White House studying supply chain 'stress tests' after semiconductor shortages, sources say 

Key Points
  • The White House is studying whether supply chains should undergo "stress tests" of hypothetical scenarios and whether to suggest stockpiling certain critical items, sources say.
  • The administration is conducting a broader review into critical supply chains amid a global semiconductor shortage that has impacted the auto industry.
  • Government agencies meet weekly to discuss the issue and have not reached any final conclusions about which recommendations to issue.
  • Any effort to mandate stress testing could run into legal hurdles, since Congress has given government agencies varying authority to regulate industries.
President Joe Biden holds a chip as he speaks prior to signing an executive order aimed at addressing a global semiconductor shortage, in the State Dining Room at the White House in Washington, U.S., February 24, 2021.
Jonathan Ernst | Reuters

As part of an ongoing review into critical supply chains, the Biden administration is considering requesting that supply chains undergo "stress tests" of hypothetical scenarios and suggesting that companies stockpile certain critical inventory, according to two senior administration officials and two people familiar with the review.

"The idea of making sure that companies have a better sense of their own supply chain vulnerabilities is clearly one of the things involved in the process," said a senior administration official who declined to be identified because the review was neither complete nor public.

Government agencies meet weekly to discuss the issue and have not reached any final conclusions about which recommendations to issue. A first report focused on semiconductors, critical minerals, high capacity batteries and active pharmaceutical ingredients (APIs) is due June 4; a broader-based review will be conducted in the year to follow.

A White House spokesperson said the outcome of the review will be shared soon and pointed to $50 billion in President Joe Biden's infrastructure proposal related to monitoring and safeguarding domestic industrial capacity.

Biden administration studying supply chain 'stress tests': Sources
Biden administration studying supply chain 'stress tests': Sources

"This administration is undertaking the first ever whole of government approach to build resilient, diverse, and secure supply chains and meet President Biden's commitment to ensure that all Americans have access to critical goods and services in the time of crisis," the spokesperson said.

Officials studying the issue have taken particular note of Toyota Motor Company's ability to withstand the current semiconductor shortage, wrought by companies underestimating consumer demand for goods during the pandemic.

In early February, as automakers worldwide announced they were slashing targets and closing factories, executives from Toyota Motor Company made surprising comments: In the near-term, the lack of available chips would have no impact on production volume.

"After the global financial crisis, we had a reflection on seeing a stop in our supply chain," operating executive Jun Nagata explained to investors, detailing the "rescue" program created to assess each tier of its supply chain. For each part it deemed critical, Toyota "secured four to six months of stocks as necessary."

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Any effort by the US government to mandate similar stress tests could run into legal hurdles, since Congress has given government agencies varying authority to regulate activities in respective industries.

In 2018, the Department of Defense began planning to remove Turkey as a supplier for the F-35 after the country bought weapons from Russia. Working with aircraft company Lockheed Martin and engine maker Pratt & Whitney, the Pentagon spent months identifying which parts could be in short supply if another geopolitical situation or natural disaster occurred.

"It's a very useful exercise, and it could be used throughout the government," says Ellen Lord, who until January served as the Pentagon's undersecretary of acquisition and sustainment.

Lord says the Defense Department recommended such scenario planning to all of its major contractors, but it was voluntary because it was not government funded.

At the onset of the Covid pandemic, the Trump administration found particular shortcomings in the Department of Homeland Security's ability to regulate supply chains, according to a former task force official. Meanwhile, agencies overseeing the energy and financial sectors have stricter regulatory authority.

The Federal Reserve is perhaps among the best known for conducting such tests, which require a bank to show detailed analysis about how its balance sheet would respond to hypothetical economic scenarios of different degrees of severity. Wall Street banks have collectively amassed thousands of compliance personnel to assist in the completion of these exams.

Semis need to rethink 'just in time' supply chain, says Acme Capital's Nada
Semis need to rethink 'just in time' supply chain, says Acme Capital's Nada

In the early days, several institutions were deemed to have "failed," a determination that meant they could not increase shareholder returns through dividends or stock buybacks. In recent years, bank executives have praised the stress tests for preparing their portfolios to weather the economic shutdown during the pandemic in a relatively seamless way.

But the global undersupply of semiconductors is different from a shortfall in bank liquidity, according to analysts. A company can't cut costs or pull financial levers to increase their availability of the product, which can sometimes take up to 120 days to produce.

Roman Schorr, automotive analyst at Fitch Ratings, says policy actions could help with long-term planning but are not likely to provide a silver bullet for a crisis caused by extraordinary consumer demand for electronics and cars.

"Government intervention can be helpful over the long term for crucial parts, but the supply-demand imbalance for chips that we're currently seeing that is really a market issue."