficientwaytoinvesttheirresources.

EXAMPLE

Duringthepandemic,theHVACindustryadopteddigitaltools—includingtheuseofartificialintelligence(AI)technology—tofacilitateconsumeraccesstoproducts.

BENEFITS

DRAWBACKS

Thistargetedapproachgivesfirmstheabilityto

Thequestionremainswhetherresiliencycanbe

reduceinitialcostswhileretaininghighoutputand

utilizedasalong-termstrategywithoutsacrific-

workercapabilitiesinthenearterm.Properresilience

ingoverallsupplychainefficiency.5Bysacrificing

developmentinvolvesredundancythatcanprovide

efficiency,thelowerinitialimplementationcost

differentavenuestohelpmitigatesuddenshocks,

couldresultinalong-termincreaseincosts.

whetherthroughincreasingthenumberofsuppliers,

utilizingdifferentriskassessments,ordiversify-

ingtransportationmethods.

3|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

DEFININGASTRATEGYOFRESHORING

Reshoringreferstoeffortsbyfirmstorenationalizetheirproductionchainsanddecreasetheirrelianceofforeignmanufacturingcapabilities.

EXAMPLE

In2014,UniversalPlasticsreshoredproductionfromChinatotheUnitedStatesduetofactorsincludingproductqualityandproductdifferentiationinChina.6OnereasonthatreshoringtotheUnitedStatesbecamemoreattractiveforthecompanywasthatitsU.S.businessbecamemoreefficientandcost-effectiveduetothedeploymentofnewtechnologyandautomation.

BENEFITS

DRAWBACKS

Whilereshoringsupplychainsinvolvesalargerupfrontinvestmentfromcompanies,themoveeliminatesdependenciesonforeignproducers,re-ducingcertainriskswhileincreasingtherelianceondomesticsupplychains.Asaresult,transportationcostsarereducedasmanufacturingmovesclosertodomesticconsumers.Additionally,asthepandem-icunderscores,reshoringcanmitigatesupplychaindisruptionsresultingfromgovernmentactions,suchaslockdownorquarantinedirectivesthatconstrainlaborinforeigncountriesorborderclosuresthatpreventtheimportofnecessaryinputs.

Reshoringcancomplicateaccesstonecessarymanufacturinginputs,especiallyrawmaterials.Forexample,withintheUnitedStates,onlysixalumi-numproducersremaininoperation.Asaresult,industriesthatrelyonsignificantaluminuminputs,suchastheHVACindustry,maystruggletooper-ateunderandadapttotheUnitedStates’limitedaluminumproductioncapacity.7Furthermore,reshoringisoftenmoreexpensiveforfirmsduetohighercostsofbothlaborandmaterialinputs.

DEFININGASTRATEGYOFNEARSHORING

Nearshoringisaderivativeofoffshoringwherebusinessoperationsarerelocatedtoanearbycountry.Thecountrychosendependsoneitheritsproximitytothebusiness’sconsumermarket(e.g.,openingafactoryinGermanytosellgoodstoGermanconsumers)oritsparticipationwithinaregionalagreement(e.g.,shiftingproductiontoMexicoduetoitscheaperlaborforceandparticipationintheU.S.-Mexico-CanadaAgreement).

EXAMPLE

LosAngeles-basedMotorcarPartsofAmericainvestedmorethan$30millioninaMexicanproductionfacilitytomovemanufacturingcapacityfromChinaandmaintainasupplychainclosertoitsconsumersintheUnitedStates.8

BENEFITS

DRAWBACKS

Nearshoringoffersamorecost-effectivemethodforsupplychainmanagementbecauseofthelowertransportationfees.Italsoofferssomeprotectionfromcontentrequirementpoliciesandothersupplychaininfrastructureproblemscurrentlycausingglob-albottlenecks.

Neighboringcountriesmaynotpossessthesamemanufacturingbasesandinvestmentenviron-mentsastheoriginalforeigndestination,therebyincreasingcostsordecreasingoutputforfirms.Forinstance,U.S.companiesseekingtorelocatefromChinatoMexicomustgrapplewithMexico’sman-ufacturinglimitationsanduncertaininvestmentconditions.

Thesethreegeneralstrategiesrepresentdifferentmethodsfirmscanemploytomitigatetheconstrictingeffectsofshocksonsupplychains.Toassesstheviabilityofthesestrategies,itis

4|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

importanttostudywhatactionscompanieshavetakenduringtheglobalpandemic.ThefollowingsectionsaddressthechoicesofthetransformerandHVACindustriestoeitherembraceresiliencyorpursuereshoring—ortomeetinthemiddlewithnearshoring.Overall,firmsinterviewedforthisproject,bothintheHVACandtransformerindustries,rejectedcallstoreshoreduetocostintensityandlackoffeasibility,preferringstrategiesofresiliencyandnearshoringinstead.

