Want to Mitigate China Tariff Risk? Follow Three Strategies

Tariffs imposed by the United States and its global trading partners, primarily China, could linger through most of 2019. Tariff uncertainties create new risks around manufacturing site selection, inventory policies, sourcing, distribution and logistics, and commercial terms with customers.

Any changes to established supply networks to mitigate the impact of the tariffs will require a measured approach, as scaling up new capabilities in new regions requires a long horizon and deployment of significant capital. For companies fulfilling U.S. demand with a Chinese manufacturing footprint, it is unrealistic to exit the Chinese market completely because of the scale and quality of the supplier ecosystem in place.

This blog summarizes three strategies to mitigate risk from tariffs.

Segment Risks Into Those You Can and Can’t Control

Managing for a broad range of interconnected risks is essential to designing resilience into supply chain networks. This means looking beyond direct suppliers to the extended network. However, very few companies have considered vulnerability beyond Tier 1 suppliers, and whether they have the ability to control these suppliers.

When considering today’s tariff environment, companies must evaluate shifts in their network strategies when planning for the next few years. As disruptive as that can be, only those companies that have been planning for resiliency in their network will be able to fast-track action plans once an unanticipated threat such as tariffs occurs.

U.S. companies face a daunting balancing act in justifying new investments in manufacturing and supply networks, while trying to gauge if trade issues will be a long-term problem.

Despite this uncertainty, network diversification may be justified. Uncertainty around trade policy will require global operators to place a greater emphasis on scenario planning.

Consider the following actions for the midterm to mitigate tariff impacts:

• Revisit and update scenarios periodically. Embed scenario reviews into strategic planning cycles.
• Evaluate the financial value at risk by products and impacted customer bases. Simulate risks based on how much control can be exerted on the network.

Research Cost Implications to Move Operations Back to the U.S. or Other Countries

Companies with extensive sourcing in China should explore multiple sourcing options and minimize trade conflicts with investment in customer markets via localization, for longer-term risk mitigation. This can take one of many forms.

• Reshoring or Nearshoring: Consider moving some production or sourcing to the U.S. or nearshoring to Mexico for U.S. demand. This provides additional agility and risk mitigation from reduced dependence on global supply chains to meet regional demand clusters.
• Product Moves Within an Established Global Footprint: For others, product moves to existing locations in low-cost regions might be a feasible option. Even when companies have an existing global footprint they face challenges with product moves, as the complexity of manufacturing processes makes shifting production time-consuming and expensive. The interconnected nature of global supply chains means that any product move cannot be made in isolation, as the impact on other parts of the company’s network must be considered.
• Manufacturing Site Selection for Network Diversification: For those without a presence in alternate countries, the process gets even longer, involving setting up and staffing in a new country. In this case, when considering a long-term strategy to combat tariffs, do not concentrate solely on tariffs. Rather, consider it in relation to your long-term business plan and overall network strategy.

Balance Position in China With Risk Diversification for Future

It’s important to ensure ongoing viability to fulfill American demand by balancing your competition position in China with risk diversification for the future.

Given the costs of reconfiguring supply networks, the time required to execute moves and the attendant risks, companies should undertake large-scale network realignment only if they expect it to be viable for several years. Given the security spats between China and some western countries over the use of western technology, this might seem like an optimum time for such moves, but moves must be made with caution.

• China’s scale as a manufacturer:Replacing manufacturing capabilities that China provides won’t be possible for more than a few replacement venues in Southeast or Central Asia. Capacity issues, labor and other logistics issues will prevent that.
• Symbiotic relationship between the U.S. and China:As much as China projects strength in its manufacturing capabilities, China needs its trade relationships with the developed economies of the west.
• China’s scale as a market:Foreign companies are not interested in giving up the market share that they have cultivated in China’s rapidly growing tech industries.

All this being said, companies are split on how to proceed. The Institute for Supply Management says that 52% of survey respondents don’t anticipate changing their global footprint. However, 48% plan to do so.

Kamala Raman, Senior Director Analyst, Supply Chain Operations, Gartner