No longer a war of words, the trade situation between two of the largest economies in the world has escalated into a full-blown trade war. With the US imposing substantial tariffs on Chinese goods, and China responding in kind, experts agree that this trade war is not blowing over anytime soon.
If you’re still taking a wait-and-see approach, the risks are rising. We believe the time is now to start strategizing contingency plans.
The Risks of Doing Nothing
Your bottom line
Tariffs are resulting in price hikes, supply chain delays, and longer-term setbacks to production readiness. All of these factors will impact your bottom line sooner or later. Even if your products are not included in the list of goods affected by proposed tariffs, the high likelihood of ongoing intensification of the trade war means your products could still be affected down the road. Despite seeing approved exclusions from tariffs, it’s risky to bank on more exclusions being made.
A potential alternative route would be to seek tariff exemption or waiver. Some are lobbying for HS codes to be removed entirely from the list, and others are seeking exemptions for their particular products within a specific HS code. The issue here for most businesses is that it’s a time-consuming and difficult process with a very low chance of yielding success. We’ve heard of a few cases that have worked for companies with political clout and large PR budgets. But for most, counting on exemptions is a long shot.
In recent weeks alone, we’ve seen intensification from the US side and stronger pushback from China. All indications tell us that the situation is still escalating. Even if both sides come to a compromise and find a solution to ease the tension, there’s no saying that this solution will not involve more tariffs. And even if the trade situation blows over in a few months, it may well flare up again.
Minimize Risk: Look to Southeast Asia
Regardless of how this trade war shakes out, having alternative product sourcing is simply good practice for risk minimization. Even if the trade situation doesn’t end up affecting your business, there are many other factors that could do so in the future. China’s escalating enforcement of environmental laws that have resulted in plant shutdowns is a prime example. There are more than just tariffs putting your supply chain at risk.
Southeast Asia is stepping up to provide sourcing alternatives or supplements. While there will be challenges in building capacity, SE Asia is looking attractive for the following reasons:
Stable political climate: Outsourcing to a country such as Mexico carries risk due to ongoing uncertainty in the NAFTA situation. SE Asia’s relatively stable political climate make it an attractive option for companies looking for dual-sourcing options.
Low prices: Monthly average minimum wages in China have risen to $363/month. As a comparison point, the monthly minimum wages in Malaysia, an emerging hub in South East Asia, have stood steady at $250/month since 2016. Even if not for tariffs, it’s worth looking into the cost/benefit tradeoffs of moving some capacity of production to the SE Asia region for optimization of costs.
Quality and ease of communication: We’ve seen more and more top-tier companies move production to SE Asia. Despite being a newer outsourcing hub when compared to China and some European countries, we’ve already seen a development of expertise within industry verticals. On top of that, there are also regulations in place that meet Western standards. Lastly, English is more common in SE Asian countries and allows for easier communications.
Do Your Due Diligence
This cannot be emphasized enough – despite SE Asia being the safest option, perform your due diligence before committing to anything. In addition to the tips we’ve shared in our recent blog on how to seek out China outsourcing alternatives, here are a few others to guide you:
Total cost: When considering cost, make sure the quote you receive encompasses the total cost – design, manufacturing, assembly, quality, logistics – and import duties. Don’t get tripped up by hidden costs you didn’t account for after signing contracts.
Look into HS codes: Don’t avoid tariffs on one front only to run into them on another. Look into the HS codes of your specific country and your specific product before making final decisions. These import duties will impact your bottom line.
The best country for you: When deciding on the country, consider the type of product, strength of the industry, and the size of the industry. A good strategy here would also be to consider adjacent industries – instead of looking into the manufacturing of an identical product, look instead at their processes. Have they worked with similar products? Do they have the right processes and expertise to build your product?
It takes time: Relationships don’t form overnight. It takes time to develop a solid working relationship with new suppliers and manufacturers. Don’t expect everything to go smoothly at first-go. Be sure to establish clear lines of communication and set expectations from the get-go in order to build good relationships.
Work with CMD: Mitigate Supply Chain Risks
Seeking out new suppliers in a new country is a heavy undertaking which carries its own set of risks. Working with CMD is like opening a business office in Asia…overnight. With a firm understanding of the landscape and a wide supplier network, experts at CMD stand ready to set up your alternative sourcing solutions from strategy to execution. Contact us today to start building specific strategies for your business.