In today's uncertain global trade environment, businesses face unprecedented challenges in maintaining resilient and efficient supply chains. To gain deeper insights into these challenges and potential solutions, Global Sources spoke with Cameron Johnson, a supply chain expert and founder of TidalWave Solutions, during his recent visit to Hong Kong to address a meeting of Global Sources’ Sourcing Elite Board (SEB), a peer community for leading professionals in the sourcing industry.
The Shifting Landscape of Global Manufacturing
The past decade has witnessed significant shifts in global manufacturing, with a notable migration from China to Southeast Asia. According to Johnson, this relocation has occurred in three distinct waves.
"10 years ago or so, the original reasons why companies such as Nike or Adidas would move to Southeast Asia is labor costs. Labor was becoming more expensive in China, so they needed to find lower labor costs, but also an ability to have more flexibility in their supply chains," Johnson explained.
The second wave was triggered by geopolitical tensions.
"When the trade war was launched in 2017–2018, then companies realized if I don't move my products, I'm not going to be able to sell much to the US. So then it was a second wave that went into Southeast Asia to take advantage of the non-tariffs from there to the U.S.," Johnson noted.
The third and current wave is driven by the maturing ecosystem in Southeast Asia. Johnson pointed out that a fuller supply chain is available in the region: “if you're producing toys, now you have plastic suppliers, you have dye suppliers, you have skilled labor., most of the key components needed to produce products." Southeast Asia is not the only destination, Johnson notes. Today, he says, companies “are planning more effectively beyond Southeast Asia. They are also looking to other regions such as Latin America and the Middle East. They are working with suppliers and buyers to better understand the challenges each have in resolving problems and better communicating issues as they occur. Developing a better understanding of the tools available to them to mitigate some of the potential tariffs and other costs such as filing for exemptions, local subsidies, and having another supplier in a lower-tariff location.”
Challenges in Relocating Supply Chains
Despite the benefits, relocating supply chains to Southeast Asia comes with significant challenges. Johnson identified several key obstacles:
- Infrastructure limitations: "Part of it is infrastructure. The ports, the railroads aren't as mature. Sometimes you can't always ship the things that you need to ship," Johnson explained.
- Labor skill gaps: "Labor is not as skilled as it is in China because it took China 30, 40 years to do that. It's the same process underway in Southeast Asia."
- Government support: "In China, the government supported tax relief, subsidies, land grants, and that hasn't necessarily happened across the board in Southeast Asia," Johnson said.
- Capacity constraints: "There is not enough space to essentially move Chinese supply chains out of China into Southeast Asia. You're only able to move pieces of it. For example, the population of Vietnam is about the size of a mid-level Chinese province. So at some point, you kind of run out of room."
Technology and Supply Chain Traceability
The integration of digital technology, particularly AI, is transforming supply chain management. However, adoption varies significantly between large corporations and smaller businesses.
"If you're a big company and you were able to throw resources at it, you often were able to get it done," Johnson observed regarding supply chain traceability systems. However, "SMEs, small and medium enterprises, haven't really been able to do that for a lot of reasons. One is the cost. Secondly, just the amount of time and effort needed to put in."
Johnson sees more success in greenfield operations: "What you do see is some success in companies where they're building brand new systems. So, for example, I have a new factory in Southeast Asia. We're going to build systems from scratch. And so that's where you see some success because then you're training people from the beginning."
As companies move operations to Southeast Asia, concerns about tariff circumvention through transshipment have increased. “Some companies are getting ‘country of origin’ certificates from US Customs that deal with some of this,” said Johnson. “Second, companies need to have traceability in their supply chains beyond just the next supplier so if questions come up about the origin of the product it can be addressed. Traceability of products is critical to showing that products are not transshipped but have been produced locally. Understanding product content requirements, such as how much of the product comes from China versus is made locally in Southeast Asia. This can help mitigate potential additional tariffs and fines as the more product is made locally in Southeast Asia, the less likely it is to be tariffed.”
The Promise of AI in Supply Chain Management
Artificial intelligence is offering new opportunities for supply chain optimization. Johnson highlighted how AI can analyze vast amounts of historical data to improve operations:
"One of the projects I've seen companies working on is we have all this production data, we're putting it in the system, and now they're finding out when this machine makes this type of material, it actually has a lot of problems. Or if we want to run this type of material, this machine and this technician on the machine is the best to do that."
