The China Risk

The risk of China has increased dramatically over the years. Early on, executives were concerned about intellectual property theft. Although that is still a concern, there are much bigger issues. For example, executives are assessing:

  • Taiwan threat: China has been aggressively threatening Taiwan, running military exercises and much more. Since Taiwan produces 90% of the world’s advanced computer chips, this is concerning on multiple levels.
  • South China Seas tensions: China has also been taking the stance that they ‘own’ the South China Seas and can decide who will pass. Clearly, there is heightened risk in the South China Seas.
  • Security threat: According to the laws in China, if data goes through a server in China (regardless of where the company is owned), in essence, China can take that data. In today’s advanced computer age, what data doesn’t go through a server? Companies are realizing this risk.
  • Policies like Zero-COVID: Executives realized that China can cut off manufacturing and the supply chain at any time and don’t want to assume this level of risk.
  • The opposite of green: Although China has been #1 in the world in manufacturing for many years, they do not have the same environmental laws as the United States. In fact, the situation is quite the opposite. The U.S. produces the cleanest natural gas and has invested heavily in environmentally friendly oil and natural gas production. For example, according to the Washington Post, the quickest route to reducing carbon emissions is American natural gas. On the other hand, China has been permitting 2 coal plants a week.
  • Water shortages: Manufacturing requires water and electricity, and China has scarce supply of both (and water is used to generate electricity). In fact, a portion of China has worse water conditions than Egypt. Read about this serious issue in our article.
  • Logistics risks: Supply chain chokepoints have come into focus as the Panama Canal experienced a drought (impacting 40% of the east coast shipments from Northeast Asia), the Suez Canal experienced Houthi rebel attacks (diverting container ships around the southern tip of Africa), the Baltimore bridge collapse, natural disasters, ports and goods movement strikes, and other issues like the Ukraine war’s impact on commodities.
  • And more such as forced labor……

If this wasn’t enough to reevaluate your supply chain, the percentage of labor cost in products continues to go down as automation, robotics, and other improvements are rolled out. In addition, labor rates in China continue to increase. In fact, Mexico’s labor rates are lower than China, and Mexico is covered by USMCA. Aside from the sunk cost of capital invested in China, product costs are telling a different story.

Examples of Succeeding with Regional Manufacturing

The feedback we hear from most executives is concern about costs. Thus, we thought providing an example is in order. Motorola Solutions touts solving for safer communities, safer schools, safer hospitals, safer stadiums… safer everywhere. Historically, Motorola Solutions was one of the first multinationals in China that built the largest continuous cellular network and the first Chinese mobile phone with GPS. The bottom line is that they were $3 Billion revenue manufactured in China and $15,000 elsewhere.

Their CEO decided to get out of China for manufacturing and R&D after trade secrets and copywritten software were stolen. It took several years, but they are now at virtually $0 manufactured in China and $50 Billion revenue manufactured elsewhere. They support 911, first responders, police etc. with radio communications.

In another example, a company in Southern California, Do It American, built their business in taking volume from China and overseas. They serve some of the largest public utilities in the United States has several large OEM customers. Do It American focuses on lean manufacturing, people engagement, and they use robotics and technologies to supplement and support their workforce. In essence, they are going after supply chain optimization, reliability and resilience with regional manufacturing.

Go Regional in Manufacturing

Not only are proactive companies diversifying their manufacturing base and optimizing their supply chain, but they are also taking advantage of opportunities to outperform their competition with quick responsiveness, rapid R&D, and fast customization. In addition to reshoring and nearshoring (friendly-shoring), they are expanding manufacturing, partnering with additional regional manufacturers and building / opening new facilities. These advantages are leading to revenue opportunities while also creating more jobs. According to the National Association of Manufacturers, for every $1 spent in manufacturing, there is a total impact of $2.69 to the overall economy.

As you look to expand manufacturing, utilize SIOP (Sales Inventory Operations Planning) to best assess how to optimize and align your manufacturing and supply chain to your revenue plans. Assess how to best utilize your assets, resources, supplier base, working capital etc. across your network and evaluate your opportunities to expand, scale up and/or down rapidly, etc. If you want to learn more about how to implement these types of strategies, download our complimentary e-book, SIOP: Creating Predictable Revenue and EBITDA Growth.

If you are interested in reading more on this topic:
Diversify to Thrive in Manufacturing and Supply Chain