By Russ Banham
Many businesses expected that trade squabbles between the United States and China would quickly subside given the value of the partnership between the world’s two biggest economies.
But with the countries’ trade issues yet to be resolved, American companies with manufacturing facilities and suppliers in China are in a bind: Should they stick with the status quo or seek alternative locations to make and source supplies?
While the cost differential of relocating manufacturing to another country might justify a move today, the decision could backfire a year from now.
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“Uncertainty has become the new normal for many U.S. companies facing supply chain disruptions,” says Wil Knibloe, an advisory services principal at the international public accounting, consulting and technology firm Crowe. “All of them have some global connectivity to make their goods, and every day there’s a new trade story altering the picture.”
In trying to make sense of the trade conflict’s impact, companies must assess minute details on tariffs, duties, value-added taxes, customs and other trade-related costs on a country-by-country basis.
This scenario is no longer the case, however. With trade actions and reactions occurring on a regular basis, Knibloe says companies are unsure of the optimal response.
“I sat down last week with an after-market automotive client that manufactures products in China through a third party,” Knibloe recounts. “The products made there represent 70% of their business, but the impact of recent tariffs has added 25% to the landed cost. The company wanted to know if moving the manufacturing from China to Malaysia or South Korea would save them enough money to justify the relocation.”
Knibloe says the company is still evaluating the relocation but has paused in wait of a more detailed analysis conducted by Crowe. “Right now, it does not appear the move would benefit them as much as they’d like,” he explains. “It looks like the return on the investment to relocate is higher than the 25% increase in the tariff. The analysis has not been finalized, so time will tell.”
Tough Choices
Many other companies are deciding to leave China, often seen as the world’s low-cost, minimally regulated manufacturing location of choice. A May 2019 survey by a nonprofit that promotes U.S. business interests in China found that as many as 40% of U.S. companies currently manufacturing in China are considering relocating parts of their manufacturing operations or already have.
Nearly three-quarters of those surveyed said increases in U.S. and Chinese tariffs are adversely affecting their business. “The negative impact of tariffs is clear and hurting the competitiveness of American companies in China,” the survey authors stated.
According to research by a major Japanese business newspaper, more than 50 multinational corporations have either announced they will move a percentage of their production out of China or are reviewing the option. In such cases, companies first need to calculate and compare their total landed costs on a country-by-country basis, Knibloe says. The outcome of this analysis might indicate the cost-effectiveness of relocating supply to neighboring Vietnam, Taiwan and Thailand or closer to home to Mexico.
Knibloe cites a client in the furniture industry that was considering moving third-party production from China to Mexico or elsewhere in anticipation of a tariff.
“The impact of the tariffs on its P&L would have been substantial,” he says. “They held tight for an extended period of time while vetting viable options elsewhere.” Once the tariff became more imminent, the company began the process of moving a material amount of production out of China but with much more certainty—and a data-driven plan.
The furniture company’s hesitancy underscores the difficulty in predicting whether supply chain disruptions will ease or worsen. While the cost differential of relocating manufacturing to another country might justify a move today, the decision could backfire a year from now.
Leadership Matters
In light of the uncertainty around relocation decisions, Knibloe says some companies are reevaluating product design to see where they can trim costs, and they are taking a hard look at other areas. He cites a client that is consolidating its shipments with a reduced number of carriers to negotiate a better deal with the freight forwarder.
Herein lie the opportunities that companies are finding amid the crisis.
“The trade war is forcing companies to do things they should be doing anyway, like strategic sourcing, competitive bidding, deal negotiations and so on,” Knibloe says. “Now is the time to make an investment in the supply chain team, ensuring a leader with a strong strategic focus is on board.”
Knibloe says he recently provided this advice to the CEO of a manufacturing client.
“We were at dinner discussing whether or not they should relocate manufacturing from China,” he says. “She felt the company lacked the institutional knowledge and horsepower to execute a move to another location. I mentioned there were plenty of smart supply chain leaders out there who could help her make the best decision. She said she’d give it some serious thought.”
While companies do have options when it comes to navigating the trade war, trusting that a satisfactory business climate for their line of business will continue would be a mistake, Knibloe says.
“You just can’t sit there and wait thinking everything will turn out right in the long run,” he says. “Hope is not a strategy.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.
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