Future Watch signal: Trade war between the US and China has triggered the foreign companies in China to rethink their China strategies. Other than multinational companies and those without multi-product lines, are impacted the most, sometimes to the extend that the new situation threatens their business survival. Some companies fear that their businesses might enter into a complete standstill because of a small, low-value component that falls under the sanctions somewhere in their supply chain. Sourcing managers are already busy finding alternate sources in countries where the new US import tariffs don’t apply – at least at this moment.

1. FUTURE WATCH SIGNALS
RETHINKING THE SUPPLY CHAINS UNDER THE US – CHINA TRADE WAR

2. When manufacturing
moved overseas over
the past 25 years, so
did your supply base.
Supply Chain 9.7.2018
Trade war between the US and China has triggered the foreign
companies in China to rethink their China strategies. Other than
multinational companies and those without multi-product lines, are
impacted the most, sometimes to the extend that the new situation
threatens their business survival. Some companies fear that their
businesses might enter into a complete standstill because of a small,
low-value component that falls under the sanctions somewhere in
their supply chain. Sourcing managers are already busy finding
alternate sources in countries where the new US import tariffs don’t
apply – at least at this moment.
Existing tariffs from the US on Chinese goods have already targeted
products such as machinery and equipment, parts and components
in the information and communications technology sector as well as
engines and motor parts. In early August 2018, the US furthered
restrictions on dozens of key Chinese companies for reasons of
national security.
Under the new sanction guidelines, every party and manufacturer in
a supply chain have to guarantee the end use and the end-user. This
applies to all components, even subcomponents that make up at lest
10% of the product value.
CHINA – US TRADE WAR IS ALREADY HURTING SOME BUSINESSES
Future Watch: Rethinking China Supply Chains2

3. Spill-over effect of
the trade war has
already begun to hurt
the global value
chains that define the
contemporary geo-
economic
architecture.
SCMP 6.8.2018
China is the major trader interlinking the supply chains of companies.
China’s growth has been enabled mainly by the increasing
participation of its small and medium sized companies in global value
chains.
The escalating trade war has and will have serious consequences on
the multilateral trading system. Tariffs will obviously make products
more expensive as imports, but “there will also be costs associated
with supply chain disruptions, spillover effect on partner countries
and sectors, plus impact on investment flows.” (SCMP 6.8.2018)
East and Southeast Asian economies will be affected as most are
deeply integrated in the electronic goods value chains for
components and semi-conductors. Machinery and equipment sectors
will likely feel the impact too.
For now, the impact of the trade war on global supply chains will be
already substantial.
… GLOBAL SUPPLY CHAINS ARE STARTING TO HURT
Future Watch: Rethinking China Supply Chains3

4. The industrialists had
to defend themselves
from the trade war
by adopting more
innovation and AI
and robotics
technology to cut
costs and enhance
production.
SCMP 30.7.2018
As an example, many Hong Kong manufacturers have three decades
experience from the Mainland. Currently, they have began to move
parts of their production lines to Malaysia, Vietnam and to other lower
cost countries in Southeast Asia. Looming trade war has pushed this
trend alrady since March 2018. Some companies with plans to relocate
for other reasons, are doing so sooner than planned. Hongkongers
estimate that to prepare a new plant location (in Asia), staff and
management would take three to six months. For many, this move
represents a back-up production line in order to prepare for the worst.
Most still won’t abandon their Mainland production lines as it would
be costly. To run down a company and even more a production line in
China is an expensive and difficult process. In addition, many plan to
develop their sales in Mainland cities and take advantage of China’s
growing market of affluent consumers. These domestic consumers
would help offsetting the losses in international trade. However, some
plan to leave entirely.
SOME ARE REALLOCATING THEIR GLOBAL PRODUCTION BASES
4
Two Sets of Supply Chains as a Potential Strategy: Some foreign companies in China
have been preparing themselves to the trade war by building two separate ecosystems
– one for China and the other one for the rest of the world. The Chinese ecosystem will
be independent and separate from the rest of the world and the main purpose is to
serve the Chinese operations, customers and consumers. The global system will have
full traceability and transparency regarding the sanctions.
Future Watch: Rethinking China Supply Chains

