And what global businesses should do now
SMITH BRAIN TRUST – As the U.S.-China trade war enters its second year, companies that depend on Chinese manufacturing are looking elsewhere for production needs.
Just look at the tech sector. Google and Nintendo are looking for alternative manufacturing spots. And Apple electronics assembler Foxconn says it’s prepared to exit China, leveraging its existing factories in places like Brazil, Mexico, Japan, Vietnam, Indonesia, to avoid more serious trade war implications.
The moves mark a clear disruption for the electronics industry, whose companies have long sourced primarily – or exclusively – from China, says Gary Cohen, clinical professor of international business, global trade and supply chain management at the University of Maryland’s Robert H. Smith School of Business.
“This is a wake-up call for companies,” he says, “(because) in today’s global economy, it is critical to implement risk reduction strategies in upstream supply chains.”
In colloquial terms, it’s better not to put all your eggs in one basket, he says.
The tech companies, many of them giants of industry, are staring down significant administrative risks, Cohen adds. There are trade barriers, like tariffs, but there are also other political and economic risks, and other potential disruptions to the economical and timely flow of goods.
“Many major companies began exploring other options since the 2016 presidential campaign when presidential candidate Donald Trump was threatening large across the board tariffs on Chinese goods,” he notes.
The repercussions may have lasting impacts, as well.
“If manufacturers identify alternative manufacturing locations that do not jeopardize their competitive position in the marketplace, I believe they will continue to manufacture in alternative markets,” Cohen says. Those include Mexico, Thailand, Malaysia, Vietnam, Indonesia, and the Czech Republic, among others.
But one of the most significant repercussions is the threat to U.S. brands who look to China as a source of growth.
“China is currently the second-largest consumer market in the world and there are also many countries that are not experiencing tariff threats on Chinese goods,” Cohen says. “I believe we will still see manufacturing in China to serve the large local market and other markets not dealing with an increase in trade barriers on Chinese goods.”
Those manufacturers must now look to diversify their supply chain risk, he added. “It’s quite possible that although this has created a disruption in the near term, this could actually be a blessing in disguise, forcing companies to invest in diversification of risk.”
For companies that don’t currently have manufacturing capabilities in alternative markets, there are basically two options, Cohen says. One is foreign direct investment in their own factories; the other is outsourcing. Foxconn, for example, has factories in multiple countries, making it easier to shake up production. Of course, that shakeup won’t exactly be simple, he says. There will be capital costs associated with the change, and new labor costs and shipping costs, both of which will impact the final landed cost of goods in destination markets.
“Global trade is currently volatile as a result of today’s political climate, so it’s hard to predict what might happen next. However, the lesson here is quite clear for electronics companies, as well as companies from other sectors,” Cohen says. “There must be a focus on diversification of risk to ensure that supply chains can operate smoothly.”
Back in 2011, he recalls, a massive earthquake and subsequent tsunami battered Japan, damaging its electronics supply chains. Another, smaller disruption followed an earthquake in 2016. “Now we have a political disruption to electronics supply chain as a result of a trade war. Geographic diversification is a must for electronics companies going forward.”
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