Amid trade war, companies ponder pivoting away from China
- Amid an escalating trade war between the U.S. and China, companies are considering the relocation of their supply chains if importing goods from China continues to threaten profitability, Bloomberg reported.
- "We're pro-actively taking action ... to sort of avoid the tariffs by moving to southeast Asia and other low-cost countries that can meet our requirements," said Todd Bluedorn, CEO of Texas-based HVAC.
- According to James Simms, CFO of Massachussetts-based Vicor Corp., the volume of components sourced from China may bear considerable cost to the power converter company. "We are seeking non-Chinese alternate vendors. In addition, we have filed requests with the U.S. government for exclusions from tariffs on a limited number of components, for which no alternative vendor exists."
Moving a supply chain is a bit of a misnomer. It is more the case of rebalancing suppliers, a common strategic sourcing process when dealing with any commodity.
Not to minimize the hassle and potential interruptions that can and will happen when moving key manufacturing sources, but the large companies mentioned by Bloomberg have the ability — and agility — to move production in search of the lowest cost provider.
While China-related tariffs may be the main reason for shifting supply now, increasing labor costs, tax considerations and other elements of supply chain risk have always kept companies' manufacturing sourcing fluid. This is not the first time they need to adjust their supply chains, and it won’t be the last. It’s simply the model they’ve subscribed to.
But smaller and less sophisticated companies — those who have taken a higher risk of shifting production offshore in search of lower costs — will have a much harder time to recalibrate their supply chain. Often, companies that shift production offshore eliminate their domestic production and supply capabilities, leaving them at the mercy of their offshore suppliers, thousands of miles away.
Even if their China supplier has production capabilities or relationships in more suitable areas, capacity constraints, production ramp-ups, cost pressures and quality issues may offset the tariff induced cost increases. These companies are essentially trapped, paying high costs for imported products or reestablishing costly domestic production capabilities. It’s a sure bet that critical suppliers in your supply chain are wrestling with this very issue.
The potential of any range of supply issues has always been part of the risk profile of offshore sourcing, with many companies willing to take the risk in exchange for lower costs. We see that companies with strategic sourcing capabilities are tweaking their supply chains and perhaps studying the economic tea leaves to determine future supply needs.
Others are holding on and hoping for the best.
- Bloomberg Companies Say They're Ready to Move Supply Chains From China
- Supply Chain Dive Timeline: How the US ended up in a global trade war