By Howell Wang, Insight Solutions

The China-US trade situation has been heating up over the past few weeks and received lots of attention worldwide. Recently, a negotiation meeting was held in Beijing, but it seems there’s no significant progress so far.

To learn how this looming trade war is impacting the manufacturers in China I interviewed a large number of factory bosses in some of China’s main manufacturing regions: Shenzhen, Dongguan and Suzhou. I gained a much better understanding of their current concerns, and indeed many of them are already working actively formulating strategies to reduce or eliminate their dependency on the US. Below I have listed some of the main changes taking place in China now:

Supply chain

  • Replace US electronic component and raw materials (like plastic resin) with equivalents from Japan, Korea, and Europe, unless they are not replaceable in short term.
  • Increase cooperation with local Chinese electronics component suppliers, preferably with a compatible long-term technical roadmap.
  • Increase safety stock levels.
  • Set up stand-alone or joint venture entities in Southeast Asia countries such as Vietnam to do simple final step of assembly or packaging. After this the goods can then easily be shipped to the US, circumventing all potential tariff issues.
  • Meanwhile the move of factories towards the hinterlands of China is continuing apace. Besides efforts to reduce costs of land and labor, factories are increasingly driven out of the urban areas as tough new environmental laws are now strictly enforced.

Sales & Marketing

  • Shift efforts to Europe, Southeast Asia, Canada, Japan, Korea and other markets.
  • Develop China domestic sales.

Product Development & Manufacturing

  • Develop more own brand products other than just act as service provider for others.
  • Develop R&D capabilities, apply various patents and increase marketing competence. The China government supports this often by funding part or all of the costs of patent applications.
  • Increase automation of the manufacturing lines to reduce labor cost and raise quality. The China government is making a big push to promote Industry 4.0 with generous subsidies.

From what I see, China manufacturing will maintain its competitive edge for a long time, mainly because of its large internal market, its unsurpassed supply chain, large number of experienced engineers, technicians and skilled assembly workers, and the relatively low cost of factory automation.

Even if the trade war itself would fizzle out, the very threat of it has already started to re-shape the whole Asian supply chain.

If you outsource manufacturing from China, we encourage you to talk with your suppliers as soon as possible, to understand more about their strategy, risks mitigation action plans and how this will impact your business.