Wednesday, May 6, 2020

The Coronavirus Butterfly Effect

By Jonathan Kaiman - May 06, 2020 at 11:45AM

Every weekday morning during the first few weeks of the coronavirus crisis, Bree Slovick would wake up, wash her hands, disinfect her door handles, walk her 4-year-old daughter to day care (so she didn't need to touch the car), ensure that her daughter washed her hands, and then go to work at a small company in Hopkins, Minnesota, that makes some of the most precise machine parts in the world. 

The company, Professional Instruments, manufactures air bearing spindles—heavy steel cylinders the size of an Instant Pot that can shape metal down to a few nanometers, about the width of a DNA molecule. Its spindles are used in machines that produce iPhone cameras, car taillights, and devices that are crucial to defense systems and medical research. It has helped produce parts of the Curiosity Mars Rover and the Hubble Space Telescope. (Disclosure: Professional Instruments' co-owner, Dave Arneson, is my partner Charlotte's father. Her grandfather, Theodore, founded the company in 1947.)

Slovick, 27, is a receptionist. She takes calls, handles logistics, coordinates payroll, and collects her colleagues' punch cards as they work on various jobs, sanitizing her hands between each one. She is also one part of the fragile web of suppliers, customers, and, of course, employees that together make up the U.S. manufacturing base—and which, under strain from the COVID-19 pandemic, is threatening to snap. 

Professional Instruments, in accordance with the Centers for Disease Control and Prevention's public health guidelines, has removed chairs from its common spaces and disinfects its equipment and bathrooms on an almost-hourly basis. Its employees are spread out across the shop. "I feel safe at work," Slovick says. 

But outside the shop's doors, chaos reigns. At Slovick's apartment complex in nearby St. Louis Park, many of her neighbors worked at hair salons and fast food restaurants. As social distancing measures ravaged their industries in March, they found themselves suddenly unemployed. Some drank and partied to quell their restlessness, sparking loud arguments at ungodly hours. What if one of them got sick and spread the virus to Slovick or her daughter? Slovick was already stretched thin. Day care was $375 per week, and she had no one else at home to help care for the girl. Taking time off would mean triaging rent and groceries. 

Slovick's colleagues—including single parents and immigrants from authoritarian states such as Vietnam, Cambodia, and Laos—leave work each day unsure of whether they'll be able to return the next. "I'd say there's a general unease, not knowing what the future brings," says Ryne Lehman, 34, an employee who specializes in rotary grinding. "To be fixated on something so small, at the micro-inch level, you're in a whole other world. A train going by makes your indicators dance. The heat from your hands affects the way the measurement is reading. And so it's a little bit weird obsessing over millionths of an inch, or the finish in my parts, when my phone is blowing up with people dying and hospitals filling up all over the world."

At this point in the COVID-19 pandemic, the U.S. is facing two parallel crises—looming public health and economic cataclysms. In navigating them, it confronts what former Defense Secretary Donald Rumsfeld famously called known knowns ("things we know we know"), known unknowns ("we know there are some things we do not know"), and also unknown unknowns ("ones we don't know we don't know"). We know that this is an extremely serious virus. We know that downplaying the threat in its early stages has forced many governments—including in the U.S.—onto reactive, rather than preventative, footing. We also know that these governments are implementing public health measures that try to account for the virus's known unknowns (its mortality rate, infectiousness, and proportion of asymptomatic carriers, among other variables) and that reflect worst-case predictions: millions of cases, hundreds of thousands of deaths. About half of the world's population has been under some degree of lockdown, according to a New York Times estimate. We know that that should slow the virus's spread. 

But the deeper we delve into the economic side of the ledger, the more we are forced to confront the unknown unknowns that inevitably lie in wait. American and European economists are already forecasting a major recession; they largely agree that we cannot simply flip the global economy back on once the terror of infection has passed. Airlines, hotels, bars, restaurants, retailers, entertainment venues, and construction businesses are struggling to survive; some have permanently shuttered. The U.S. unemployment rate has surged above 16 percent, the highest since the Great Depression, and will likely continue to climb. "People may end up calling this the 'Greater Depression,'" Nicholas A. Bloom, an economics professor at Stanford's Graduate School of Business, told the school's digital magazine last month.

Globalized supply chains are a recent development in economic history. Since the 1980s, trade barriers have fallen, shipping technologies have improved, and U.S. manufacturers, lulled by the prospect of lower costs and greater efficiency, have cast their nets far beyond our country's borders. This has engendered a panoply of unforeseen risks, and the pandemic has laid them bare. A close look at companies like Professional Instruments—which, despite its small size, plays an important role in a complex international supply chain—shows that even one closure could send shockwaves from a small town in Minnesota to Pennsylvania, Tennessee, and New Hampshire, even all the way to the Caribbean, England, and Germany. A growing, trans-partisan movement demands that we mitigate these risks by bringing all U.S. manufacturing back home. Yet global supply chains have also engendered unprecedented prosperity. They're the reason you can buy a t-shirt for $10, or an iPhone for $1,000; they're the reason countless Bangladeshis, Haitians and Guatemalans no longer need to till the fields. Because of them, if you zoom out far enough, the lines between "us" and "them" begin to blur.

