What's Going to Happen With My China-Dependent Supply Chain?

When I was 16, I lived for a year in Istanbul, Turkey, and it was then and there that I decided I wanted to become an international lawyer (if I was not going to make it as a professional basketball player). This was back in the days when you were considered international if you had driven to Windsor, Canada ( I grew up in Michigan).

I am now an international lawyer and I LOVE it. I love that it is part of my job to know the world. The entire world. Its politics. Its economics. Its cultures. What is more interesting than that? I also love getting questions from clients and giving them answers. And if I don’t know the answers right away (which is typical, actually), I love having an awesome legal team that knows a ton and what they don’t know, they almost always know how to find out. I especially love giving clients actionable information. I hate not having answers.

Which gets me to the question of the week and my answer: What is going to happen to my supply chain? I don’t know and there is probably no way to know right now. I hate having to give an answer like this.

Renaud Anjoran heads up a quality control and sourcing company out of Shenzhen. I’ve known and worked with and greatly respected Renaud for a decade and I have probably cited on this blog citied more often to Renaud’s blog posts more than to anyone else’s; 68 times by my calculations (69 after this one). I cite to Renaud because he knows whereof he speaks regarding China manufacturing and because he writes about it often and because he tells the truth.

Renaud’s blog post today is entitled China Epidemic: Real Effects on Logistics and Manufacturing, and it answers as best as possible, the manufacturing and logistics and supply chain questions our international manufacturing lawyers have been getting.

Renaud starts his post by briefly laying out the current situation. The virus is “spreading like wildfire,” governments are resorting to extreme measures, and “nobody believes Beijing’s official numbers.” I used to multiply those numbers by five but I now believe multiplying them by ten is not only quicker, but more accurate.

Below is Renaud’s take on the manufacturing/logistics/supply chain situation, with my comments in italics.

Will China’s factory workers return to work? When? Some will return, some won’t. Many Chinese factories are “walking dead.” Even before the coronavirus, many Chinese factories were on the verge of closure due to the economy, the tariffs and the duties. The coronavirus will be their last straw.

“The vast majority of factories are closed, and the holiday is getting extended. Certain employees (salespeople, HR staff, R&D engineers…) are starting to work, mostly from home.”

I 100 percent agree with the above. We have clients that have tried communicating with their China factories and gotten no response. The most common response is “we don’t know yet.”

What is the worst that can happen in the next two months? Many migrant workers will not want to return to their jobs for risk of getting the virus. Many will refuse to work cheek by jowl with their co-workers for fear of getting the virus. Many will simply be prohibited or unable to return. Renaud presents the following as possibly contributing to a worse case scenario, all of which seem quite plausible to me:

Some cities (or districts) that traditionally host a lot of migrant workers (e.g. Dongguan, Ningbo, Xiamen) may get frightened and decide to go into lockdown
Many people from Hubei who tried to get into Hong Kong (for better health care) have been stopped at the border, have stayed in Shenzhen, and this may trigger Shenzhen’s infection cases to skyrocket to the point where people are ordered to stay home
Stories about people getting infected at their workplace may multiply
Some entire factories may not re-open at all because their entire management and a good part of their operators are still blocked in Hubei province (and that’s true of many factories!)
The lower manufacturing output at the component level impacts many assembly & export suppliers, and many batches of finished goods can’t get made at all

How long will this last? Nobody knows.

What about the impact on logistics? How will products get to their buyers? Air carriers are suspending their flights. Some countries are blocking or delaying incoming carriers. Borders are closing. Certain types of products may be banned to prevent the spread of the coronavirus. Some countries might ban all products from China. I concur with Renaud on all these things and I raise him one. President Trump has always wanted to force a US-China decoupling. In August, 2019, in Repeat After Me: There Will be No US-China Trade Deal, we stated: All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well. I can absolutely see President Trump using the coronavirus as a cover for shutting down or at least drastically reducing imports from China.

Is China a low risk country? I give you Renaud’s answer:

This epidemic is causing a lot of purchasing managers to reconsider their risk analyses. China has generally been considered a stable, low-risk area. This is changing!

I remember a few years ago, after the disasters (building collapses, deadly fires in factories, rampant subcontracting) and the “Arab revolutions”, many apparel buyers were pulling production out of Bangladesh, which seemed very risky.