5. Just finding [new]
suppliers is only half
of the battle.
Qualifying and
completing a risk
assessment is
typically required
and a new supplier
evaluated.
Supply Chain 9.7.2018
Some of the US tariffs are written so broadly, that they could
include any hardware product connected to web. The current tariff
list includes a big number of parts that go into hardware devices,
including wires, charges, adaptors, semiconductors, cables, glass,
surge protectors.
Products are subject to sanctions and must comply with the US
export controls, even if the technology is embedded in a
component, or is a subcomponent. The manufacturer of the end
product has to guarantee and secure commitments throughout the
supply chain. This applies to everyone in connection of the product.
Rule of thumb is that all parties in the supply chain will have to
ensure traceability. This is hard to monitor without the use of
technology.
TRACEABILITY BECOMES FUNDAMENTAL
5
IoT as a strategy to ensure the tracking of end use: Use of IoT enables traceability to
the extend of each touch point in the supply chain. Chips and sensors that are
embedded in every device and item create data that can be tracked. In addition to
licensing and export control, this data can also be used for monitoring compliance.
Future Watch: Rethinking China Supply Chains

6. Hong Kong
Industrialists are
moving out of
Mainland China to
safer havens in Sino-
US trade war.
SCMP 30.7.2018
Corporate Governance, i.e. decision making must be transparent in
order to avoid US sanctions, export controls, and blocking of
acquisitions and collaborative agreements. Transparency, in most
cases, however, is lacking in the Chinese business culture, especially
in the case of SOEs (state owned enterprises). And today, most of
the supply chains in China are run by Chinese companies.
Chinese companies tied to global supply chains have to
fundamentally change their corporate governance. The ultimate
example was ZTE’s case who had to change their entire
management as a result of the trade dispute with the US. If Chinese
companies do now change their behavior, they will continue to get
sanctioned and be denied export license.
This is a true challenge for Chinese operations and consequently a
challenge to foreign manufacturers in China that are subject to
tariffs and have to guarantee their supply chain.
In addition, trade wars and consequences may be coming soon to
corporate risk disclosures.
TRADE WAR PUTS CORPORATE GOVERNANCE IN TEST
6
Future Watch: Rethinking China Supply Chains

7. 7
CONSIDERATIONS
 The current US policy is seeking to remap global supply chains in favor of American
manufacturing.
 To secure new suppliers and to do strategic planning using multiple “what-if” supply and
cost scenarios. Your focus should be on developing alternative and flexible supply chains
that can be adjusted with speed.
 Finding alternate sources in countries where the new U.S. import tariffs do not apply
may only be a temporary solution.
 Adding a new supplier is a complicated and long process. Before a new supplier can be
added, a qualifying and a risk assessment are typically required. Supplier must be
evaluated for product quality, capacity, schedules, and other criteria. Trade war, tariffs
and sanctions makes the process even more complicated.
 From now on, old routines are challenged: supplier schedules will be affected, logistics
may become a more significant factor, and inventory levels may have to be adjusted.
 You may find big increases in the cost of goods sold or the unavailability of parts because
other companies have placed big anticipatory orders and are hoarding raw materials.
 Uncertainty in your supply chain is the new normal.
Future Watch: Rethinking China Supply Chains

8. Sources:
• Market Watch 5.4.2018, 8.8.2018
• South China Morning Post 30.7.2018; 2.8.2018, 6.8.2018
• Bloomberg 23.7.2018
• Forbes 30.7.2018
• CNBC 24.7.2018
• Financial Times 3.8.2018, 7.8.2018
• Supply Chain 9.7.2018
• IMA Asia
• Company Interviews

9. Sari Arho Havrén
Business Finland Asia Pacific, Strategy and Foresight
Hong Kong
+852 6895 5221
sari.arhohavren@businessfinland.fi