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    U.S.-China relations mean tough decisions for supply chains

    June 2023

    U.S.-China relations mean tough decisions for supply chains

    As relations cool between the U.S. and China, leaders should evaluate the risks for their supply chains. Below, learn about the three steps you can take to rebalance supply chains that may be unsettled by geopolitical tension.

    In the new reality of constant and disruptive global events, supply chain leaders must improve supply chain resiliency through strategic investments such as inventory buffer stocks, the creation of alternative logistics, distribution and manufacturing capabilities and diversifying their suppliers, to name just a few.

    At the same time, there is the need to reduce overall exposure to risk since resiliency can only go so far and is extremely costly to create. This is a challenge because resiliency building capabilities through backups and redundancies actually increase the overall risk surface or exposure to risk. What’s a supply chain leader to do?

    U.S.-China relations: Supply chain leaders to take action

    Adding to the already significant challenges supply chain leaders are facing is the evolving situation in China; which could be poised to be one of the most disruptive environments for supply chain leaders to date. , So, what are the options to address these additional risks?

    First, the evolving risks of staying fully invested in China are large and must be carefully considered when making decisions which include: Rapidly changing Covid-19 policies that cause production stoppages, geopolitical tensions between the U.S. and China leading to potential market access risk, the potential blockage of Taiwan and forced labor utilization in supplier sub tiers. In addition, tariffs on Chinese imports, sanctions on Chinese businesses and new U.S. human rights laws targeting forced labor in China and the pending response with supply chain weaponization and market access risks make the case for full exit, where possible, a major consideration to address.

    In reality, a full exit from China may be out of reach for your company due to substantial reliance on raw materials and established supply chain capabilities that exist today. That said, a major part of the strategy should be to reduce reliance, through a partial exit strategy – balancing resiliency and risk exposure along with the cost implications of doing so.

    The three steps to rebalancing supply chains

    And, so, to rebalance their supply chains and address these emerging risks (and associated costs) leaders have tough strategic decisions to make. Here are the steps we believe leaders can take to begin rebalancing their supply chains:

    Step one: you should undertake a full review and alignment of their company’s risk tolerance or appetite for the current and pending risks of doing business in China. The results should determine the urgency and importance of reducing reliance on China for your operations.

    Step two: scenario planning will uncover the alternative options available to your business. In our view, the key to robust scenario planning is using prescriptive and predictive analytics. A digital twin of your supply chain will also support this process and allow the modeling of these scenarios and their overall impact to your supply chain.

    Step three: should action be needed, prepare a highly-detailed, time-phased exit (or partial-exit) strategy from China. This may include diversifying your sourcing processes and establishing broader supply chain capabilities into India and Vietnam, reshoring or near-shoring – or a hybrid approach with a combination of these alternative options.

    New risks must also be considered

    Of course, these newly-created supply chains are not without risks, too. Any decision to reroute must be balanced against new risks that emerge. Indeed, new suppliers located outside China may themselves still source from China. Plus, shifting substantial logistic volumes to ports, freight lanes and vessels with lower capacity could create future bottlenecks as more businesses move their operations from China to new locations.

    Regardless of what the exit strategy may look like, the signals are already clear that supply chains reliant on China require a rethink. Companies that are proactive in implementing risk mitigation strategies could reap the benefits – by avoiding potential revenue losses while securing longer-term profitability and customer satisfaction.

    Learn how Moody’s is supporting customers to identify and mitigate their supply chain risks, as well as develop their long-term supply-chain planning.