President Trump has taken aim at Huawei by implementing strong actions to severely restrict the Chinese tech giant’s access to American markets and technology. The implicit risks introduced to the supply chain by this move are, as the President himself might say, “huge.” There is a clash of the titans taking place, and it is our duty as supply chain managers to understand the emerging risks—through all the tiers of our supply chains—and maneuver to get out of the way.
Any competent supply chain professional is well versed in risk management, so we understand the logic behind President Trump’s moves against Huawei. (Word choice is important here. The verb used is “understand,” which is not the same as “agree.”) The logic used to justify the lockout of Huawei is that the company is susceptible to pressure from the Chinese government. Based on current executive branch thinking, this means there is an inherent national security threat. In the words of the novelist Tom Clancy, Huawei is a “clear and present danger.”
But if we believe Huawei to be a threat, does that extend to other Chinese manufacturers as well? In 2019, according to statistica.com, the U.S. imported close to $65 billion in “cell phones and other household goods” from China. If Huawei is a risk, what about these other Chinese suppliers?
This issue gets particularly tricky the farther back you peel the supply chain onion. There is an entire ecosystem of tier 1 suppliers to American companies that source from mainland China. Let’s just pick one of many possible threads: rare earth metals. Rare earth metals are ubiquitous in electronics. These metals are essential inputs to the manufacture of things like smartphones, cars, night-vision goggles, and lasers. Around the house, rare earth metals are in ear buds, baseball bats, and golf clubs. According to geology.com, around 80% of rare earth metal ore comes from China. We need these metals, not just for our ear buds, but as essential inputs to defense products. But, using the President’s rubric from the Huawei confrontation, shouldn’t we ban the import of rare earth metals, too?
Flipping the risk profile around, let’s consider U.S. exports to China. As the United States becomes more confrontational, with aggressive moves like blocking Huawei, China will likely react and introduce their own restrictions and distortions into the balance of trade. This could have major repercussions for U.S. exporters.
Intel, for example, is a formidable exporter to China of computer chips and is a dominant player around the globe in the segment the economists call “electronic integrated circuits; processors and controllers.” There are other American exporters in this segment, and the patriotic corner of my brain is proud.
Beyond semiconductors, the U.S. is a powerful exporter to China in other segments too. About 10% of U.S. export value to China are in soybeans. Boeing exports a lot of planes, parts, and engineering know-how to China, and that is another 10%. Buicks may be long past their prime in the U.S., but they are a status symbol in China. The U.S. automotive industry does well in China, the world’s largest export market for automotive manufacturers.
Despite the popularity of Buicks, the U.S. buys more from China than China buys from the U.S. According to the U.S. Census Bureau, through the first seven months of 2020, the United States has run a trade deficit of around $160 billion dollars. In simple terms, for every $1.00 of goods we sold to China, we bought and imported around $3.50 of goods.
Where to next?
If you are in a room where a brawl is getting ready to break out, it’s good to know where the door is. As supply chain professionals, we have a responsibility to manage risk in the supply chain. The Huawei situation is a warning. It’s getting ugly as the big guys reach for their weapons.
In terms of China and our supply chains, it may be time to ask for the check and head for the exit. Diversifying out of China is the prudent move. But where should U.S. importers shift? Unfortunately, from a risk perspective, the obvious candidates carry similar risks.
Japan is a stalwart ally and trading partner. Regrettably, there are risks there, too. Japan is in a nasty and disruptive trade war with South Korea. This trade tiff between Japan and South Korea is already disrupting exports to the U.S. Worse, Kim Jong-un of North Korea was launching missiles over Japan not that long ago.
Another established and reliable exporter to the U.S. is India. Unfortunately, political tensions are rising in the subcontinent. A Washington Post headline on September 8 reported, “Shots fired on the India-China border for the first time in decades as tensions flare.” Add to that the fact that India has a significant pandemic problem, and it is unclear that a move to India removes enough risk.
Taiwan? Vietnam? Thailand? These are all significant partners in Southeast Asia. All have cloudier risk profiles than a few years ago. Sifting through the potential for chaos emergent in Southeast Asia, a localized geographic lateral shuffle may not be enough. Given the continuing chaos of Brexit, Europe doesn’t look like a safer harbor, either.
Nearshoring to Canada or Mexico or reshoring to the United States may be the answer. As global political dynamics force a move away from low-cost offshore sources, we are implicitly adopting a more holistic view of sourcing decisions. We need to make best-value decisions that consider supply chain risk, not just supply chain cost.
It is time to rethink our sourcing decisions. No action is an action. The clock is ticking.
