Uncertainty is not a friend of business, and US-China tensions, tariffs, and COVID-19—just to name a few concerns—have left many businesses to make global investment decisions in murky waters. Despite these challenges, companies must still compete to win business, and are adjusting strategies to position themselves to continue accessing opportunities in the China market.
Companies are investing in local supply chains.
Localization of multinational company supply chains in China is not a new development. Over the past two decades, multinational companies selling products in China have been investing in local assembly, processing, product development, and support functions to advance their foothold in the Greater China region. Proximity to customers allows speed to market, and for the many US companies selling in the China market, localization puts them in a better position to compete for market share with non-US competitors in a highly competitive market.
Volatile US-China tensions have disrupted all companies doing business in or with China, and we are often asked how this has impacted company strategy for the China market. Global supply chain heads started adjusting strategies at the first sign of US-China tariff escalations in 2018 to avoid crossborder pitfalls—many reducing dependence on imports and investing in local supply options, both in China and the United States. Nearly a quarter of USCBC member companies have indicated the objective of their investment in China this year was to reduce risk due to uncertainty brought about by US-China tensions.
More recently, the unexpected COVID-19 pandemic has raised challenging questions for company strategy in China and Asia-Pacific. Unexpected global factory closures and widespread international shipping disruptions rendered some companies unable to operate. Many have since assessed exposure to international supply chains, and with risk mitigation in mind, many companies are doubling down on localizing regional supply chains.
For example, one company that relied on raw materials from South East Asia for manufacturing a final product China was not able to import the materials into the country once pandemic-induced transport restrictions flew up. Once China’s local COVID-19 restrictions eased and factories were back online, their suppliers outside of China were still facing shutdowns, which prevented production in China from returning to full capacity despite its ability to do so. Their more localized competitors were able to win that business. It raises the question: are the companies better off diversifying their product supply chain, or does the risk of political tensions or other pandemic-like emergencies outweigh the benefits of splitting product supply chains?
Investment is still driven by long-term growth opportunities
Companies often decide to move forward with projects to further invest in local supply chains in China simply because companies are still seeing growth there and need to expand existing operations to support that growth and compete. Before the pandemic, there was already enough demand in China to warrant an expansion of local supply capacity. While some companies have seen a slowdown in sales, many have noted that despite the uncertainties, they have experienced record years for sales in the China market and simply need to expand their product capacity to meet demand. Companies have also benefited from openings in specific industries that are included the US-China Phase One agreement.
Despite US-China tensions and COVID-19 disruptions, many US companies selling in China continue to see growth and sales opportunities. Some 90 percent of USCBC member companies’ main objective of investment in China is to access and sell into the growing market. USCBC member company survey responses about the business environment consistently reflect that China remains a top market for growth compared to other markets, and the results from this year’s survey (to be released soon) reflect the same sentiment. The International Monetary Fund’s most recent prediction is that China will grow some 8.2 percent in 2021.
Companies shift inward rather than relocate
While some companies have been shifting operations from China to other locations outside of the country, many do so to be in proximity to the market they are selling into, such as moving some production to Mexico if they are planning to sell in the US market. Some have also moved aspects of production to South East Asia. For those in cost-sensitive manufacturing such as lower-value consumer goods, they are moving mostly due to rising costs, a longstanding trend.
As China operations returned to full capacity following the COVID-19 outbreak, and US-China tensions continue to escalate, companies are assessing how to reduce disruptions in the future. While all companies want to reduce risk, instead of packing up and leaving the market where they are seeing the most growth this year, companies have begun looking inward for more redundancy in their supply chains, rather than shifting physical production facilities.
Many companies are now using internal resources to review existing suppliers and engineers, asking where they may be able to acquire alternative supply in case of future regional or local disruptions, as well as other questions they may not have needed to consider in the past. For example, if a company selling in the China market relies heavily on a supplier in Northeast China that shuts down unexpectedly, would suppliers in Southern China be able to produce the same product if need be? For a company exporting from China, do they have supply resources outside of the country that would have the skill set to produce the same product if needed?
This is an exercise in reducing regional supply chain risks through redundancy and elimination of single points of failure. While it otherwise might not make immediate business sense, it can make a defining difference when faced with escalating political tension with the potential to restrict trade, or should COVID-19 or another unforeseen disruption impact a region’s ability to operate.
Opportunities to improve efficiency
Companies that act proactively might even see US-China tensions and COVID-19 as an opportunity to improve their overall business footprint globally. Uncertainty in the US-China relationship and tariffs have created hurdles for companies, but many have been able to take a broad look at their overall supply chain and improve efficiencies and costs, finding new supply options at a lower cost, consolidating suppliers, and seeking tariff reductions or other opportunities to cut costs that may not have been considered in the past. Companies in China and across the globe are moving to remote solutions—for supply chains, this means incorporating virtual factory visits where possible to conduct due diligence inspections as a result of travel restrictions, saving time and budget. Many US companies feel that adjustments that have been made due to hardships this year actually have put them in a better situation to compete in China.
Same as before the pandemic, US companies are in China to sell products and services in an increasingly competitive market. Companies are continuing invest in local capabilities and improve efficiencies to better position themselves to compete, or face losing market share to non-US competitors that are not hesitating to leverage opportunities that the China market presents. If implemented effectively, some of these novel solutions may in fact outlasting the pandemic, leaving the company in a more competitive position over the long term.
Owen Haacke is Chief Representative of the US-China Business Council Shanghai office.