Supply chain leaders – including me – have been stressing that diversifying supply chains away from China will take time, energy and money.
But what if politics doesn’t give your organization much choice? Business leaders need to start deploying optionality in case your supply chain or markets get hit with an unexpected executive decision. The China decoupling might happen faster than we expect.
Did China Target Apple? Or Is This A Warning Shot?
The Wall Street Journal recently reported that China banned iPhones and other foreign-branded devices from central government agencies. Since then, a government spokeswoman denied those claims. But even that CNN report noted that the Chinese government has closed some U.S.-based offices, fined others, and detained and questioned staff members.
Apple CEO Tim Cook recently made his second trip to China this year. He touted Apple and China’s symbiotic relationship. If China is willing to clamp down on Apple, every leader doing business in China should consider that a warning shot.
For decades, China has used loans, tariffs, quotas, subsidies, tax incentives and forced sharing of intellectual property. Western companies have been long accustomed to this uneven playing field.
Over the last few years, the West has responded with tariffs, quotas, subsidies, tax incentives and export restrictions. China has responded with the heavy-handedness noted above, along with its own export restrictions.
The decades-long sparring between the West and China carries grave implications for all CEOs, from small and midsized businesses to multinational firms.
As my latest analysis shows, companies are going to have to redesign global supply chains. This means your entire network – sourcing, production, suppliers, distribution. Business leaders are going to have to deploy optionality as never before, considering multiple alternate production, logistics and transportation solutions.
Optionality – The Supply Side
When discussing the China decoupling, most experts are talking about the input side. The geopolitical tit for tat does highlight the need to proactively manage geopolitical risks and build resilience into your business models. Diversify your supply chains and reduce dependence on any single country or region.
Optionality will include sourcing materials, components and services from various suppliers in different countries. This strategy can help your company mitigate risks associated with political instability, trade disputes and other disruptions. It can also provide companies with greater flexibility to respond to changes in market conditions and customer preferences.
Even Apple is increasing production in India, hedging its bets.
Optionality – The Demand Side
However, the demand side is important, too.
China is a huge market for Apple and other Western firms. Apple gets about 19% of its revenue from sales in China. Many companies are in the 20%-30% revenue range.
A few companies get 48%, 51%, even an astounding 63% of their revenue from China, according to an analysis by Barron’s.
If you make machine tools, and one-third of your sales are in China, you had best prepare for the possibility that those sales could be cut off in an instant.
Sure, you might have a joint venture with a Chinese company. But there’s literally nothing to prevent that joint venture from facing regulation or takeover.
Optionality here could be tougher. Few regions or countries can replace China.
India, currently the fifth-largest consumer market, is predicted to be the world’s third largest – but not until 2027.
Sub-Saharan Africa has nearly 1.2 billion people. Its potential as a growing consumer market has been touted for years. Many ASEAN countries are grow their economies at a rapid pace.
The Choice Might Not Be Yours
Insightful leaders need to have optionality in place for your key business drivers. Finding new sources of components and materials is one thing. Finding new markets for your products could be tougher.
But the time has come for leaders to prepare for the China decoupling. After all, depending upon tomorrow’s news, you might not have a choice.
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.