Supply-chain lessons from the COVID years

After two very long years, there’s a sense of optimism emerging in Australia that the worst of Covid-19 might be behind us. It’s tempting to assume that if we see the beginning of the end of a once-in-100-year pandemic then we’ve got most of our policy settings right. That kind of thinking is wrong-headed.

Before we put the pandemic-related consumer shortages behind us, we should consider the lessons we’ve learned about national resilience. Australia is still facing several historically significant challenges, including great-power competition and climate change.

What Covid-19 has clearly illustrated is that market forces don’t always create resilience in our supply chains, and we pay for this during a crisis.

In the first year of the pandemic, Australians learned that global ‘just in time’ supply chains don’t always work. Despite the private sector’s agility, it alone cannot necessarily resolve supply issues during a crisis. The most prominent examples in 2020 involved shortages of masks, hand sanitiser, vaccines and, almost comically, toilet paper.

The second year of Covid shone a light on the complexity of our supply chains. The long-term reduction in passenger flights has deeply disrupted mail and cargo services to this day. Rolling domestic retail shortages in a country that in many ways is a global food basket clearly indicates that there are problems.

While Covid has driven most of our supply-chain problems for the past two years, that wasn’t the only issue faced by the government. Consider the potential shortage of AdBlue, a urea-based liquid added to modern diesel engines to reduce exhaust pollution.

China manufactures more than 80°% of the world’s urea. The international price of the fertiliser skyrocketed in 2021. In response, China diverted its urea exports to keep down its domestic price. Diverting AdBlue production to the local market was intended to reduce pollution ahead of the 2022 Beijing Olympics.

Due to offshoring, we produce very little urea domestically. We’ve done little to support local production that struggles to compete in the global market.

This shortage will potentially affect our air quality and agricultural and transport industries. It will reduce the availability of goods and increase costs from the petrol pump to the supermarket for the average Australian.

The AdBlue shortage is a symptom of a broader issue exposed further by the pandemic.

Numerous factors have contributed to these vulnerabilities.

For more than four decades, most of Australia’s private sector has had a corporate focus on efficiency and effectiveness. This has resulted in the concentration of production offshore, in many cases creating near-monopolies abroad.

Shareholder capitalism, as opposed to the more altruistic stakeholder capitalism, creates a short-term strategic focus across the private sector that preferences immediate profit over broader stakeholder engagement. This approach often limits investment in research and development. It inhibits the development of new technologies and results in lean organisations with limited capacity to surge and little interest in sovereignty or resilience.

As always, there are exceptions to the rule. Shining lights like technology entrepreneur Bevan Slattery are trying to be different. Slattery has committed to building Australia’s next generation of digital infrastructure and green industrialisation. Often these thought leaders achieve results by fighting market forces.

While Slattery’s work is impressive, Australian governments tend to be overconfident about the private sector’s ability to self-organise during a crisis. It’s easy to conclude from the ultimate easing of the shortages of masks, vaccines and rapid antigen tests that the system worked in the end. In truth, the success was due, for the most part, to good fortune and good will rather than resilience or policy.

We need to be careful to ensure not only that we’ve learned lessons from the last two years but that Australian governments are committed to doing something with them.

The government has a big part to play in building national resilience. We’ve relied on markets for more than 30 years to fix these problems, so the public service doesn’t have the experience or knowledge to lead this effort. A change of approach will require bigger thinking. Finding a solution for our increasingly vulnerable supply chains and reduced domestic manufacturing capability is complex.

This is not a call for a return to protectionism, or for Australia to return to 1970s- and 1980s-type manufacturing. It’s about how the government can build an economy that’s more resilient to the shortcomings of globalisation.

At the very least, governments and the bureaucracy need to work with industry to identify goods impacted by market monopolies controlled by countries with a history of, or potential for, economic coercion. They will also need to focus on goods whose supply chains are vulnerable to sudden disruption.

The government needs to promote discussions with the private sector about supply-chain resilience, nation-building and sovereignty. We need a national conversation on whether government’s roles here need to be reconceptualised.

First, we need to consider where and when market forces and shareholder interests are divergent from our sovereign interests, especially with respect to resilience. And then we need to ask whether governments require more policy options to ensure resilience.

Next, we need to develop a means to identify these situations proactively.

Finally, we need to find an Australian way of dealing with these resilience vulnerabilities. Our economy and production capacity are nowhere near the size and scale of those in the US and China, so stockpiling, for example, may not be an appropriate Australian policy measure. Neither the government nor the private sector has the economic means to maintain large strategic reserves as a workable solution.

Now is the time to harness our collective optimism to leverage the pandemic’s lessons and bring about changes.

This article was published by The Strategist.