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First came the tariff war. Then came the coronavirus. For the past year, U.S. businesses have been scrambling to move manufacturing out of China.
What was once just a consideration to achieve more profitable margins and maintain tighter production schedules, looking to quality alternatives in the supply chain is now a necessity.
Why We Need to Diversify the Supply Chain Right Now
Last month, Thomas released a new eBook detailing the effects of COVID-19 on U.S. manufacturers using data from a survey of more than 1,000 manufacturing companies. (Results from the latest survey, which was conducted late last month, will be available later this week.) Results from the survey show 60% of companies have already felt effects through disruptions in shipping, and many have been forced to turn down or delay new orders.
By February 10, many Chinese factories had begun production again — but not at full capacity. Hurdles such as manpower and compliance slowed operations, prompting the American Chamber of Commerce Shanghai to provide a checklist of best practices for manufacturing facilities during the coronavirus. Thomas has also been providing ongoing shipping and logistical updates.
There are many advantages to streamlining supply chains, such as cost reductions for larger contracts, but as we’re seeing now, the disadvantages can be crippling. One in five manufacturing companies has Chinese production factories, and this lack of supply-chain diversity is spelling trouble.
When a single nation sustains such a significant portion of American business or, even on a smaller scale and domestically, when a single supplier sustains a significant portion of a small business, if there is a difficulty — whether it be infectious-disease-related or a result of trade wars, natural disasters, or strikes — business can come to a complete standstill.
The Problem with Moving the Supply Chain to Other International Landscapes
The world’s top export country is China. Are other countries fully prepared to successfully step in as alternative supply chains?
When the trade war with China began, some U.S. businesses turned to other Asian markets. “In 2019, Vietnam exported almost $47 billion more than it imported from the US. That’s a significant increase from the $34.9 billion trade surplus between the countries in 2018. Companies including Samsung, Nike, and Adidas have shifted production into Vietnam from China as tariff concerns have grown,” according to Business Insider.
A custom manufacturer in Wisconsin responded to our COVID-19 survey, saying, “This event is putting a lot of pressure on Indian and Mexican sources as OEMs and Tier Ones seek alternative to Chinese sources.”
Even if a new-to-you facility is eager to take your business and has the best intentions to fulfill your order, it’s not a simple matter to move a supply chain with sudden notice. There are a number of issues businesses need to consider.
Checklist of Questions to Consider When Moving Your Supply Chain
- Staff: Do they have enough fully trained workers for the job if they normally operate on a smaller production scale?
- Product quality: Can they produce the same quality of work?
- Business practices: Is the factory up-to-code in terms of its facilities and business practices, including everything from secure and confidential handling of customer data to labor rights and sustainability?
- Compliance: Are they aware of all compliance and regulatory standards that your business requires? Keep in mind that even in the U.S. there are not only national regulations but that some states, such as California, have more stringent codes, and a foreign vendor or supplier may require significant education and time to adjust their operations to be compliant.
- Schedule: Will they deliver goods on the schedule promised if they are also being courted by other similar businesses looking to use them as their new link in the supply chain?
- Costs: How will the move to this facility affect your bottom line? There was an economic advantage to doing business in China; facilities in other countries may demand a larger slice of the profits as a matter of business. Or, they may recognize that the slowdown in China puts you in a bind and price gouge. Perhaps the facility itself is comparable, but shipping costs may increase. Time is also money, so you will also have to factor in delays in the schedule for any negotiations, training, acquiring of resources, and getting up to speed.
If So Many Products Are “Made in USA,” Why Is There a Concern?
Manufacturers told Thomas that current events are leading them to “consider reshoring some of their production capacity back to North America.”
“We’ve long aimed to be a domestic alternative to Chinese manufacturers, anyhow,” one Washington-based agricultural OEM told Thomas. “If anything, this just further asserts that we are on the right path.”
Indeed, after China, the U.S. is the largest exporter of goods, and its leading exports are transportation vehicles (cars, planes, helicopters, and spacecraft), refined petroleum, and pharmaceuticals so this sounds great in theory. Not only that, but in the second quarter of last year, U.S. manufacturers added $2.37 trillion to the U.S. economy.
President Hoover signed the Buy American Act in 1933, and President Trump won on the “Make America Great Again” slogan and last year signed an executive order meant to strengthen buying American. But what does “Made in the USA” truly mean? In actuality, many items are not wholly American-made. They’re often comprised of foreign imports.