Ecologists have a concept called "keystone species," coined in 1969 by zoologist Robert Paine. It describes a plant or animal that plays an outsized role in its ecosystem despite a relatively small population size. A classic case study comes from Yellowstone National Park, where the gray wolf is the apex predator. In the 1920s, government-led extirpation programs laid waste to the park's gray wolf population, allowing its main prey, the elk, to overpopulate. Elk overgrazed the park's willow, aspen, and cottonwood trees and devoured its river rushes, leaving its beavers little to eat. As the beavers starved, their dams disintegrated, causing creeks to overrun their banks, wiping out key flora. In 1995, ecologists reintroduced a group of 31 gray wolves to the park—and then watched in wonder as the park's ecosystem dramatically transformed. Populations of pronghorn, trout, bald eagles, and red foxes proliferated. So did the beavers and thus their dams. The rushing creeks slowed, and aspen and cottonwood trees spread across the land.

When you think of the U.S. manufacturing sector, you likely think of General Motors and U.S. Steel, faceless megaliths with armies of disciplined workers. But it's more like Yellowstone National Park, an intricate ecosystem of small and specialized players, their fates closely intertwined. "If you look at anyone who is a node in a supply chain—a manufacturer, or sub-manufacturer, or raw materials extractor—each of those entities may be partnering with many different customers, as well as many different sub-suppliers beneath them," says Karen Donohue, an expert on supply chains at the University of Minnesota's Carlson School of Management. "Their solvency is potentially dependent on the weakest link in both of those networks. And that's what makes prediction difficult." A 2018 survey by the consultancy Deloitte found that 65 percent of more than 500 procurement leaders from 39 countries had a hazy view, at best, of their supply chains beyond their most important suppliers.

"I tell my students that the supply chain professionals they're becoming are going to be the heroes of the next phase of [the coronavirus] recovery," Donohue says. "Right now, the health care workers are the heroes. But supply chain professionals are the ones who are going to have to figure out all these pieces, and how they connect, and how to reconnect them to different sources."

Professional Instruments is a case in point. Years ago Dave Arneson, now 57, toured me through his high-ceilinged, 38,000-square-foot shop and its forest of minivan-sized machines and neatly stacked piles of metal. "Think of a standard power drill," he says, when asked how air bearing spindles work. The drill bit leads down to a rotor, which turns on a tightly packed ring of tiny ball bearings. Those ball bearings may all look the same, but each is slightly unique, with surface ripples and imperceptible differences in size. This is fine enough for, say, assembling furniture. But to manufacture an MRI machine, an iPhone camera, or a part on a Mars Rover, you need something far more precise. An air bearing spindle suspends the rotor on a thin film of compressed air, making its rotation essentially frictionless. 

The company occupies a similarly precise economic niche, with decades-long business relationships and scarce competition. "Most places don't need the level of performance in our spindles," he says. "And it's not that people can't figure out how to make them. But if you're a small company, it's just hard, and if you're big, it's not worth trying to replace the little guys." 

Professional Instruments made it through the 2008 financial crisis, President Donald Trump's 2018 and 2019 trade tariffs (which drove up the cost of steel and aluminum), and countless boom-and-bust cycles that are a feature of the trade. But COVID-19 has been different. On March 19—the day I returned to Minnesota from a stint in India—Arneson was frantically calling suppliers, customers, and competitors across the U.S., seeking relevant information. None were forthcoming, and many of them were doing the same. "People started wondering—other states were doing shelter-in-place shutdowns, and what will happen when and if we do?" says Steve Kalina, president and CEO of the Minnesota Precision Manufacturing Association, a trade group that's been helping its members navigate the pandemic. "They were asking a lot of questions that weren't prescribed anywhere. What form do I fill out to gain 'essential' status? Then you look into it and you find there are no state standards. There are no forms."

When Minnesota's governor issued a shelter-in-place order for the state on March 25, it initially came as a relief. It allowed most manufacturers, including Professional Instruments, to remain open. But Minnesota's reported infection numbers remain relatively low—about 7,200 as of May 5. If they spike and the company is forced to close, Arneson is not sure he can keep his employees on payroll. Specialists like Lehman take years to train, and some are irreplaceable. Moreover, Arneson estimates the company has about 100 suppliers, many of them small, specialized companies like his own, and many of them far from Minnesota. He gets his optical encoders from Germany and the U.K. and his industrial coating done in Tennessee, all of which have been under some degree of lockdown. Last year, after a motor supplier in Virginia shifted focus, it took Arneson about six months to find a new one—a company in Pennsylvania, which sources its parts from the Caribbean (both also under lockdown). And that was only one supplier. What if several close at once? 

