OM in the News: Tariffs and Global Supply Chains

The potential costs of tariffs being discussed by the U.S. and China have prompted many firms to get creative with sourcing strategies, reports Supply & Demand Chain Executive (March 29, 2019). Oftentimes, that means working with Chinese suppliers to find alternative countries to buy from to avoid the tariffs. The same factories that were relied on in China are now shifting to countries like Thailand and Vietnam, a move that’s expected to take at least 6 months — and increase prices. Companies that have simply accepted tariffs as a new way of doing business are 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 that it takes at least 2 years to get manufacturing up and running someplace else, but its closer to 5,” said one industry exec. 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, Foxconn, announced it would invest $230 million 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 McKinsey report, 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. 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. The China exit is seen as a bigger hit to the domestic economy there, with factory activity shrinking to a 3-year low. Exports slumped to the worst in a decade. Unfortunately, the China slump hasn’t led to a significant bump for the U.S.

Classroom discussion questions:
1. How does the trade war impact global supply chains?

2. Where does a firm like Apple fall in the “Four International Operations Strategies” graphic in Figure 2.9?