Supply Chain Matters highlights published findings from a recent survey conducted among U.S. based companies doing business within, or sourcing supply chain materials and production within China. The results are revealing and yet point out the delicate balance underway to de-risk supply network exposures in the country while maintaining an access to China’s markets.
Background
Our research parent, The Ferrari Consulting and Research Group, recently published 2023 Predictions for Industry and Global Supply Chains (Available for complimentary downloading in our Research Center).
Prediction Three of the report indicates: More Direct Control in Strategic or Tactical Material Sourcing Will Continue to be a Prominent Element of Business Strategy for Businesses and their Chief Supply Chain or Chief Procurement Officer Efforts.
Specially related to China, Apple alone experienced multiple days of production shortfalls involving Foxconn’s Zhengzhou “iPhone City” manufacturing complex resulting in a revenue shortfall for iPhone14 holiday orders. By late December, Apple’s shares closed at their lowest level since 2021 amid investor growing concerns over the supply and potential revenue shortfalls of iPhones and other hardware products during the crucial holiday fulfillment period. Apple CEO Tim Cook acknowledged that the company’s 60 percent sourcing of supplier manufacturing in the country was too much and industry reports pointed to stepped-up efforts to seek alternative sourcing options across Asia including India and Vietnam.
Our sense was that Apple’s experience, along with others involving U.S. based companies sourcing in China would be impetus to accelerate termed China Plus alternative or supplementary sourcing strategies. The open question would be industry impetus and timetables.
New Survey Revealed
In our efforts to keep Supply Chain Matters readers informed, we are highlighting a rather important survey recently released by The American Chamber of Commerce in China (AmCham), a business association helping American companies to succeed in China.
The released 25th annual China Business Climate Survey (BCS) focuses on current sentiment for making investments and conducting business in the country. The stated takeaway from the report was that while members still view China as a priority market, but their willingness to increase investment and a strategic business priority is apparently declining.
Indicated in the reports Executive Summary was the following:
“After three full years dominated by the COVID-19 pandemic, members expressed concern about their companies’ financial performance and expectations regarding China’s openness and business climate, contributing to a slightly more pessimistic outlook compared to previous years. Estimated performance results for 2022 showed a decline in the portion of member companies that saw increased revenue, profitability, and Earnings Before Interest and Taxes (EBIT) margins compared to a specific previous year, largely due to COVID-19.”
A published report by Bloomberg News (Paid subscription required), is headlined with the takeaway: “For the first time in about 25 years, China is not the top three investment priority for a majority of US firms, with geopolitical tensions and domestic economic issues driving businesses to increasingly focus elsewhere.” Bloomberg noted in its report that 2022 was the worst year for foreign based manufacturers in China over the past 20 years.
Michael Hart, President of this organization indicated to Bloomberg:
“A year ago, 60% of companies said China was the top or a top 3 investment priority and this year that’s fallen to 45%. China is falling in the rankings as a place for people to invest globally. It’s still important but not one of the top destinations for the majority of companies.” Hart additionally indicated to the news agency that U.S. companies are mostly seeking to “derisk” their supply chains by investing elsewhere, especially after the large scale lockdowns that affected large areas of Shanghai and factories in the surrounding region.
This survey was conducted between October and November of 2022. Readers who desire to download the report can do so by signing-up for the AmChem newsletter at this web site.
Bloomberg separately reported that Apple Suppliers Are Racing to Exit China (Paid subscription required). The report highlights Apple AirPods producer GoerTek Inc. as one of many manufacturers exploring production sourcing beyond China. GoerTek reportedly established operations in Vietnam ten years ago to produce acoustic products for Samsung Electronics. Now, this supplier is reportedly considering an initial $280 million investment in a new production facility in northern Vietnam. The deputy chairmen of GoerTek is cited as indicating that consumer electronics clients are visiting every day seeking information relative to Vietnam production options.
Further reported by Bloomberg: “Behind the scenes, 9 out of 10 of Apple’s most important suppliers may be preparing large-scale moves to countries like India, which is dangling incentives to drive Narenda Modi’s Make In India initiative.”
Separately, a recent survey conducted by the U.S.-China Business Council, a group representing large U.S. companies with business ties to China, reportedly two-thirds of member companies indicated they were taking a wait and see attitude about any future investment in China. The president of this organization indicated to business media that the U.S. should be de-risking from China rather than de-coupling.
Additional Thoughts
Recent published data from the U.S. Commerce Department related to trade volumes among China and the United States indicates merchandise trade between the two countries rose to a level of $690.6 billion in 2022, exceeding a record number established in 2018. However, the data was not adjusted for inflation nor for high tariff levels. The trade deficit among the two countries widened upwards of 8 percent.
Yet, trade tensions and geo-political related risks are widening, particularly in areas involving semiconductor, high tech and alternative energy related intellectual property and supply network capabilities.
From our lens, supply chain risk mitigation related to China has become increasingly important, and that ongoing survey data would imply that businesses large and small, are changing their perspectives related to reliance solely on China or trying to balance needs for lower cost with needs for supplemental supply network resiliency.
It’s a balance, particularly as concerns for an economic downturn and increased geo-political tensions motivate senior business executives to attempt to not initiate radical moves unless absolutely necessary.
In the end, revenue performance, balance sheets and product margins remain the elixir of certain senior management thinking and supply chain senior management leaders will continue to navigate initiatives within this environment.
Bob Ferrari
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