Getting to Point B: Texas businesses strengthen and protect supply chains in response to the pandemic

Special to the Insite Brazos Valley Magazine
by Glenn Hegar

Dec. 31, 2021

Texas businesses and consumers were significantly affected when the COVID-19 pandemic threw a wrench into industry supply chains, the global production and delivery systems for products that we use every day. Our state is home to businesses at every level of the supply chain system in a wide variety of industries, thanks to our business-friendly tax structure and strong workforce that are vital to these networks, and that means that the health of these production networks is crucial to the Texas economy.

The difficulties posed by the pandemic dramatically highlighted that the constant evolution of how to best create and transport needed parts and other goods from point A to point B is good business for everyone, including Texas, as supply chains aim to maximize efficiencies and reduce costs for both producers and the consumers.

Supply chains represent a major driver for Texas’ economy and a big opportunity for future expansion. The Federal Reserve Bank of Dallas recently reported that in November, Texas’ production index rose nine points to 27.4, showing strong growth. This positive news comes despite the lingering supply chain issues that many manufacturers believe will continue for at least six more months.

Our state has been No. 1 in the nation for 17 straight years in exports, sending $328.9 billion in goods outside our borders, according to the International Trade Administration. That staggering amount represents 17.4% of our gross state product, more than double the U.S. average. And we don’t just send products out of state; Texas’ robust manufacturing and trade sectors rely on imports of products and parts from foreign companies to create final goods within our state. In calendar year 2019, the state took in almost $295 billion in goods, according to the U.S. Census Bureau.

Because of the issue’s importance, my office recently released a comprehensive study focused on how supply chains work in key Texas sectors and how the pandemic has laid bare existing critical risks and vulnerabilities in this production system. Each segment of a product’s supply chain creates and ships a component of that end product, and the trade value of these components is twice that of the final goods. The trade of these intermediate components is especially important in the automotive and semiconductor industries, both of which have a large footprint in the state.

I shared the results of this study during my recent Good for Texas Tour: Supply Chains Edition, highlighting how the automotive, semiconductor, food service, household chemicals and rare earths sectors both use and are affected by improvements and disruptions in their respective supply chains.

To better understand the importance of each link of a supply chain, let’s look at the automotive industry. I visited General Motors’ Arlington Assembly Plant in early October. The facility manufactures every single full-size SUV in the company’s fleet, from Chevrolet Suburbans to Cadillac Escalades. To produce these vehicles – 1,300 every day – GM relies on a specific system of other businesses that specialize in a product or process. According to a McKinsey report, the company spends $80 billion each year across about 15,000 global suppliers.

Few companies exclusively control the entire process for their product, from production to distribution and sales. Several distinct tiers of suppliers feed into one another to ultimately create the product sold to consumers. GM is an example of an original equipment manufacturer (OEM), the hub of a supply chain’s regional supply network that produces the final product.

Three tiers of small- and medium-sized businesses act as spokes that feed parts and materials into the hub. Tier 1 companies are typically located near the OEM’s facility and make the major components the hub needs to create the final product. Tier 2 businesses manufacture the parts that Tier 1 companies need ― things like semiconductor chips that today’s vehicles use for everything from emergency brakes and airbags to the touchscreen navigation and entertainment systems. Tier 3 companies are the foundation of the whole chain, supplying all other levels – from OEMs to Tier 2 businesses – with raw or base materials.

The automotive industry was hit hard with delays in 2021 because of a shortage of semiconductor chips, which can have a lead time of as long as five months. When everything went into lockdown at the beginning of the pandemic, the demand for cars and other vehicles plummeted. Once consumers were ready to get back on the road and looking to buy, the low chip supply meant that manufacturers couldn’t meet the explosive demand. According to The Washington Post, automotive manufacturers worldwide were expected to produce 1.5 million to 5 million fewer cars than planned in 2021 because of these delays and shortages. COVID played a big part in the delays, especially when cases spiked in Malaysia, where many chips are processed and packaged. In Texas, February’s devastating winter storm exacerbated the semiconductor deficit, as did a fire at a vital plant in Japan.