“To begin, the EO does nothing to strengthen domestic content requirements that agencies use to determine if a good is “domestically sourced”—that is, actually made in the United States. Many Americans would be startled to learn that a product requires only 51% U.S. content to be considered domestically made under the Buy American Act, which applies to federal government procurement,” reports the Economic Policy Institute.
“Clothing and other textiles are permitted to have a ‘Made in USA’ label as long as the item was cut and sewn in the U.S .and the fabric was created in the U.S., regardless of where the fiber was originated or where the yarn was spun,” according to Business Insider. The article was written in 2017 before the executive order (EO) was signed in 2019, but the EO does not specifically mention clothing or textiles. Of course, that’s not as bad as the allegation that back in the 1990s two prisoners were put in solitary confinement after they claimed that they were ordered to swap “Made in Honduras” labels with “Made in the USA” labels on clothes, a claim that if true signals devious manipulation of what American-made means.
In practice there are considerations that need to be factored in when it comes to moving your supply chain exclusively to the U.S., some more significant than others:
- Corporate tax rate: Although the rate dropped recently, the U.S. corporate tax rate is still significantly higher than in many countries, including China.
- Regulations: Conforming to regulations costs approximately 11% of sales.
- Cost of living: U.S. workers demand higher pay than those in many international locations, which means the cost of making them goes up and likely the sale to customers goes up. “However, as the cost of living is higher in the United States than China, many goods cannot be produced in the United States for a price comparable to their production costs in China,” according to The World Atlas.
- Ethics: To cut down on the cost of labor, some companies use prisoners to manufacture auto parts, electronics, and clothing. Some argue that the prison labor is exploitive because the skills aren’t transferable outside of prison and the wages are far less than minimum wage (compare 33 cents to $7.25) and that it incentivizes the prison industrial complex. During the first few weeks of COVID-19 spread in the state, it was announced that New York was using prison labor to make hand sanitizer to combat the current shortage caused by coronavirus fears.
Even if you move your supply chain domestically instead of internationally when making the departure from China, you’ll still face the same Checklist of Questions to Consider When Moving Your Supply Chain as previously mentioned above. That means additional delays and costs as your domestic supply chain transitions. One particular issue to be aware of is that U.S. manufacturers, faced with a widening skills gap, have been unable to fill job positions. A record 522,000 manufacturing jobs were unfilled in September 2019, according to the National Association of Manufacturers.
U.S.-based supply chains create jobs, can stimulate the American economy, and generate consumer pride, so there is plenty of reason to move operations domestically.
Checklist to Move Forward in the Days to Come
In the best-case scenario, you already have a diverse supply chain and an established backup plan in place. However, even if you don’t there are still ways to mitigate the negative impact of current events on your business as you vet alternative suppliers.
Communicate with your team
As staff and vendors panic over how the coronavirus and stock market will affect business, provide an honest assessment of business risk as well as address any concerns they may have about their own potential health risks and company financial stocks.
Set clear guidance on current operations. During turbulent times, people look to a strong yet compassionate leader. Out of fear, rumors may spread about policy changes and assumptions may be made based on what competitors are doing, so be at the forefront in directing your staff and vendors toward best practices and next steps.
Evaluate your inventory
Analyze your current inventory and assess how long you have before your company will begin to feel the pinch from the factory slowdown in China, with an eye toward what’s realistic for your competitor. (Last year, for example, GM had sufficient inventory that the strike didn’t immediately negatively impact sales; it helped that they had an above-industry-standard supply.) You may want to alter your short-term and long-term rollout as well as pricing.
Contact your liaisons in China
Factories in China are resuming production. Stay updated on current logistics. Work with your contacts, or speak with your vendors to have them work with their Chinese suppliers and factories, to get status updates, negotiate schedules and prices (supportive relationships and providing a bonus may incentivize a factory to prioritize your schedule over your competitor’s, for example), and brainstorm solutions together.
While many companies may be looking for a competitive edge, most of you are in the same boat and would prefer a healthy market. Consult with your network to see how their company is handling operations. It may be mutually beneficial for smaller businesses to partner. For example, in book publishing co-editions is when more than publisher simultaneously publish an edition of a book (usually for a different market), which often helps save costs at the printing plant. As The Globe and Mail said about strategic partnerships, “There is no better approach to solving challenges than the famous saying ‘two heads are better than one.’”
Image Credit: Image courtesy of Anton Gvozdikov / Shutterstock
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