Johnson believes AI will drive efficiency improvements first, with traceability benefits following later: "It's not that it's going to change and people will lose jobs. I think what it will do is it'll give us a lot more insight into the information, but also how to improve our overall business."
Navigating US-China Trade Tensions
The ongoing trade tensions between the United States and China show no signs of abating, creating significant challenges for businesses on both sides. Johnson emphasized that this situation is likely to persist:
"I think the thing that companies have to realize is that this is not going to end. The US feels in some ways aggrieved by both Chinese industrial practices, but also the fact that it has lost manufacturing. So it is a double blow," Johnson stated.
Given this persistent uncertainty, what time horizon should companies use when making supply chain investments, and how can they build flexibility into their tariff response strategies? “Supply chain investments are 10–20 year timelines. Tariffs are a political tool that was used sparingly ten years ago; now they are part of doing business. Companies should look at their overall supply chain map, including focusing on long-term resiliency (several locations and regions), specialization, and how to gain long-term access to key inputs such as raw materials and talent so they can continue to build out and be prepared as challenges come. Finally, companies should engage policymakers on all levels to ensure they are receiving the correct feedback and understand how these policies are hurting, or helping, businesses.”
Johnson advised that US policy is increasingly focused on reshoring manufacturing: "US policy is now driving more towards we want to either reshore to the US or North America, or we want it (supply chains) out of Chinese influence."
Regional Trade Agreements
RCEP and similar agreements deal with both tariff and non-tariff barriers. “The key for companies is to understand what benefits these deals have in each country, and how the US could perceive certain instances of going around tariffs – transshipment. The US is often focused on circumvention and raw inputs from China. China is more focused on trade within the region. Companies can look at how to deal with each focus in unique ways such as producing US-focused products in a location that has few tariffs to the US versus broader products that can be produced and sold in most of Asia.”
Building Resilient Supply Chains
In light of these challenges, Johnson offered several strategies for building more resilient supply chains:
- Geographic diversification: "Companies that do have several geographical locations, for example, China plus 1 +2I have a factory in China, I have
one in Southeast Asia, maybe one in the Middle East or Mexico. And customers like that because they can now order from different places." - Demonstrating adaptability: "What customers particularly in the US do not want is they do not want to see suppliers who aren't actually addressing concerns... sometimes that just means, 'We're working on a plan… Here's our plan of mitigation.’"
- Market diversification: "If you're particularly sourcing from Southeast Asia, it's also, where else can you sell to besides the US and Europe? And when you look at the new markets open in the Middle East, Africa to some degree and in the rest of the Americas, there's a lot of other places you can go and still make money."
Opportunities for Chinese Companies in the US Market
Despite the challenges, Johnson sees opportunities for Chinese companies looking to enter the US market, particularly through greenfield investments: "If you're doing greenfield investment or if you're in an area where you're helping create jobs, the government often doesn't have any challenge with you," Johnson explained. "For Chinese companies and suppliers who want to open up, there's a lot of opportunity in that regard."
He advised building relationships with local stakeholders: "You do have to go talk to different parts of the government. For example, if you want to open up in a certain state or town, you should go talk to the local mayor, the county commissioner, the utility company to make sure that they actually have what you need and to understand their concerns."
Conclusion
As global supply chains continue to evolve in response to geopolitical tensions, technological advancements, and changing market dynamics, businesses must adopt flexible and forward-thinking strategies. By understanding the challenges and opportunities in this changing landscape, companies can build more resilient supply chains that can withstand future disruptions.
Cameron Johnson is the founder of TidalWave Solutions, a consultancy focused on supply chain, manufacturing, and technology areas. He was formerly the vice chair of AmCham Shanghai and has extensive experience in US-China trade relations.
Established in 2022 by Global Sources, the Sourcing Elite Board (SEB) is a collaborative initiative dedicated to advancing the sourcing industry through shared expertise and innovative strategies. Senior executives, from buying offices to retailers and brands, are welcome to join this distinguished community.
Image by Maickel Althuizen from Pixabay
