Yahoo Finance The U.S.-China trade war is disrupting global supply chains in surprising ways
When U.S. officials, led by Trade Representative Robert Lighthizer, meet with their Chinese counterparts for the latest round of trade talks, enforcement mechanisms and the timeline for tariff rollbacks will be among the key sticking points.
But, Alex Camara isn’t waiting for a resolution.
The CEO of Seattle-based electronics manufacturer Audio Control has already begun shifting the company’s supply chain away from China, forced to make a business decision with the political uncertainty in Washington and Beijing clouding outlook.
“We’ve started. We have plans in place, we’re working through that with two or three Chinese companies that supply product because we can’t wait to suddenly find out, by the way the tariffs are now 25% or something,” Camara said.
Camara sources 70% of his components from U.S. suppliers. But when the Trump administration implemented a 10% tariff on $200 billion in Chinese goods last fall, Camara’s costs jumped. Everything from resistors to the diodes he imported were all taxed, resulting in a $200,000 bill, for the small business so far.
“That’s a lot of money that’s not being invested in our company, that’s not being invested in growth, not invested in trying to improve efficiencies and employ more people as we grow in size,” he said. “It’s not Chinese people that are paying tariffs. People need to realize that.”
The high costs have prompted Audio Tools to get creative with its sourcing strategy. Oftentimes, that’s meant working with Chinese suppliers to find alternative countries to buy from to avoid the tariffs. The same factories Camara relied on in China are now shifting to countries like Thailand and Vietnam, a move that’s expected to take at least six months — and increase prices.
A growing number of companies
Sage Chandler, vice president for international trade for the Consumer Technology Association, says Camara represents many member companies that have simply accepted tariffs as a new way of doing business, taking control of their own supply chains instead of waiting for a political solution. The challenges are especially great for American companies with manufacturing hubs outside of the U.S.
“We have heard, on the very conservative side, that it takes at least two years to get an operations manufacturing up and running someplace else, but more like closer to five,” Chandler said. “That’s five years out of financial planning for something they already had. They’re not getting anything new or better”
The diversified supply chains have made the shift particularly expensive and lengthy for tech companies. Apple, for example, sources parts from 43 different countries to assemble its iPhones. Late last year, its key assembler Hon Hai Precision, known as Foxconn, announced it would invest roughly $230 million combined in factories in India and Vietnam to expand its presence outside of China amid the trade spat.
The global rethink of supply chains goes beyond the tech space. In a recent report published by McKinsey and Company, 33% of companies surveyed said uncertainty over trade policy was a top concern. Nearly half said their companies would shift their global footprint in response, and expected to invest more in local supply chains.
Rising labor costs in China
Nathan Resnick, founder of Sourcify, a manufacturing platform that connects entrepreneurs with overseas factories, says trade uncertainty has only accelerated a trend that began well before U.S.-China relations turned frosty. Rising labor costs in China have been a key driver for the shifts, especially among apparel makers.
“There are some areas in China that are still affordable, but if you’re in, say, the Guandong Province, moving production to outside Ho Chi Minh in Vietnam, labor costs can be as much as a third more affordable compared to a factory that is close to a very big city in China,” he said.
Resnick says Chinese factories used to source 90% of his clients. Today, that number has dropped to nearly 60%, with Vietnam and the Philippines among the biggest beneficiaries. And those numbers aren’t likely to reverse, regardless of what President Trump and Xi Jinping agree to, he said.
Chandler says the broader shift out of China has raised another threat: the vacuum created by hollowed-out factories. Chandler says there are concerns that employees that are trained and well-versed in the manufacturing of some of these products could look to replicate the process and compete with some of her member companies.
The China exit is seen as a bigger hit to the domestic economy there, with factory activity shrinking to a 3-year low in February. Exports slumped to the worst in a decade.
But Chandler cautions that the China slump hasn’t necessarily led to a significant bump for the U.S.
“Precious few companies have said that their solution to this is bringing jobs back to the United States,” she said. “In fact, we’ve seen several that say we’re leaving the United States.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter at @AkikoFujita
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