Insights for Procure-to-Pay and Finance Leaders

Trade, tariffs and tension: supply chain flexibility in an unstable world

In September, President Trump slapped 10 percent tariffs on $200 billion of Chinese imports. China responded hours later, accusing the US of “economic hegemony” and applying taxes of 5 percent to 10 percent on $60 billion of US goods. These actions are just the latest in a series of tit for tat moves as tensions between the world’s two economic superpowers increase. Tensions that are shaking the foundations of global trade and ushering in a new era of instability and change.

Let’s take a closer look at the impact of escalating trade tensions on businesses and find out why supply chain flexibility is ‘mission critical’ for companies caught in the crossfire.

Increased tensions: a recap

Before we begin, let’s recap how we reached this point. In recent decades, there’s been a shift in global supply chains. This is as companies in developed markets moved manufacturing and production offshore to low-cost developing markets.

China, with its enormous, low-cost workforce, has been the main beneficiary of this activity. It’s known as the ‘factory of the world’, making everything from personal computers to clothing. This has supercharged its economy and put it at the heart of the global supply chain.

Enter President Trump. He’s unhappy with the trade deficit the US has with China — which in 2017, stood at $376 billion.  He believes the current structure of global trade hurts US manufacturing, job numbers, and the US economy overall. In his words: “it’s a bad deal”.

To rectify this, President Trump introduced tariffs, raising the cost of imported goods to make it easier for US manufacturers to complete. He’s supplemented this with tax reforms and encouraged US companies to repatriate overseas cash and invest in the US.

Every time Trump makes a move, China retaliates. It’s recently said the US is “intimidating other countries through economic measures such as imposing tariffs, and attempting to impose its own interests”. China believes the actions of the US threaten the global multilateral trading system as well as Sino-US ties.

Businesses in the crossfire

Increasing trade tensions and tariffs create sizeable risks for companies with supply chains deeply imbedded in China. It may lead to increased costs, lower returns, and potential supply chain disruption. The IMF have warned it could cost the global economy $430 billion.

To mitigate the impact of these risks, some are planning on raising the price of goods for customers to offset the tariffs. According to research from S&P, 37% of the 110 Fortune 500 companies that mentioned tariffs in recent earnings call are saying they’ll do this.

Long-term, many businesses are looking to reduce their reliance on China by shifting portions of their supply chain to other low-cost markets. Names like Flex, Steve Madden and Techtronic, are just a handful of companies that have publicly stated their shifting production to Southeast Asia. But the trade war is forcing companies to accelerate these plans.

The problem of static supply chains

Companies looking to shift their supply chain from China have a problem, however. As our CEO, Christian Laang, told CNBC earlier this year: “supply chains are not built for change”.

Most supply chains, and the technology that supports them, are designed for a static and open world. As a result, making small changes, let alone moving large portions of the supply chain, is often a painstaking and often multi-year process.

This poses a big issue for companies whose profit margins are under pressure because of tariffs. If they don’t have flexibility in their supply chain to mitigate the impact of tariffs their only option is to continue rising prices. This may relieve pressure initially, but it’s not a long-term strategy.

There’s also a question of capacity. China’s a huge country that’s set up to produce a large proportion of the world’s goods — there’s room for everyone. This isn’t the case in places like Vietnam, Bangladesh and Cambodia. And apparently these markets are already crowded. Sheng Lu from the University of Delaware, told the FT there were few spare workers or production facilities left in Vietnam. “If you’re not in Vietnam at this point, you’re probably too late,” he said.

So if businesses are serious about diversifying their supply chains and reducing reliance on China they need to act now or risk running out of options. And if they’re planning to double down on their supply chain in China, they need to think about how to do this whilst mitigating the impact of tariffs.

Flexibility is mission critical

Change will be the only constant in global trade for the foreseeable future, and businesses must prepare. Those that make flexibility in the supply chain ‘mission critical’ will be most successful. Our co-founder and SVP APAC, Mikkel Hippe Brun recently discussed this with CNBC. This means taking advantage of technology platforms that digitise the supply chain end-to-end and allow business to be proactive in managing the supply chain to keep the wheels of commerce turning.

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