Firmsinterviewedforthisproject,bothintheHVACandtransformerindustries,rejectedcallstoreshoreduetocostintensityandlackoffeasibility.

5|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

2

IndustryPrimers

TransformersandHVACs

WhatAreTransformers?

Powerplantgeneratorsproducepowerbyconvertingmechanicalenergy(usuallyaturbinepoweredbysteamheatedfromburningfossilfuels)intoelectricity.Theelectricityisthentransmittedfromthepowerplantdowntransmissionlinesintothegrid.Locatedalong

theselinesaresubstations(whichcontainmaintenanceequipmentandcircuitbreakers)andtransformers.Transformersincreaseordecreasetheoutputtedvoltageleveloftheelectricalcurrenttomatchthevoltageneededforthecircuitryofelectricalequipmentorsystems.

Step-uptransformersincreasethevoltageofalternatingcurrent(AC)immediatelyafterelectricitygenerationatapowerplant.Thistechnologyisnecessarytoattainahighvoltagetominimizeenergylossovermanymilesofpowerlinesduringpowertransmission.Step-uptransformerscanincreasevoltagetoseveralhundredthousandvolts.Step-downtransformers,ontheotherhand,decreasethevoltageoftheACtovoltagelevelsusablebyhomesandbusinesses(usually120to720volts).Becauselow-voltcurrentismoresusceptibletoenergylossalongtransmissionlines,step-downtransformersareusuallylocatedclosetotheend-usepointofelectricity.

6|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

Source:PaulPeterUroneetal.,“Transformers,”OpenStaxCNX,lastupdatedJuly11,2021,

/@go/page/2713

.

ThisworkislicensedbyOpenStaxUniversityPhysicsundera

CreativeCommonsAttributionLicense(by4.0)

.

Source:Uroneetal.,“Transformers,”OpenStaxCNX.ThisworkislicensedbyOpenStaxUniversityPhysicsundera

CreativeCommons

AttributionLicense(by4.0)

.

Transformersconsistofasteelcoreandtwocoilsofwire:theprimarywindingandthesecondarywinding.Theprimarywindingisthesideofthetransformerthattakespower,andthesecondarywindingisthesidethatdeliverspower.Step-uptransformershavemoredenselywoundsecondarywinding,andtheoppositeistrueforstep-downtransformers.ThesteelcorecanconsistofGrainOrientedElectricalSteels(GOES),whichareiron-siliconsteelalloysthatprovidethelowcorelossandhighpermeabilityrequiredforefficientandeconomicalelectricaltransformers(thisessentiallylowersresistanceforthecurrenttoflow).Energyconservationiscritical,andGOESaredesignedtominimizeheatlossatthecore.GOESareusedprimarilytoproducelaminatedcoresforlargeandmedium-sizedpowertransformers,whichhandlehigh-voltagepowerfromgenerationtothecentralsourceofdistribution,anddistributiontransformers,whichhandlelower-voltagepowerfromcentralpointstothepointsofusage.

Transformersareoneofthemostcriticalcomponentsindeliveringelectricitytocustomers,withoutwhichtheU.S.electricgridwouldnotfunction.9In2019,theglobalpowertransformermarketsizewasvaluedat$27.7billion,anditisexpectedtogrowby7.9percentfrom2020to2027andreach$50.8billionby2027.10Thisgrowthisattributedtoincreasingelectricitydemandsandtheupdatingofagingtransmissionanddistributionsystems.TheU.S.EnergyInformationAgencyforecaststhatelectricitydemandwillincreaseby2.8percentin2021andby1.0percentin2022.11Atthesametime,thenation’selectricgridisrapidlyaging.AnalystsnotethattheaverageageofatransformerontheU.S.

7|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

electricgridis35years—neartheendofitslifespan.12WiththecurrentpushintheWhiteHouseandamongcongressionalDemocratstowardcleanenergyinfrastructure,someagingtransformersarelikelytobereplacedbyenergy-efficientones,advancingtheagendaforcleanelectricityinfrastructure.13

WhiletransformersmaintainacentralfunctionintheU.S.electricgrid,theirsupplychaindynamicsremaincomplex.Relyingonanunhinderedandaffordablesupplyofrawmaterials,mostnotablysteelandcopper,androbustmanufacturingcapabilities,thetransformermarketwasgreatlyimpacted

byrawmaterialpriceincreasesandavailability,manufacturingdelays,andlaborshortagesduringtheCovid-19pandemic.Thus,thetransformerindustrypresentsaninterestingcasestudyonhowavitalU.S.industryapproachedsupplychainresiliencyandefficiency.