Same goes for Arneson's customers. Each has its own Slovicks and Lehmans, its own lockdown measures to contend with, its own buyers and suppliers spread across the globe. "It's like a 3D jigsaw puzzle that you're trying to assemble as it's falling out of the sky, as you're skydiving," he says.

Professional Instruments' primary customer is a small company in New Hampshire whose ultraprecision machine tools are crucial for manufacturing in the medical device, defense, consumer electronics, and automotive fields. "It's almost impossible for someone to anticipate the knock-on effects of some businesses being closed down because they're deemed nonessential, because they're suppliers for companies that are deemed essential," says the company's recently retired former CEO, who requested anonymity to discuss sensitive business matters. "You build a quarter-million-dollar machine, but if you can't get one $150 component off the shelf, you can't put it into production." His neighbor owns two bars and a golf course, he says, all of which closed under government orders in March. The neighbor laid off his employees but continues to spend $3,000 each week to prevent the course from being overrun by weeds. He's not sure how long he'll last. "You get thousands of things just like that, in specialized sectors—it'll be catastrophic," the former CEO says.

Zoom out further, and the pandemic's global nature becomes palpable. The future of the New Hampshire company is also uncertain, thanks in part to closures abroad. It has representatives in several countries (including South Korea, Japan, and Taiwan, all of which have implemented lockdown measures) and customers in many more. "Representatives might need to come from the U.S. to help install the machines," says the former CEO. "But with global travel being affected, how are you going to get that equipment installed? You still need those people to travel. These machines don't install themselves." In March the company opened a training center in China, but "whether that center will be utilized for some time remains to be seen." 

Businesses are attempting to navigate the COVID-19 crisis without any guiding precedent. The Trump tariffs have compelled many U.S. companies to tweak their supply chains—say, by swapping Chinese suppliers for Taiwanese ones. But that relied on a simpler calculus; there were ample safe havens and no mass shutdowns or travel bans. Perhaps the closest analog is Japan's 2011 Tohoku earthquake and tsunami, which, amid its wrenching devastation, razed a factory that produced the world's entire supply of Xirallic, a pigment that gives car paint its glittery shine. This forced Chrysler, Toyota, General Motors, and Ford to restrict sales of some red and black car models for months until the factory's German operator could reconfigure its supply chain. 

COVID-19 could cause similar disruptions on a much larger scale. We have already seen shortages of some goods, including food and cleaning supplies. Boeing, General Motors, and other multinationals have suspended production at key plants to comply with social distancing measures. The pandemic has also caused financial markets to crash, oil and gold prices to plunge, and currencies to depreciate. Economists say these dynamics could engender a vicious cycle: Suppliers, especially in developing nations, lack the cash flow to survive short-term hardships, causing mass layoffs; unemployed people have less money to spend, depressing consumer demand; and depressed demand causes further closures. In other words, the economy's gray wolves are under serious strain.

The COVID-19 crisis has accelerated changes that have long been gathering pace, according to David Collins, CEO of CMC Consultants, a supply chain consultancy based in Shenzhen, China. As that country grows both more costly to operate in and more authoritarian, large corporations are shifting to suppliers in Southeast Asia, Africa, and the Middle East. Now Collins' clients are facing not only mass closures but abrupt shifts in demand. Chinese companies that usually make auto parts have switched, under government orders, to producing masks and other medical supplies, many of them for export. "There's that saying that nature abhors a vacuum? Well, Chinese business abhors a vacuum even more," he says. 

The precision manufacturing sector is in no danger of total collapse, according to Collins. "If we don't have precision manufacturers, we wouldn't be driving, taking high-speed trains, flying," he explains. "We're back to horse and buggy without them." Yet its smaller players could be in for a rough ride. "If they don't have the cash flow to make it through," he says, "someone else will take their place." Yellowstone survived without its wolves—it just looked very different. 

In late April, Professional Instruments began manufacturing, on a volunteer basis, single-use "patient enclosures," small tents that may help hospital workers treat intubated COVID patients without risking exposure to the disease. It is still getting a steady stream of spindle orders, though Arneson doesn't know how long they'll last. His spindles are a key component in manufacturing high-end smartphones—but "how many people are going to be able to afford a $1,000 cellphone a few months from now?" he asks. Several big machine tool conferences have either been canceled or gone virtual, making new business relationships harder to forge. 

Slovick, the receptionist, says her out-of-work neighbors continue to hold loud parties. "There's no parking in the complex, because nobody leaves anymore," she says. In late March, she sent her daughter to live with her grandparents in Goodhue County, Minnesota, about 60 miles away, where the preschooler won't have to leave the house. "She's staying out in the country," Slovick says. "And I'm just staying at work as long as I can."


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