33% of Supply Chain Execs Say They’re Ready to Exit China by 2023

Date: Thursday, June 25, 2020
Source: Sourcing Journal

The COVID-19 pandemic has put pressure on supply chains worldwide, and many industry leaders are taking their frustrations out on its source. In fact, 33 percent of supply chain leaders either already have moved their sourcing and manufacturing activities out of China, or plan to do so by 2023, according to a Gartner survey.

An exit from China would follow growing consumer sentiment against buying products made in the country. As many as 47.8 percent of consumers to a June Coresight Research survey said they either agree or strongly agree that U.S. retailers should source fewer products from China. In light of the pandemic and the sentiments that have emerged surrounding it, 39.7 percent said they are now less willing to buy products manufactured in the so-called “world’s factory.”

It would be shortsighted to blame the pandemic alone for the pressures within the chain, especially given that the trade war between the U.S. and China has lingered for two-plus years. In the latest chapter of the saga, U.S. trade representative Robert E. Lighthizer last week said the U.S. will seek a “broader reset” of tariffs at the World Trade Organization (WTO), in which the U.S. will be working to raise its WTO tariff ceilings. Meanwhile, earlier this week Trump administration advisor Peter Navarro’s comments led to the fears that the U.S.-China trade deal was cancelled, though he quickly clarified that that was not the case.

While China has traditionally been seen as a great value for high-quality, low-cost manufacturing, tariff increases have steadily slimmed margins for companies looking to add jobs in China versus those that aren’t, according to Gartner’s “Weathering the Supply Chain Storm” survey, which gathered data from 260 global supply chain leaders between February and March.

“We have found that tariffs imposed by the U.S. and Chinese governments during the past years have increased supply chain costs by up to 10 percent for more than 40 percent of organizations. For just over one quarter of respondents, the impact has been even higher,” said Kamala Raman, senior director analyst with the Gartner supply chain practice. “Popular alternative locations are Vietnam, India, and Mexico. The second main reason for moving business out of China is that supply chain leaders want to make their networks more resilient.

According to a Reuters report in May, U.S. lawmakers are drafting proposals to drive American companies out of China by incentivizing them to uproot their supply chains with tax breaks and subsidies. Government officials are reportedly considering a $25 billion “reshoring fund” to sway these businesses toward bringing the supply chain home.

Some businesses are at least starting in that direction—25 percent of supply-chain execs said they have already regionalized or localized manufacturing in some form to be closer to demand.

Retailers looking to bring their supply chains back to the U.S. would have much greater control over their operation. Only 21 percent of survey respondents believe they have a highly “resilient” network today—meaning they have good visibility into their supply chain, as well as agility to shift sourcing, manufacturing and distribution activities around quickly. These executives envision a brighter future though, with 55 percent saying they expect to have a highly resilient network in the next two to three years.

Raman noted that the present global supply-chain environment puts companies in a bind as far as evaluating and building out their own network. On one hand, retailers have the opportunity to choose just-in-time systems designed to improve operational efficiency and closely align production with demand. But they also have the alternative of “just-in-case” plans that emphasize planning and preparing for a range of plausible scenarios.

“To find balance, supply chain leaders must engage in risk management to assess their organization’s willingness to take risk onboard and decide how to quantify that risk against other network objectives such as cost effectiveness,” Raman said.

Despite potentially eliminating tariffs from their expenses, 58 percent of respondents agree that a more resilient supply chain also results in additional structural costs to the network. While these costs are inevitable, regional supply chains are designed to ease delays and shortages in times of disruption, ultimately benefiting the retailer and the end consumer.

“Many Western organizations will have to explore new forms of automation on the factory floor to decrease the costs of near- or onshore production,” Raman said. “Some also favor a partial option, such as manufacturing in Asia and moving only the final assembly closer to the customer.”

 

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