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Business Will Never Be the Same in China, Is It Time for an Exit Strategy?

May 28, 2019

china exit strategy

A trade deal between the U.S. and China is just one part of the complex relationship between the two countries. Rather, the shock of the tariffs can now be called an alarming wake-up call to those doing business in China. U.S. companies that depend on Chinese factories for the supply chain were already looking at other options, and many more now want out now. Ultimately, everyone knows that no matter what concessions are made in any new deals, business with China will never be the same.

Capital Investment Also Huge Factor in U.S.-China Breakdown

The Wall Street Journal recently offered insights on why a trade deal alone won’t fix strained relations between the U.S. and China. The article identifies that the investment flows between the two countries has already been decreasing, plunging to $19 billion in 2018 after a peak of $60 billion in 2016. China has been closing down capital outflows while the U.S. Committee on Foreign Investment has been blocking Chinese investment in companies that would offer them a strategic advantage.

So, should companies permanently reduce their China footprint?

U.S. Companies Leaving China

There has been an exodus out of China, including GoPro, moving its camera production for the U.S. market from China to Guadalajara, Mexico. They had already been considering a move; the tariffs just hurried up the process.

The bicycle maker Kent International Inc has also found a Plan B, investing in Cambodian factories to avoid the Chinese tariffs.

What Happens If You Leave China?

While these and other companies reestablish manufacturing in other countries, it’s vital to note that leaving China is complex and can have consequences.

Before you make any plans to move and inform your China supplier, you must have your new supply chain up and running. China manufacturers are struggling right now, and for them to lose more business means you need to handle the parting of ways strategically.

  • Tooling and molds: Chinese manufacturers could hold these, claiming they own them. You’ve made a significant investment in these elements, so you need to have an agreement in place that you retain these things before severing ties.
  • Trademarks: In many instances, the company finds out that someone in China has registered their brand names and logos as trademarks after they terminate the relationship. There is no evidence to prove that the manufacturer did this, but the company is stuck with not owning its own trademarks in China. It can also lead to product seizure as a violation of trademarks. Thus, it’s critical to ensure you have trademark ownership in every market.
  • Sinosure reporting: A new strategy by desperate Chinese suppliers is to claim that the foreign company owes them lots of money and then reports them to Sinosure, which then stops insuring products sales to the foreign company. This is becoming even more pervasive.

These are just a few of the possible concerning outcomes. The bottom line is that if you have decided to exit China, you need a strategy, including viable supply chain alternatives to China.

If you’d like to chat about what to do next, CMD is here to help, leveraging our over 30 years of experience. Connect with us today to redefine your China strategy.

 

Topics: Manufacturing, In The News, Operations