The escalating tariff war between the United States and China has created uncertainty for U.S. supply chains that mainly source their raw materials and manufactured goods from the republic. To hedge against risks, U.S. companies are looking to new suppliers in other countries while Chinese manufacturers are seeking to add value to their products and retain their customers, Financial Times reports.
As a risk management measure, both U.S. and European companies have been shifting their sourcing to other Asian countries throughout the past decade. To reduce their reliance on a single country and take advantage of cheaper wages, manufacturers have set up factories in and sent work to Bangladesh, Cambodia and Vietnam.
This trend is being accelerated by the tariff war. In preparation for potential tariffs, handbag designer Steve Madden announced it is shifting more of its production to Cambodia. Following suit, Flex, an electronics producer that supplies Bose and Google, is exploring options in Malaysia and Mexico, and Techtronic, which produces parts for Hoover, is sending business to Vietnam.
However, it may be hard for U.S. customers to find reliable, quality labor in developing markets. Unless companies have existing relationships with factories, suppliers and governments in developing markets, it is challenging to shift labor there because investment laws often are unclear. Similarly, labor and environmental standards often are lacking in these markets. Spencer Fung, chief executive of supply chain management company Li & Fung, says that it will take about two years for a company to stabilize production in a new country.
Plus, because complicated electronics supply chains are so entrenched in China, it’s unlikely that all business will shift away from the country as a result of these tariffs. “Everybody is looking for a way to hedge but it’s not that easy,” said Larry Sloven, executive at Capstone, which sells China-made LED lighting in the United States, in the article. “Think about all the components that go into making an electronic product — they all come from China.”
Chinese companies are not going to let their customers go that easily either. Instead, they are going to rethink their value propositions and business strategies. “This is a moment for the [Chinese] manufacturing industry to think about how to diversify risk, whether to upgrade products and add more value or expand production to other regions,” said Clara Chan, president of the Hong Kong Young Industrialists Council and chief executive of a metal production business in China, in the article. Fung adds that Chinese factories also will invest in automation to boost their competitiveness.
As U.S. companies transition to other manufacturing sources, the switch likely will be slow and possibly even temporary because of China’s market dominance and value offerings. This still leaves U.S. companies with the challenge of figuring out how to grapple with new tariffs while still securing the supply they need.
Managing the risks
As the market fluctuates in the midst of this tariff war, companies will have to utilize a variety of strategies to protect their supply and bottom lines. Risk remains an essential part of supply chain planning, and some companies might be leaning on it now more than ever. Consider the definition of risk response planning as it appears in the APICS Dictionary: “The process of developing a plan to avoid risks and to mitigate the effect of those that cannot be avoided.” Companies that anticipated higher tariffs as part of their risk response planning likely are dealing better than those that didn’t.
APICS offers the APICS Risk Management Education Certificate to help professionals understand how to manage these and other risks that will inevitably affect their companies. An individual who completes the program demonstrates a commitment to protecting his or her employer from supply chain risk and the ability to balance rewards and risks in the decision-making process. To learn more, visit the Education Certificates page.
