Key Takeaways

• Abbott initiated a voluntary recall of some of its powder formulas after contamination issues. The move has caused a shortage of baby formula.
• In the first seven months of 2021, the out-of-stock percentage for baby formula in the US was between 2% and 8%. The figure increased to 23% in January 2022 and 29% in the week of March 13, 2022.
• In October 2020, a three-day fire at Asahi Kasei Microdevices' semiconductor factory in Japan took chips out of circulation.
•  Pew Research Center found that, on average, regular gas cost 58.7% more in November 2021 at $3.491 a gallon, compared with $2.20 in November 2020.

Introduction

Why There is a Baby Formula Shortage

• There is a current baby formula shortage in the US because of the following reasons:

• According to the United States Food and Drug Administration (FDA), Abbott initiated a voluntary recall of some of its powder formulas, such as Alimentum, EleCare, and Similac, that were manufactured at one of the company's facilities in Sturgis, Michigan. The move taken in February 2022 has led to a shortage of baby formula.
• Abbot recalled the powder formula products after receiving four consumer complaints related to Salmonella Newport and Cronobacter sakazakii in infants who had consumed powder baby formula manufactured at the facility. According to Parents, four infants became ill, and two died from possible bacteria contamination.
• In addition, the company found evidence of Cronobacter sakazakii in its manufacturing facility in Sturgis during routine testing for Cronobacter sakazakii and other pathogens. However, it found no evidence of Salmonella Newport at its Sturgis manufacturing facility.
• In the first seven months of 2021, the out-of-stock percentage for baby formula in the US was between 2% and 8%. The figure increased to 23% in January 2022 and 29% in the week of March 13, 2022.
• The FDA is currently working with other manufacturers of infant formula to increase the current production and supply of baby formula in the US.
• Also, Abbot is mitigating the problem by shipping millions of cans of baby formula powder from its FDA-registered facility in Cootehill, Ireland, into the US. The company has also ramped up production of infant formula at its Columbus, Ohio, facility.
• On May 13, 2022, Abbot stated that it was addressing the concerns raised by the FDA and would restart operations at the Sturgis facility within two weeks, subject to approval from the FDA.
• According to the US Department of Health & Human Science, the Biden-Harris Administration's effort to cut red tape on the types of formula available, a crackdown on unfair market practices like price gouging, and increased supply through increased imports have helped manufacturers to increase production by 30-50%, way above pre-recall levels.
• According to NielsenIQ, the availability of baby formula went down sharply during the week of March 5, after the on-shelf availability dropped to 84%. During the week of April 30, the figures set a low record of 81.2% and missed sales at $11 million.
• The Washington Posts stated on May 11, 2022, that the out-of-stock levels for baby formula in the US topped 43% the previous week.

 

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• As per the FDA, even before the voluntary recall of formula products by Abbott, the COVID-19 pandemic had caused supply chain issues that were still impacting many industries, including the infant formula industry.
• The supply chain knock-on effects due to COVID-19 have made it difficult for the baby formula industry to meet the demands of its consumers.
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Why There is a Semiconductor Chip Shortage

• There is a shortage of semiconductor chips because of the following reasons:

COVID-19 Supply Chain Disruptions

• According to the Harvard Business Review, one reason for the semiconductor chip shortage is disruptions to supply chains during the COVID-19 pandemic. The crisis caused a drop in car sales in the spring of 2020. Automakers were forced to cancel orders for car parts, including semiconductor chips.
• When demand for passenger vehicles went up in the third quarter of 2020, chip manufacturers could not supply them to automakers, as they had already committed to supplying IT and consumer electronics companies.

A Fire at a Semiconductor Manufacturer

• In October 2020, a three-day fire at Asahi Kasei Microdevices' semiconductor factory in Japan took chips out of circulation.
• The fire created supply chain interruptions for many industries that depend on items such as digital‐to‐analog and analog‐to‐digital converter chips.

Geopolitical Factors

• Geopolitical factors have also contributed to semiconductor chip shortages. For example, the Trump administration started to tightly regulate sales of semiconductors to Chinese firms like Huawei Technologies and ZTE. These companies started stockpiling chips used to make items like 5G smartphones, contributing to the shortage.
• In addition, the federal government blacklisted China’s Semiconductor Manufacturing International Corporation. The move cut off US companies from chips made by the firm, contributing to the shortage.

 

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Why Gas is Expensive

• Gas is expensive in the US because of the following reasons:

• According to the U.S. Energy Information Administration (EIA), gas is expensive because of the low global oil inventories and the continued high demand for gas.
•  Pew Research Center found that, on average, regular gas cost 58.7% more in November 2021 at $3.491 a gallon, compared with $2.20 in November 2020. The EIA warns that increased production won't lead to reduced prices in the short term.
• In addition, the EIA says, "global oil inventory draws averaged 1.7 million barrels per day (b/d) from the third quarter of 2020 through the end of 2021." The organization estimates that there were 2.63 billion barrels of commercial oil inventories in the OECD in the first quarter of 2022, "up slightly from February, which was the lowest level since April 2014."

 

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• The second reason gas is expensive is because of Russia's invasion of Ukraine. The EIA states that after Russia invaded Ukraine, sanctions on Russia and other independent corporate actions contributed to falling oil production in Russia.
• The war has disrupted the supply of oil and has created significant market uncertainties and increased oil prices, which (in the case of crude oil prices) remain above $100/b.
• In addition, the US responded to Russia's invasion of Ukraine by banning the import of oil from Russia. The import ban has led to US petrol prices going up.
• Although Russia accounts for just "3% of US crude oil imports, it supplies 20% of US imports of petroleum products."

 

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Research Strategy