As you may know, Toyota has many plants in the United States. This kind of regional diversification has to be good for the company in the wake of the Japanese earthquake, right? Even though the Japanese plants are in trouble the US ones can up production, hopefully making as many cars as the Japanese-based plants can’t, balancing out what is a scary time for the company.
Well, no. The US ones can’t run without specific parts from Japan, and since they aren’t independent but instead part of a global supply chain a shock anywhere hits a shock everywhere. So even though there are Toyota plants in the United States there will be shutdowns and reduced time for the United States based plants because key components only made in Japan are being rationed.
Barry Lynn presented this risk in his excellent book Cornered. When I met him for coffee once he showed me a small piece that attaches to an engine that, as a result of a previous Japanese earthquake, couldn’t be made anymore at the one plant. Since that one plant made 80%+ of all of them it sent shockwaves across the entire manufacturing base. He presented his arguments about the tight coupling of our industries at INET:
(He also was on The Breakdown recently discussing monopoly law.)
Finance readers might note his idea is explicitly based on the idea of the system engineering concept of tight coupling. Tight coupling was brought into the regulatory discussion as one particularly interesting explanation for the general state of our financial markets by Rick Bookstaber in his excellent book A Demon of Our Design. Bookstaber explains the concept in this blog post here. In this sense, it explicitly links the fragility of the financial system to the fragility of our production more broadly. It’s a fascinating, and important linkage to be made.
I liked both of Lynn’s books. He notes the Bookstaber/Taleb comparison on p. 79 of Cornered, arguing that “almost no one has written about” the risk of “catastrophic cascading failures” in the industrial system generally.
This reminds me of the debate over “surge capacity” in hospitals, but it is subject to the similar rejoinders. For example, I was worried that 100s of thousands would die of bird flu in 2006 due to lack of extra ventilators, but that never materialized. I’d have to know more about the depreciation rate of ventilators to know if it was a total waste not to have prepared for that problem. But even if the ventilators would have been a waste, would it have been so much worse than the trillions of dollars now trapped in corporate coffers or atavistic gold hoarding?
(If you really want to worry about scary scenarios, imagine a “solar storm:”
(“an event like this would knacker most of the systems which keep us alive”)
I think Lynn makes the case for a more autarkic world. As Taleb said once, you can have either globalization or massive debt, but you can’t have both and expect the resulting system to be stable.
Oops, I meant to say “would have been a total waste to have prepared.” Late night. In my defense, my proposal focused on a financing scheme for such preparedness that only would have affected the very rich and worried:
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