Automobile manufacturing helps fuel Texas jobs, trade and economic growth. Jobs in this sector rose by an average rate of 3% between 2010 and 2020, more than the overall statewide job growth numbers. Even more impressive, the gross domestic product (GDP) of Texas’ auto manufacturing industry between 2001-2019 skyrocketed by 285%, adjusted for inflation. This number includes motor vehicles, bodies, trailers and parts. To add some context, the state’s total GDP rose by 73% during this period. And total automobile-related exports were $11.7 billion in 2020, ranking third among all states (behind Michigan and South Carolina) and comprising about 11% of the U.S. total.

These numbers depend on Tier 3 companies that supply raw materials or near-raw materials to all parts of the network. Texas is blessed with one of the largest U.S. deposits of rare earth elements (REEs), a group of minerals needed to make things like LED lights and rechargeable batteries. These elements are essential to the high-tech industry and other applications across sectors. For instance, Cerium is a component in colored glass used for flat-screen televisions and monitors, catalytic converters in vehicles and in the process of petroleum refining.

These REEs are big business globally, with a market value estimated at around $3 billion to $5 billion and the value-added market end products using the minerals at more than $1 trillion. As is the case in all sectors and their supply chains, materials’ point of origin and who has control of their distribution pose legitimate and growing concerns for the United States.

Oxides of just four rare earth elements (REOs) are the mostly widely imported and used (by quantity) REEs, according to estimates by the U.S. Geological Survey (USGS). China has had a lock on the global market for the elements since the 1970s, with that country controlling 97% of REO production in 2010. Having such a vast amount of a material that is critical to U.S. manufacturing in the hands of another nation leaves Texas and the rest of the United States vulnerable. Political or diplomatic disputes could cut off supply, leaving businesses scrambling. The concerns are not just conjecture; China cut REE exports by 37% in 2010 over a disagreement with Japan and caused a huge price increase around the world.

Such reliance on foreign countries for the materials needed here at home has prompted the federal government to seek way to strengthen the domestic supply chain. The U.S. Department of Defense has set up agreements to build domestic REE mining and processing under the Defense Production Act, and the USGS is tackling an extensive mapping project for deposits.

USA Rare Earth LLC will start mining 950 acres of state land in 2023 at the Round Top deposit in Sierra Blanca, Texas. The company plans to produce American-made magnets using rare earth materials to cover 17% of estimated U.S. demand, which equals an estimated $140 million in sales annually. Moving the processing and creation of materials used in the production of consumer goods and services just makes good business sense.

Shortages aren’t caused only by natural disasters or political disputes. The pandemic put a lot of people out of work, and when the economy began to rebound, not all of the employees came back. The national unemployment rate (not seasonally adjusted) sat at 4.3% in October, compared with 4.8% in Texas and 4.1% for the Brazos Valley. Despite these relatively low numbers, the U.S. Bureau of Labor Statistics estimates that more than 10.4 million jobs went unfilled across the nation as of September 2021.

Employment plays a big part in the delicate balance of supply and demand. In the Brazos Valley, the economic picture focuses on employment in educational services (more than 35,000 workers), accommodation and food services (almost 17,000) and on mining, quarrying, and oil and gas extraction, which has a high concentration of employment compared to the national average. All these sectors are actively seeking people to fill empty spots as pent-up demand for consumer goods and other spending is eating up the already limited supply of many products and services.

Supply chains form the underpinning of the economy in Texas and around the world. Refining processes, ensuring an adequate number of qualified workers, and bringing key businesses closer to home, will go a long way toward stabilizing current imbalances and protecting against future disruptions. I have seen an incredible amount of innovation during my tour of the state and in discussions with industry leaders committed to creating a stable, strong, and dynamic supply system. That’s the Texas way, and it will help ensure a stronger economy for all of us.