Global supply chains cannot escape the influence of China. From trade tensions and tariffs to geopolitical risks and shifting alliances, manufacturers face increasing challenges in how to source, produce and deliver from China. Lisa Anderson, President of ASCM-Inland Empire Chapter and President of LMA Consulting, and John Tulac, an international business attorney and expert in cross-border trade, explore the U.S., its current position in trade and what executives should be thinking and how they should take action.
Geopolitical Risks of Doing Business with China
China’s internal economy has not transitioned from an external focus to a more internal one, required to build a middle class. In recent years, there has been a return to the political officer being embedded in companies in China. Control is a significant factor in China and so innovation has been stifled. The outcome of this strategy is that the focus is on manufacturing and building. After running out of infrastructure to build in China, they focused on the Belt & Road Initiative (building infrastructure for the rest of the world) which also increased control over those assets and countries. They are hitting the wall in keeping the primary focus on manufacturing and building. For example, there are more empty apartment buildings in China than there are people in Germany.
No business should sole source a critical item. To add to that best practice, you should definitely not sole source with multiple suppliers located in or owned by China as the risks are high that you might run into shortages. China is also increasingly bullying its neighbors in the South China Seas. Thus, Southeast Asia suppliers can run into a potential chokepoint in the South China Seas. According to Tulac, the tensions are at the highest level, and a mistake could result in an escalation. For example, a surveillance vessel could be seized if it goes a bit too far into the wrong waters. Thus, it makes sense to build resiliency in the supply chain. For more information on this topic, refer to our article, Strategies to Move Supply Chains from Global to Local with Resiliency. China will also turn off production or shipments if it fits with their strategy. For example, they shut down production with Zero COVID and shut down shipments of rare earths to the world with the tariff and trade issues. China dominates rare earth mining and refining and so they can control the world’s supply of a critical element for artificial intelligence, medical devices, and defense. Lastly, you should assume there is no privacy if doing business in China.
Trade Deal: Truce
The U.S. and China summit was a net positive. It eased the tensions. It brought down tariffs while opening up access to rare earths for the world. The key question is how to bring down the tensions further (although hard to do with China still wanting to take over Taiwan) while figuring out how the U.S. and China can work effectively together economically while also creating resiliency. Miscalculations can lead to dire consequences. Tulac advocated for pursuing peace especially with our intertwined economies for the foreseeable future. There might be opportunities to work together and provide technical expertise related to water and the environment to create win-win solutions.
Create Supply Chain Resiliency
The bottom line is that companies interested in succeeding long-term must build resiliency in their supply chain. In addition to backup sources of supply and creating a diversification of suppliers, companies must take these geopolitical threats seriously. Regional sourcing, reshoring and/or expanding domestic manufacturing, nearshoring, vertical integration and developing strategic partnerships will become of paramount importance. In addition, companies must pursue AI and advanced technologies to enhance this resiliency, automate what makes sense and maintain EBITDA while transitioning their end-to-end supply chain. Refer to our eBook for additional strategies: AI & Advanced Technologies in Manufacturing: How AI Powers Smart Supply Chains and Smarter Decisions.
If you are interested in reading more on this topic:
Geopolitics Impacting Supply Chain Networks