China seems poised for economic collapse after it’s post-Covid recovery stalled and it’s international relations continue to deteriorate. This will affect the US economy in general, and your business in particular. You may not know how much you are really doing business with China. It’s the hidden inputs that will mess up your supply chain.
Problem 1: Bankruptcies Buried Deep in the China Supply Chain
The first problem caused by China’s economic collapse is that bankruptcies will cause shortages, bottlenecks, and quality problems. Businesses that can manage their supply chains will keep their customers. Whether the US tips into recession or not, you can expect a new type of competition for customers. Business decision-makers that can keep the shelves full of inventory will keep the aisles full of shoppers. But empty shelves will lead to empty parking lots.
The Factory of the World Model is in Trouble
China has been known as the factory of the world. They’re involved in almost every type of production – and in some cases they are the ONLY supplier or producer. When assessing your new risk, the key is to differentiate between your direct supplier and his upstream workshops. Your direct supplier is a manager at a shiny new factory in Shenzhen. He’s an educated, eager, competent young man with a college education who speaks 4 languages and takes care of all your problems. HIS suppliers, however, live in a 6th-tier hamlet in a province so poor it doesn’t have a name. They process your copper hardware to give it that antique look. They work by dipping the metal in vats of carcinogenic acids and then burning off the residue in open-pit garbage fires.
The workshop in the province has gone out of business because the company that used to burn trash for the hamlet when bankrupt. That means you aren’t getting the hardware fittings you need to finish your product. That nice factory manager who speaks 4 languages isn’t looking quite so chipper these days.
Bottlenecks, shortages, quality problems
China’s economic collapse means that US retailers will suffer from shortages, bottlenecks, and quality problems. These are issues that analysts and mangers in the US haven’t worried about for years. If China’s supply chain starts to disintegrate we will all face empty shelves and lower quality.
Advice for businesses who buy from China – or from those who do:
1. Bulletproof your supply chain with alternate sourcing options.
This is the time to make sure your relationships with existing suppliers are as good as you thought they were. Then find out what their/your exposure to China is. They may laugh grimly, but stay with it. You will definitely find out if you have any vulnerabilities or gaps in your supply chain. The catch is, you’d rather find out early when you still have time to do your moves.
At the same time, you are also looking for alternate sourcing options. The key here is to start sourcing from new options, which means you want to try to diversify out of China. You may have heard this same advice about tariffs, and other China issues. This time, though, the decision will be made for you. Your supplier won’t have what you need, or the quality will be unacceptable. Then you’ll start diversifying.
If you regularly update the design of your product, you might want to find a way to design in supply chain constraints.
2. Hone Your Inventory Management Strategies
We may have to scramble to keep shelves stocked and production lines running. Some of you may remember the struggles of Radar O’Reilly from the TV show MASH. Radar was a master juggler — but he didn’t work with balls or bowling pins. He worked with materials and suppliers — juggling the resources he had to get his hands on what he needed. Well, that’s all of us now. After the logistics nightmares of 2021, Just In Time inventory management is OUT, and Just in Case risk managment is IN.
3 Prepare for a Hit to Low-End Production
The coming supply chain problems will be unpredictable and chaotic, but there is one thing we can predict with some confidence. Shortages and supply-chain breakdowns will be concentrated in low-end (and low-profit) industries. Simple plastic parts that are molded, extruded, or blown. These are low value-adding operations that run on low margins and may not survive a downturn. Don’t feel too confident if your products are high-value or more complex. Sometimes the most expensive, complicated device uses parts made in the sketchiest workshops.
Conclusion: Make lemons from lemonade.
This is a competitive reset, so you can play offense as well as defense. Many leading brands who used China for production are looking vulnerable. New upstarts or old competitors can leapfrog industry leaders by being better at supply chain management. “Just in Time” inventory management has been replaced with “Just In Case” risk management so this is a good time for scrappy networkers who can always find materials and supplies. The “New Economy” favors nimble dealmakers, so for some of you this may turn out to be your competitive advantage.
