One third of companies with global supply chains have moved their sourcing and manufacturing activities out of China or plan to do so in the next two to three years, according to a recent survey from analyst firm Gartner Inc.
And while the Covid-19 pandemic is certainly one of the top reasons for the trend, other powerful factors are the U.K.’s economic withdrawal from the European Union, known as Brexit, and rising tariff costs incurred by President Trump’s trade war with China, the Stamford, Connecticut-based firm said. Gartner’s “Weathering the Supply Chain Storm” survey gathered data from 260 global respondents between February and March 2020. Participants were responsible for supply chain and related functions across a range of industries, including high-tech, industrial, and food & beverage.
While China itself doesn’t pay any money for tariffs imposed on its exports to other countries—such fees are collected by U.S. Customs and Border Protection (CBP) from domestic importers, who typically pass the cost on to consumers in the form of higher prices—the tariffs still make Chinese products more expensive to American buyers.
In reaction to those elevated prices, many companies have begun sourcing from alternative locations such as Vietnam, India, and Mexico, Gartner said. In addition to dodging the increased costs triggered by tariffs, moving business out of China also allows companies to make their supply chains more resilient, meaning that they have good visibility and the agility to shift sourcing, manufacturing, and distribution activities around quickly.
“Global supply chains were being disrupted long before Covid-19 emerged,” Kamala Raman, senior director analyst with the Gartner Supply Chain Practice, said in a release. “Already in 2018 and 2019, the U.S.-China trade war made supply chain leaders aware of the weaknesses of their globalized supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged.”
However, building a more resilient supply chain has a price. Fifty-eight percent of respondents told Gartner that more resilience also results in additional structural costs to the network. “We are at a crossroads in the evaluation of global supply chains that pits just-in-time systems designed to improve operational efficiency against just-in-case plans that emphasize planning and preparing for a range of plausible scenarios,” Raman said. “To find balance, supply chain leaders must engage in risk management to assess their organization’s willingness to take risk onboard and decide how to quantify that risk against other network objectives such as cost effectiveness.”
One way companies recapture that added cost is by leveraging their newly regionalized or localized supply chains to ease delays and shortages in times of disruption, since manufacturing now occurs closer to the source of demand, Gartner said.