As the trade war between the U.S. and China heats up, it’s becoming clear that the dispute won’t end in a quick resolution. Nevertheless, importers must take action now, to protect themselves from the disruption that’s sure to result.
In the immediate future, importers are facing tariffs on goods from China of up to 25 percent, potentially affecting thousands of product categories. Longer term, the impact on product cost, quality and origin promises to be even more profound.
High tariffs are threatening the fundamental relationship that currently exists between suppliers and buyers in China. In response, an importer’s first impulse might be to shift sourcing to a country whose products aren’t subject to high tariffs. But a move of that sort presents an enormous challenge to global supply chains.
Switching factories across borders requires extensive time to locate the right supplier and ramp up production. Buyers have spent decades building relationships with producers in China, who have intimate knowledge of the customer’s needs. They know what it takes to get goods to market on a timely basis, with high levels of quality. It’s unrealistic to assume that a similar arrangement can be quickly established in an alternative location.
In moving production to another country, importers and original equipment manufacturers (OEMs) face sharply different factory types, shipping patterns and labor environments. As a result, manufacturing lead times are certain to increase, as producers attempt to duplicate the extensive resources on which they relied in China for the last 40 years. There’s no guarantee that they’ll find an equivalent source of raw materials, production capacity or trained workers. The inevitable result will be severe delays, higher costs and general confusion during this painful period of adjustment.
Yet another cause for concern is the state of the chosen country’s infrastructure. Few low-cost locations have the extensive network of ports and roads that make moving product into and out of China so easy. For example, we recently sent a team to Vietnam to research that country’s ability to produce furniture for export. What they found was a warehouse that was separated from the point of container loading by half a mile of dirt and gravel road. Imagine multiplying that problem on the scale necessary to accommodate full production – and compare it with the high-quality facilities that have existed in China for years.
At the same time, importers must prepare for the regulatory, financial and administrative issues that arise from a shift in sourcing. The checklist includes the need to prepare a new bond, ensure adequate cash flow to cover the higher cost of goods, and implement checks on quality.
Companies that opt to continue sourcing product from China face their own set of issues, primarily in the form of higher costs due to stiff tariffs. In theory, a Chinese factory might promise to absorb the additional expense to hold on to key accounts. But how long can it afford to do so? And what happens when it suddenly announces that it can’t? The problem is akin to being told that one’s neighborhood is suddenly shutting down, leaving residents scrambling to locate new homes, schools, stores and other local amenities.
The answer lies in adopting a double-edged strategy. On one hand, importers stand to benefit by continuing to rely to some extent on their well-established ties to factories within China. On the other, they have no choice but to seek out alternative countries for low-cost production. Those that decide to ignore the impact of 25-percent tariffs are taking a huge risk, with the possibility of having to re-source virtually overnight when those costs become impossible to bear.
In one sense, importers are simply having to adjust to the classic pattern of production constantly seeking out the lowest-cost countries. That’s a predictable and normal part of the globalization scenario. Even without a punishing 25-percent tariff in place, China is aiming to rid itself of the “dirtiest” industries, in line with rising wages and an emerging middle class.
Either way, importers and OEMs need to act now, to prepare themselves for changes in the global sourcing landscape. They should be striving to keep their current relationships in China alive, while seeking out new ones in other countries. That’s a hard road to follow – but in my opinion, it’s a necessary one.
Mark Laufer is CEO of Laufer Group International, provider of a complete logistics and service platform for global commerce.