In Thomas Friedman’s bestselling book of 2005, he declared that “The World is Flat,” a view that globalization was so pervasive that it had torn down traditional geopolitical barriers to international commerce to the point that the world was a level playing field, open equally to all competitors. This week the Chinese government said it would raise tariffs on goods from the United States in retaliation for an increase of tariffs announced the prior week by the U.S. government. U.S. stock markets had a strong negative reaction, falling more than 600 points on the news. It’s the latest flare-up of a long and drawn-out trade war between the U.S. and China and adds to mounting uncertainties of the long-term impact for manufacturers.
Even though Friedman’s declaration may have been hyperbole, it certainly was partly true. Today, in the wake of escalating trade tensions and nationalist policies, we must ask ourselves, is the world reacquiring its spherical and, some would argue, more natural state of roundness? And if so, what does that mean for the state of gangly and highly vulnerable global supply chains of the world’s manufacturing companies?
With both sides digging in for what could be a long and protracted battle, many companies are reconsidering their Chinese manufacturing bases. Even before the latest volleys were fired, the South China Morning Post reported that a Baker McKenzie poll shows that 93% of Chinese companies are reconsidering their supply chains. Some are closing plants there altogether and relocating to a different country, while others are shifting production of goods bound for the U.S. to facilities outside of China.
There is also a widespread effort underway to seek non-Chinese alternate suppliers for component parts. As this Forbes article points out, intense scrutiny from federal regulators of goods imported from China and Southeast Asia has created major headaches and loss of business as products are waylaid at ports for lengthy examination of contents or rejected altogether and stamped “Return to Sender.”
If they haven’t already, multinational corporations with global supply chains should take a hard look at the sustainability of their existing manufacturing footprint and consider a benchmarking location analysis to determine if their strategic locations should be adjusted to meet the new reality. Many manufacturers are impacted by the following location-dependent cost factors: logistics, labor, utilities, property costs, and taxes including tariffs, but costs are not the only thing to consider. Companies with extended supply chains are also subject to geographic risks including regional conflicts, natural disasters, as well as the economic impacts of quickly evolving geopolitical policy decisions.
The Impact of a 25% Tariff
To demonstrate the benefits of examining alternative locations, consider how a 25% tariff would impact a multinational company.
Cisco CEO Chuck Robbins provided an eye-opening explanation on CNBC Squawk Box recently. He said that to remain competitive there is no way his company can pass along the full 25% cost increase to consumers. Therefore, they must decide whether to sacrifice P&L, which isn’t an option with publicly traded companies, or cut costs and put R&D at risk. In the current global tech environment, slowing down R&D is suicide by complacency. Competition is simply too fierce and too fast to slow down.
Tariffs will hit industries ranging from gin distilling to iPhones. Some industries such as automotive and aerospace manufacturing, and companies such as BMW and Boeing, are likely to be impacted more than others. They often get hit twice because they source first, second or third-tier parts from China and then turn around and sell finished goods assembled in the U.S., cars and airplanes, to China.
All of this means that the location where a company currently makes products may no longer be the optimal one, and that increased polarization between countries and governments requires a highly analytical approach to realigning your corporate real estate with shifting supply chains. A location benchmarking analysis provides visibility to the costs and benefits of making such change. By evaluating costs, business environment and risks to your business model, you have the confidence to recommend and implement changes to your supply chain that will insure the long-term success of the company.
For decades, Global Location Strategies has assisted corporations with understanding these dynamic environments so that they can determine under what conditions a change must be made. This knowledge allows company leaders to monitor conditions and act with confidence when the time comes. Whether you are a U.S.-based operation sourcing products from China, or a manufacturer based in China selling to the U.S., the time to reanalyze your supply chain costs is now, before your next strategic location is locked down by a competitor.
Contact us to discuss your company’s current situation and if location benchmarking is a viable solution for lasting productivity and success.