WhiletransformersmaintainacentralfunctionintheU.S.

electricgrid,theirsupplychaindynamicsremaincomplex.

WhatAreHVACs?

HVACsystemsregulatebuildings’internalenvironmentsbymaintainingtemperatureandairquality.HVACproductsandcomponentsincludefurnaces,heatpumps,airconditioners,andductwork.Dependingonwhetherthesystemisinstalledinresidentialorcommercialbuildings,thesizeandcomplexityoftheHVACsystemvaries.Ingeneral,therearefourprimaryHVACsystems:splitsystems,hybridsystems,duct-freesystems,andpackagedheatingandairsystems.

SplitSystems:OneofthemostcommontypesofHVACsystems,thesplitsystem,consistsofbothindoorandoutdoorunits.Thissystemutilizestwomainunits,oneforheatingandtheotherforcooling.Thecooling,outdoorcomponentexpelshotairwithafan,whilerefrigerants,compressors,andcoilscoolairinsidethebuilding.Theindoorheatingunitdisperseshotairthroughductswitheitherafanoranevaporator.Traditionalunitsalsoincludeathermostattomeasurethetemperature,aswellaspurifiersorhumidifiers.

HybridSystems:Likesplitsystems,hybridsystemsincorporatetwodifferentunits.Thehybridheatingsystem,however,reducesoverallenergycostsbecauseuserscanswitchbetweengasandelectricheatingsystems.Therestofthesystemreflectsthatofthesplitsystem,includingthetraditionalductsandthermostatsfortemperaturecontrol.

Duct-FreeSystems:Athirdtypeisduct-freesystems.Basicductlesssystemsutilizeoneoutdoorcompressorandoneindoorelectronicunit.Thetwocomponentsareconnectedbyrefrigeranttubingandelectricwiringthroughasingleholeinthewall.Theindoorunitsaregenerallywall-mountedtodelivertheheatedorcooledairdirectlytothespecifiedarea.Theoutdoorcompressorpumpschemicalrefrigerantthroughthetubeconnectedtotheindoorunitcoil.Thisprocesstransformstherefrigerantintoagaswhileremovingheatandhumidityfromtheroomastheairblowsalongthecoil.14Thecoolerairissentintotheroom,andtherefrigerantgasreturnstothe

8|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

outdoorcompressor,whereitisconvertedbackintoitsliquidformanditsheatenergyisreleasedviathecompressor’scoil.Theprocessisreversedtoproducewarmerair.

Unliketheprevioustwosystems,thissystemrequiresalargerupfrontcostbutdoesnotrequiretheinstallationofducts,whichcanbecostlyintermsoflaborandcomponents.Theremovalofductsallowsforindependentunittemperaturecontrolforeachindividualroom.Furthermore,theduct-freesystemiseasiertoinstallandmoreenergyefficient,mitigatingthehighercost.Thesesystemsrequireroutinemaintenanceandcleaning.

PackagedHeatingandAirSystems:Finally,thefourthtypeispackagedheatingandairsystems,whicharetypicallyinstalledinwarmerclimates.TheselesspowerfulHVACsystemsuseelectricityasapowersourceandcanbothheatandcoolahousewithamorecompactunit.Theseunitsareusuallyinstalledoutsideofthehomeandconnecttoductworkviaholesinthewall.

Fromindividualstocommercialindustries,HVACsystemsarewidelyutilizedacrossthecountry.In2020,theglobalHVACmarketwasvaluedat$127.4billion,andtheindustryisexpectedtogrowby5.9percentfrom2021to2028.15TheU.S.marketremainsoneofthelargestconsumersofHVACsystems,secondonlytoChina,andseveralpressuresmayincreasedemandforHVACs.Furthermore,asclimatechangeandpandemicsalikeputpressureontemperatureandairquality,HVACsstandtogrowinimportance.First,thedemandforcomfortamongconsumersplacesupwardpressure

onconsumerdemand.Second,technologicalinnovationwithintheindustry,includingreal-timemonitoringandcontrollingofsystems,facilitatesbettermanagementofHVACsystems,therebyincreasingconsumerdemand.Third,theunpredictabilityofweatherconditionsandpoorairqualityduringfireseason,bothexacerbatedbyclimatechange,increasetheneedforheatingandcoolingsystemsasextremeweathereventsleadtoanincreaseddemandforbothresidentialandcommercialinvestmentinHVACsystems.Fourth,althoughthepandemichadatemporarynegativeimpactontheHVACmarket,thepandemicisexpectedtoprovidetheimpetusforfuturemarketgrowthasbusinessesandconsumersdemandbetterindoorairquality.

