Is your company sufficiently diversified? Does it have its eggs in enough baskets?
A long time ago, my law firm was known as THE law firm for the Russian Far East. We ate, drank and slept Russia and Russian law. If there was a mining deal, an oil and gas deal, a timber deal or a fishing deal between an American company and a Russian company in the Russian Far East, there was a good chance our law firm was part of it. Then came 9/11 and our Russian practice fell off a cliff. American companies found doing business with Russia too complicated and difficult and vice-versa.
Fortunately for us, it was around that same time that our China phone lines started ringing incessantly. I can remember telling our lawyers that for every ten hours spent trying to get China matters we got ten such matters and for every ten hours spent trying to get Russian matters we got just one. It made sense for us to pivot from focusing on Russia to focusing on China and that is what we did, and we never looked back.
Well not exactly. I say “not exactly” because the changes with Russia seared into my mind that it is never good for a company to focus too much on one country, and so our firm has always strived to take on as much Vietnam and Thailand, Brazil, Mexico, Latin American, Spain, and just about any international business or international dispute resolution matter.
I am writing about this because in the last month or so I have spoken with about a dozen clients seeking (more accurately, begging for) alternatives to China for the manufacturing of their products. The situation/manufacturing history of these companies is roughly the following
1. Our international manufacturing lawyers talked with them in late 2018 (pre-COVID) about China’s increasing risks and costs and their response was along the lines of, “We know we need to diversify and we will, but in the meantime, we have no choice but to keep getting our products from China.
2. Then they did almost nothing to advance their manufacturing diversification and then COVID hit. We spoke with them a couple times during COVID and they assured us that they would move on diversifying their manufacturing “as soon as COVID lessens” but then they did little or nothing to accomplish that. Some of them told us they thought Biden would lift the China tariffs and things “will get better between the U.S. and China” when he does. This was a big factor in their doing nothing.
3. Then when Biden became president and the China tariffs were not lifted, many of them told us that they were “now going to get serious” about finding China replacements, but few actually did.
Then when China (and Vietnam) factories started closing again because of COVID and factory costs started rising and US-China relations began even more rapidly deteriorating and shipping costs started soaring through the roof — i.e., like right now — they started calling us, desperately seeking help.
Many years ago, our law firm represented a really successful and sophisticated and good-sized company that pretty much did everything right all the time. It was headed up by a terrific (in every way) CEO and it was constantly growing and hiring new employees. All was good for them. Then one day, pretty much out of the blue, they told me that they would be shutting down their company.
They told me that nearly all of their main product (which made up about 85% of their sales) had been coming from one country and that sanctions and other issues involving that country meant that they would no longer be able to get their product from that country at a price that could work. I was floored.
A few months later (over lunch), the CEO very honestly told me that the death of this company had been his fault. He said that he had “chased money over diversification” even though he knew the risks while he was doing so. He said that he had been given plenty of opportunities to diversify the company’s sourcing channels, but doing so would have meant his company would need to spend relatively big amounts upfront and also to pay slightly higher prices for the product. He described what happened to him as an amazing lesson.
A few years ago, the Wall Street Journal published an article, U.S. Soybean Farmers Work to Loosen China’s Grip, positing that American soy bean farmers had become too dependent on China:
U.S. soybean farmers worked for decades to make China their biggest foreign customer. Now they face a tougher challenge: weaning themselves off the market.
As trade tensions cut deeply into exports, U.S. soybean farmers, industry groups and government officials are seeking a stronger foothold in international markets beyond China, including Europe and Southeast Asia.
“While we’ve enjoyed the market share, has China become dependent on us or have we become dependent on China?” Agriculture Secretary Sonny Perdue said at an industry event last week. “That’s not a healthy economic balance.”
This morning, I was talking with my son-in-law (and that is what spurred this blog post) about how people are still dying from COVID because they never got around to being vaccinated. His first reaction was disbelief, but then I talked about how common it is for people who know how important it is to visit their doctor or dentist to put off such visits because they can be time consuming and unpleasant. Diversifying your suppliers and your buyers can be a similar calculus.
Is your company “too” dependent on China for its products or its sales? Is it too dependent on any one company or country? What are you doing about it?
