Why China Supply-Chain Intelligence Matters Even More Now

The Dollar is weakening, American consumers are feeling less flush these days in light of the housing crisis, the U.S. economy is headed for a recession, according to many analysts, and inflationary pressures in China are pushing up the prices of many goods we consume here, putting pressure on Chinese suppliers to raise prices, making imported goods more expensive, leading American consumers to ratchet back on their consumption....

With all these economic drivers, U.S. importers should expect to see a decline in the demand for Chinese-made goods in the coming months. But here's why U.S. companies will need to hone their China-supplier due diligence activities and increase their oversight of their suppliers in China in the coming months.

A decline in demand from U.S. buyers will likely reveal some fragility in the Chinese supply base. Rising raw-material prices in China will put pressure on Chinese manufacturers to act in ways that could negatively impact their U.S. customers. And a stronger Euro and Yen will lead Chinese suppliers to turn their attention to European and Japanese customers at the expense of their U.S. ones.

If your current China suppliers react to these economic conditions adversely, then you will want to learn immediately about new or more resilient suppliers that could make more stable and reputable supply-chain partners.

Decline in demand for China-made products is bound to produce a shakeout in the Chinese supply base of many industries. Such a shakeout is long overdue. Even Chinese officials are aware of this. Among China's estimated 5+ million export-focused firms, many have suffered the consequences of over-investment (thanks to generous regional or local government incentive plans and favorable domestic tax programs), poor management, lax process control and predicted export demand that may never have fully materialized. The Chinese government has acknowledged that some local “enterprises seek to reduce export costs by exceeding pollution limits” and worker-safety rules. Last October, the Chinese government went so far as to threaten to ban domestic firms from exporting if they flaunt environmental laws. Rising wages and a reduction or elimination of certain subsidies and rebates for firms in China, combined with an erosion in demand from U.S. buyers will only accelerate the shakeout. As a result, in the coming months, for a variety of reasons, many Chinese suppliers will cease operations. Will yours be one of them? What leading or current indicators of supplier performance and reputation will you be watching to know for sure?

Saddled with higher energy and food prices, Chinese manufacturers will attempt to pass through those cost increases to their overseas customers. But not all buyers will be willing to accept the pass-through. Faced with the possibility of losing key customers, Chinese firms will naturally look for ways to reduce their cost structures to compensate for these rising costs. We shouldn't be surprised to see suppliers reducing investment in quality-assurance programs, customer service, IT and other infrastructure as well as environmental, health and safety programs.

And the strength of other global currencies relative to the Dollar (since China loosened exchange-rate restrictions on its currency in 2005, the Dollar has weakened more than 10% against the Renminbi) will drive Chinese exporters to turn their attention to buyers paying with Euros or Yen. Any purchasing professional who has to contend with “mindshare” issues at a supplier will tell you that unless you control a significant portion of a supplier's revenue stream, you will find yourself fighting for manufacturing resources.

The bottom line: for U.S. buyers to successfully manage through these challenging economic conditions, they will need to do two things well: increase their vigilance about the evolving reputation and performance of their current partners, and remain constantly aware of new, alternative sources of supply in China that will allow them to remain competitive and ultimately avoid catastrophic supply-chain disruptions.

Buyers with access to the right set of tools and services to do these things well will continue to enjoy success with their off-shore supply chains. Those who don't invest in these tools and resources are in for a rough spell.