Chinese Manufacturers are Shifting their Supply Chains – So What?

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Arbitrage is a shifty thing – literally!  Especially when it comes to supply chains and that is true whether we are talking about goods or services.  That is why we have advised clients to build competencies, tools and decision models that help them identify where arbitrage is shifting and then decide when to take advantage of that.  A similar trend happened a few years ago with lots of the call center providers in India who then started moving some of them to South East Asia for lower costs.  Similarly, “Vietnam has become an outpost of Chinese businesses, especially manufacturing and exporters looking for cheaper labor and less regulations” according to Forbes.

Amongst many others, there are two implications that should worry our community.  First, do we have visibility into which of our suppliers is doing this or planning to do this?  It clearly adds an element of risk that was not included in the original decision model to outsource, go offshore, go to China or go to your particular supplier.  Had you known that your Tier 1 supplier was now actually a combination of the supplier in China and Vietnam or worse still, your Chinese supplier is just the one booking the order and invoicing you – your actual Tier 1 supplier is in Vietnam – you may have made a different decision.  Imagine all the risk factors that you included in the original decision model and multiply them by a factor of X.  It is time to start re-running those models to adjust your Category Strategies (and make sure you make those models dynamic going forward and update them regularly!!!).  It would also be a great idea to start putting together a presentation for your key stakeholders and start educating them on these types of issues so that if you do go back to them with some recommendations, they will be prepared and aligned.

The 2nd implication that we should be worried about is why this is happening?  For that, Forbes points out that because of the trade wars, the Chinese economy is in trouble.  While we don’t have time to go into details in this post, here are some broad trends:

  • Shanghai composite down 30% over 12 months
  • GDP target dropped from 6.5% to 6% (real number alleged to be 2%!)
  • Exports dropping fast ($1.5bn) Dec.
  • Imports dropping faster ($5.8bn) – that’s a net trade value lost for US ($4.28bn)

What this means is that economic downturn/instability in China may be here for a while. Chinese labor costs are going up, population imbalance is a structural long-term issue, etc., etc.  All of these should factor into a review of all current supplier relationships because the arbitrage in China may be shifting.  If you are an exporter to China also, then the drop in demand should be of concern.  Perhaps you should be looking into where the arbitrage is shifting.

Here is an example from current headlines “Apple Inc.’s largest iPhone assembler, Foxconn Technology Group, is considering producing the devices in India, people familiar with the matter said, a move that could reduce Apple’s dependence on China for manufacturing and potentially for sales.” (emphasis mine) Have you looked at India recently😊?? (Be happy to help!)

This is the true essence of Category Management. Re-evaluating your current strategies against the changing dynamics is critical.  Educating your Stakeholders and aligning these challenges with their Value Driver’s is absolutely essential for our role as Consultants and Strategic Advisors. For a detailed discussion on this topic and to hear from your colleagues, join us for our first ever virtual PERT workshop.

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Dalip Raheja
Dalip Raheja is President and CEO of The Mpower Group (TMG). Dalip has over 30 years of experience managing large organizations and change initiatives. He has worked across the spectrums of supply chain management, strategic sourcing, and management consulting.

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