Dealing with the current and coming capacity squeeze

As most everyone in business is experiencing, from microchips to cheese, we are pretty much out of manufacturing capacity as a nation and perhaps globally. On the many boards I am on - counter to the current trend play it safe in times of uncertainty trend - I have been advocating an invest in the future approach.

Playing it safe could be one of the worst things business leaders could do right now. Where is the evidence that markets are structurally shrinking? Where is the evidence of a population contraction? And of course, where is the evidence of reduced government spending?

On the other hand, we see lots of capacity issues, and yes, you can say that logistics are partly to blame, that COVID is partly to blame, and that the dearth of employees is to blame. BUT: Are they really? Like our infrastructure, industry seems to have underinvested in capacity and that has resulted in empty grocery shelves, emptying new car lots, and an inability to locate needed items from network gear to some basic consumables.

So, what are the likely dynamics of underinvestment? This is a critical question to answer to take the right next strategic steps. And if you are in a public company, your investors likely will not like you doing the right thing for the business, at least in the short run.

Here is what seems to make sense to me: after sitting on the capacity sidelines for three long COVID years, a few gutsy souls will start to invest in capacity, and indeed are doing so already. As capacity comes on-line, others will see it sold out quickly and decide they need to invest too. The really smart early-movers will cease investing at this point in order to build their war chests.  As massive over-capacity comes on-line, and there will be a quick race to the bottom followed by a wave of bankruptcies in which those early movers can pick up extra capacity for next to nothing - should they be strong enough to go counter to the trend. The result, of course, will be that they have just the right capacity well into the next business cycle, perhaps about six or so years from now.

Yes, this is all highly speculative, but if even a little bit of this fanciful narrative comes true, business owners would be well advised to pay close attention to capacity needs, not just now, but in six to 10 years’ time.