These days, some Western consumers are shocked by the way some minorities in Xinjiang and Tibet are treated, and now they might be worried about their health, too. “Made in Vietnam”, “Made in Portugal”, and “Made in Mexico” are starting to look much better than “Made in China”, don’t they?

Since October, 2018 we have been clear on how decoupling between the West and China is inevitable. See the below:

On October, 6, 2018, In China, the United States and the New Normal we called the US-China trade war as the “New Normal” and we predicted a “diminished future for foreign companies” manufacturing in China. We also said that “since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war.”
On October 30, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we recommended companies move their manufacturing out of China (if reasonably possible) and we have relentlessly done so ever since.
On January 30, 2019, in The Huawei Indictments are the New Normal, we wrote how what was happening between the US and Canada and Huawei would negatively impact the West’s relations with China even further.
On April 21, 2019, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, on how “There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’ and on how the tariffs, the arrests, the threats, and the heightened risk have impacted companies and that reality will not go away.”
On May 1, 2019, in Yet Another International Trade (AD/CVD) Petition Against China, we wrote of how the United States was upping duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting its anti-China foreign policy on the sly.
On May 4, 2019 — the day before President Trump’s by now infamous tariff tweet — in The US-China Trade War: Winter is Coming we wrote how neither the United States nor China wanted relations to improve and we should therefore expect relations between those two countries to worsen. We said “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade” and shutting out China will become a regular thing in all new U.S. trade agreements.
On May 8, 2019, in The US-China Cold War Starts Now: What You Must do to Prepare, we proclaimed the start of the US-China cold war.
On June 20, 2019, in Has Sourcing Product From China Become TOO Risky? we laid out the many growing and unpredictable risks inherent in having products made in China and we posited that China was becoming too risky for many who make their products there.
On June 21, 2019, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants to decouple from the West. We used Chinese government writings (in Chinese) to reach this conclusion.
On August 12, 2019 in The Top 14 China Wild Cards/Future Risks, we set ou the 14 biggest risks for Western companies doing business with China and promised to monitor the extent of those risks (and new ones) going forward.
On August 24, 2019 in Repeat After Me: There Will be No US-China Trade Deal we wrote how President Trump had intentionally “made it all but impossible for China to make a trade deal with the United States” and of how he U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China as well. And then we said that this means you “must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.”
On September 4, 2019 in China’s New Company Tracking System: Comply, Comply, Comply we wrote how China’s new company tracking system would be used to bring foreign companies doing business in China to heel and/or to push them out of China.
On October 9, 2019, in Can Your Business Afford/Stomach the China Risks? We looked again at the 14 key risks involved in doing business with China and concluded that “the risk of doing business with China has gone up substantially in just the last two months — heck, it’s gone up substantially in just the last two days. Many are no longer asking whether China is too risky; they’ve already decided that it is.”
On October 17, 2019, in China Detains 2 Americans Amid Growing Scrutiny of Foreigners, the New York Times wrote the following: “China has become a risky place,” Dan Harris, a lawyer at Harris Sliwoski . . . . says. “If you are going to do business there you had better know what the laws are and you had better follow them, because China is not going to let anyone slide, especially not an American or a Canadian. Little things that were virtually ignored for years are leading to foreigners going to jail.” I would now put Swedes in the higher risk category. See today’s SCMP article, on China’s threats against Sweden.
On October 20, 2019, in How to Avoid China Prisons: Know YOUR China Risks, we wrote how “every foreigner and foreign company is at risk in China; it’s just a question of how much” and then we laid out how to reduce your risks.

So yes, for many (most?) companies, sourcing products from China has become too risky. As for the risks doing business in or with China, I will write about that later this week.

Will there be “a massive switch of production away from China in the short term?” Renaud emphatically says in the short term, definitely not, but in the long term, probably yes. As Renaud puts it: “I haven’t read any announcement in the press about this. No big brand wants to be seen as dropping China with it is in a deep crisis (or “shooting on an ambulance”), especially if that brand sells to Chinese consumers. Yet, make no mistake, decisions are going to be made.” I completely agree. Few companies will be able to make short term changes. Just not possible. But few companies are not going to be looking at alternatives. I probably had three to four times as many Mexico discussions last week as in any week previously.

If you are looking to move your production from China, be careful and read the following:

UPDATE: China has ordered all film and TV production to cease indefinitely. If the coronavirus has gotten so bad in China as to end film production throughout the country, I fear it has gotten so bad as to end factory production throughout the country as well.