Experts weigh in on China’s supply chain risks and mitigation strategies

As the world’s second-largest economy and the largest exporter, China plays a significant role in global supply chains. 

However, with the rapid expansion of China’s manufacturing sector and its integration into the global economy, there are also inherent risks that businesses need to consider. 

In recent years, the Covid-19 pandemic exposed the vulnerability of supply chains, and the ongoing trade tensions between China and other major economies have added further complexity and uncertainty to the situation. 

In this article, we will explore the supply chain risks associated with China and the strategies that businesses can adopt to mitigate them.

According to analytics firm Everstream’s annual risk report, businesses can expect myriad delays and order cancellations if their suppliers are based in China. 

Everstream tracked more than 85 lockdowns in 2022 across China’s industrial cities, with 18 in November alone. The report states that although China’s lockdown measures are loosening in major cities, rollbacks are far from uniform.

As such, the firm affixed a 90 per cent risk score to the country, as they feel Chinese manufacturers will leave businesses hanging, repeatedly, and recommends businesses to have a ‘China diversification strategy’ built into their plans for 2023. It recommends companies to expedite this route to safeguard their commercial futures.

China’s significance

According to Mal Siriwardhane, CEO of Bdynamic Logistics, it is estimated that around 60 percent of Australia’s non-food retail imports are sourced from China. Globally, the rate is thought to be as high as over 80 per cent.

“The container throughput at China ports is growing YOY and almost five billion tons last year with a five per cent  increase from the previous year,” he told Inside Retail.

He feels geopolitical events have severely disrupted supply chains and trade channels with China. Australia has been impacted significantly in the coal and wine industries, and the tariffs have had the potential to negatively impact both imports and exports.

“Retailers need to source products locally or from a range of different suppliers. The bulk purchase of products is also a good strategy. But not every retailer has the luxury of being able to afford to do this and having the facilities to store and distribute this quantity of product,” he noted.

Siriwardhane thinks that companies should partner with medium to larger scale suppliers in China as a risk mitigation strategy as they will have proper business structures, compliance and governance in place. 

“This could also assist to prioritise your shipments to destinations if there are disruptions as the larger suppliers will have dedicated vessel space available to them,” he added.

An interesting perspective

Brittain Ladd, strategy advisor for Shatranj Capital Partners, brings a very interesting perspective to the discussions surrounding the risks associated with China and the supply chain industry as a whole.

According to his recent LinkedIn post, Ladd pointed out that China is investing billions in Mexico, and this is part of their ‘long game’ in the case hostilities break out between Taiwan and China, which could in turn have consequences for U.S. companies that rely on China.

“China’s research indicated that the only logical destination for companies wanting to find an alternative to China is Mexico. Executives at U.S. companies came to the same conclusion,” he told Inside Retail.

He believes Chinese companies have no intention of forsaking the American economy, still the largest on earth. Instead, they are setting up operations inside the North American trading bloc as a way to supply Americans with goods, from electronics to clothing to furniture.

Ladd expects Mexico to see an influx of Chinese labour, as China will not only be building factories using equipment from China, but also provide most of the skilled labour. 

He is also of the opinion that nearshoring manufacturing to Mexico also ensures there is a second location for generating massive amounts of revenue for the country.

“Mexico provides China with protection. China understands that if they attack Taiwan, the U.S. may enact punishing tariffs or even sanctions. China also understands the U.S. won’t do anything to disrupt manufacturing and shipping in Mexico, because it will severely disrupt the U.S. economy,” he added.

Proactive steps

In order to ensure ethical and sustainable sourcing practices when working with Chinese suppliers, Siriwardhane feels retailers need to physically visit their manufacturers and build relationships where they get to know them and trust their processes.

“The ethical and sustainable sourcing requirements must form part of the commercial contract and should reserve rights to periodic audits of the factories in China. Building a strong partnership with suppliers is the key for quality service,” he stressed.

Transparency, in his opinion, is also another critical element. There are a number of software solutions available in the market to share information and for track and trace. 

“The partnership agreements should articulate the buyer requirements clearly including the level of transparency. Monthly and quarterly business reviews are critical to check status and the buyer should clearly understand the supplier processes well,” he concluded.

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