The shifting winds surrounding China geopolitics have left many companies feeling adrift. “We have been trying to diversify away from China manufacturing for years, but we’ve only managed to move about 10% of our supply chain out,” a client recently told me. “China still makes 80% of our products. Even if we wanted to pull out more, we couldn’t do it soon.”
You may have had similar thoughts as supply chain instability grows. Country relations have strained ties between Chinese factories and U.S. buyers, and increased supply chain risks in numerous ways. Wary watchfulness has turned to alarm and now panic for some companies caught unprepared.
Many U.S. and European firms have spent years, even decades, building relationships with Chinese manufacturers. These partnerships fostered stability, freeing companies to invest in competitiveness. But trade wars and bans introduce new, long-term uncertainty that disrupts markets and profits. What should you do if, like my client, you rely heavily on China but need to diversify? As a brief aside, let the record reflect that we started warning our readers back in 2018 to expect US (and then EU) relations to go into a straight line decline, and we have consistently re-issued that warning many times since.
But like our client I mentioned above, many U.S. companies working with Chinese counterparts have learned that decoupling from China manufacturing and diversifying supply chains is at least to some degree desirable, but understanding this does not change their economic reality. In this ongoing and late-hour appraisal of China risk vs. reward, here are several questions to consider:
Is it Too Late to Start Diversifying My Supply Chain?
It is never too late, but if you are just now asking the question, know that diversifying into other markets will take time and money, and it will be stressful and challenging. But it can and should be started now. The alternative is to just sit back, and hope things change for the better with China, though there is little reason to believe that is what will happen. Meanwhile, forward-thinking and risk-averse companies will continue to look to other markets where more general principles of the rule of law and market forces and low or no tariffs provide more certainty.
Where Can We Move Our Manufacturing?
There are a host of countries eager to engage with U.S. companies. Much of your analysis will depend on your industry. Are you in a high-tech industry? What inputs do you need? Do you need human labor or will machines fill the need? Countries like Vietnam, India, Thailand, Philippines, South Korea, Turkey, Malaysia, Taiwan, and Mexico offer opportunities to diversify supply chains, and each has its own set of factors to analyze. One of the things we as international lawyers are finding so fascinating is where our clients are ending up; it is often not where we expected. Each company has different goals and wants and needs and each product is different.
I urge you to check out Nearshoring to Mexico: The Key Questions to Ask for a terrific list of questions companies looking at nearshoring to Mexico should be asking. Though many of the questions are Mexico-specific, many are not, and this post makes for good reading for anyone looking for a new country for manufacturing.
Can My Good Relationship with My Chinese Supplier Overcome This?
Your longstanding relationships with your Chinese suppliers are important and you can establish new relationships in China based on the new current reality. It’s time to explore your network and call in your favors in China to help buy you time to diversify. It’s also time to make sure you have real contracts with your Chinese manufacturers, so as to reduce the likelihood of their thinking you will be leaving and then start treating you accordingly.
Will My China Manufacturer Steal My IP and Compete with Me in Other Markets?
That risk is probably increased, but it will depend on both your relationship with your supplier and how badly things are going. for them. If their other customers are leaving, they will probably try to keep their best customers happy. They will not be able to compete with you in the U.S. market because even if they try to leapfrog you and sell directly to your customers, the tariffs will apply equally to your new direct competitor. If you keep your China manufacturer filling orders for foreign markets, they will have less time to wonder if now is the right time to steal your IP and woo your customers.
Will a Chinese Court Enforce My Claims Against a Chinese company?
This is an ongoing risk for companies doing business with China, especially now. But having good contracts in place is always the first place to start because your China counterparts know that you know how to play in China on China’s terms and in their language. Keeping the communication lines open will let you know whether your counterpart is about to renege on your trade relationship, and then you and your China lawyers can discuss the potential of litigating your case in China.
Sound business principles continue to remain relevant. U.S. companies have to stay nimble and engage their customers. This means setting a strong culture course for your business of ongoing innovation and customer service. Why? Innovation means the assurance of your company continuing to stay relevant in the marketplace and command a profit, even if it is diminished due to the trade war. Even if your Chinese supplier could cut and paste your company to China and become your direct competitor, they cannot replicate your customer engagement or your culture of innovation overnight. It will be a long road ahead. Dig in and start your diversification now.