Withincreasedawarenessabouttheimportanceofcleanindoorair,especiallyasmanyconsumerstransitionedtowork-from-homeenvironments,consumersareinvestinginHVACsystemsforairpurificationpurposes,whichislikelytocreateadditionalmarketopportunitiesforexistingfirmsandpotentialentrants.Thecombinationoftheworkplacetransition,adverseweatherconditions,andhealthconcernsregardingairborneviruseshascompelledconsumerstoseriouslyassessindoorairquality.InasurveycommissionedbyLennoxIndustries,aleadingHVACmanufacturer,threeoutoffivehomeownersnowprioritizetheirhomeairquality,while61percentwerewillingtospendmoremoneytoimprovequality,underscoringthegrowingimportanceoftheHVACmarket.16

9|TheManufacturer’sDilemma:ReshoringandResiliencyinaPandemicWorld

3

IndustrySupplyChains

Transformers

Themainactorsinthetransformersupplychainarecomponentsuppliers,manufacturers,anddistributors.Thecomponentsuppliersprovidetherawmaterials,whicharethenusedbythemanufacturerstobuildthetransformers.Manufacturersoftenselltoelectricalutilitiesdirectly

orgothroughdistributorswhichhavewell-establishedlogisticalnetworksinvariousregions.AreportbyTransformersMagazineprovidesinsightintotheuniquefeaturesofpowertransformersupplychains.17First,thepowertransformerindustryisarelativelylow-outputbusiness,asonlyabout20,000powertransformersareproducedeachyear.Asaresult,themarketsizefortransformerinputsisrelativelysmall,andnearshoringwithintheindustryiseasierthaninothercomparableindustries.

In2019,U.S.transformersalesamountedto$4.42billion.MajorplayersintheNorthAmericantransformerindustryincludeGeneralElectric,Siemens,andMitsubishi,andutilities,suchasPacificGas&Electric,aretheprimarysourcesofdemand.TheCommerceDepartment’sBureauofIndustryandSecuritysurveyed36domestictransformermanufacturingandpowerhandlingcompaniesintheUnitedStates.ThereportfoundthattheseU.S.companiesemployed15,238peopleandthatlaborrepresentedanaverageof36percentoftheoverallcostsfortheindustry.18

Second,powertransformersarealmostalwaystailor-madefortheneedsofspecificutilitycompanies,meaningtheabilityofthetransformermarkettoadaptquicklytochangesismoreconstrainedandlessflexible.Therefore,transformersemploynumerous,highlytailoredspecifications,andthus,manufacturers’abilitytomaintainalargestockisdifficult.Moreover,transformercomponentssuppliersmustadapttotheneedsofthemanufacturers;thissignificantlyincreasespressureonthesupplychain,ascomponentsupplierscannotsimplymassproduceinputs.Complicatingmattersfurther,suppliersaregenerallysmallerfirmswithalocalorregional

10|WilliamReinsch,EmilyBenson,JasmineLim,AnthonyHokayem&SarahMortensen

presence,andonlystandardcomponents,suchasGOES,maintainanexpansiveinternationalmarketplace.

Theorderandfulfillmentprocessisalsohighlycomplexwithintransformersupplychains.Manufacturersoperatewithaninabilitytoaccuratelypredictcustomerpreferencesanddemand.Whenautilitycompanyplacesanorderforatransformer,themanufacturermustfirstcompletethedesignandreceivetheutilitycompany’sapprovalbeforeplacinganorderforcomponents.Iftherearedesignchanges—includingafteraninitialdesignmaybeagreedto—productionschedulescanchangesignificantlybecausethetailor-madenatureoftransformersrequiresalengthycomponentsprocurementprocess.Mostpowertransformersrequireabout50to100componentshipmentsfromaroundtheworld,includingsteelfromChinaandcopperfromSouthAmerica.Thisprocessisoftendifficulttosynchronize,makingadhocprocurementmeasurescommon.

Finally,about70percentofpowertransformersarepurchasedbyutilitycompanies,with

purchasesoftenmadeinbulk.19Thisgivesutilitycompaniesexceptionalleverageovermanufacturers,oftenlimitingmanufacturingflexibility.Theremaining30percentofpowertransformersareutilizedinmanyotherindustries,includingchargingstationsforelectricvehicles,electronicdevices,andcommercialaviat