China’s role in the global supply chain is changing right before our eyes, leaving foreign buyers to feel the discomfort that happens when a superpower readjusts itself to new realities. While China’s outsized role in the global supply chain is still largely unmatched, conditions on the ground there in the last few years have revealed some cracks in the supply chain that foreign buyers have to figure out how to handle.
To better understand how China’s role in the global supply chain is evolving and how buyers should adjust their thinking, I recently welcomed Jeffrey Goldstein, Founder & President of Onward Global, to the Art of Supply podcast. Onward Global is a consulting and contracting company that works with international companies, brands and wholesalers, helping them manage, optimize, and scale their supply chains in Asia, specifically in sourcing product development and manufacturing.
Based in Shanghai, Jeffrey and his team have a boots-on-the-ground perspective on China’s supply chain and have recommendations for foreign buyers on how to take an eyes-wide-open approach and reconcile their reliance on China while also avoiding costly mistakes.
A Completely Different China
“China’s supply chain has gone through significant, transformative changes in the last five years,” said Jeffrey. “For executives or engineers, designers or buyers, who have not been here since before COVID, they’re going to see a completely different China.”
These changes have created a sense of uncertainty that foreign buyers have to understand and navigate. According to Jeffrey, there are two important macro-shifts happening in China that are important to be aware of: economic instability and emerging labor trends.
A sluggish property market, rising debt levels, and declining consumer confidence are just a few reasons China’s economy is weaker today than it was 5 years ago. Many factories have taken devastating hits to their revenue and lost some of their biggest customers, forcing them to downsize, outsource, or close up shop altogether. And this means, as the saying goes, buyer beware.
“It’s important for buyers to understand how healthy their Chinese suppliers are because bankruptcies are happening here every single day,” said Jeffrey. “And once that happens, it can be very hard, if not impossible, for a buyer to retrieve their material or any goods they’ve purchased.”
Secondly, he said, China’s radical demographic shifts and talent shortages are so acute that manufacturers are readjusting operations and buyers are – whether they know it or not – facing increased supply chain risk. Less than a decade ago, Jeffrey said, the average worker on a factory production floor in China was 20 years old. Today, the average factory worker is 50 to 60 years old. China is experiencing a talent shortage, particularly for younger workers who are now in high demand and commanding increasing wages. They are turning away from factory work and seeking other opportunities in major urban centers.
“The huge jump in the age of workers impacts everything from trainability to efficiency and even safety risks,” said Jeffrey. “And, because it’s so hard for many factories to hire workers, the size and labor capacity of these factories have significantly shrunk.”
To fill the gap, a lot of factories are relying on subcontracting and sub-factories to meet fulfillment. This is fine, Jeffrey says, as long as the buyer is aware of it, approves, and plays an active role in helping the primary supplier manage the quality and risk across the supply chain. But, “a lot of the time, buyers don’t know, and that can really increase both ethical and quality risks.”
China’s Supply Chain Staying Power
Despite the headwinds in China’s supply chain, they’re still a global powerhouse that most buyers cannot – and should not, says Jeffrey – turn their backs on completely. Decades of investment haven’t made Chinese manufacturers impervious to problems, but the sheer vastness and sophistication of their supply chain means those problems might be cause for concern or attention but certainly not for panic.
“I think China by far remains the most competitive, diverse, and flexible supply chain in the world,” said Jeffrey. While other countries like India, which has abundant labor capacity, or Mexico, with its proximity to the U.S., can offer buyers specific advantages, “no other country offers the whole package that China has, from the expertise, network and competitiveness.”
Over 40 years of foreign investment, partnerships, and training have created an infrastructure and supplier network that remains strong, efficient, and safe despite domestic challenges.
“For as many challenges as China has today, it still remains the go-to place for many companies,” he said.
The On-Site is Making a Comeback
Along with understanding the kinds of economic and labor pressures Chinese suppliers are under right now, Jeffrey says foreign buyers can safeguard their supply chains by paying more attention to suppliers at the local and factory level. For some, this could mean the return of on-site visits, a practice he says has fallen somewhat out of favor post-COVID, but that provides buyers with a unique insight into supply chain conditions so they can enhance decision making and risk assessment.
“Americans kind of see the world or business or their interactions in a very black and white, yes or no, right or wrong kind of way. But much of Asia navigates situations and interactions in a much more fluid manner, in a gray zone, if you will,” said Jeffrey. “And so without traveling there, studying and knowing how this impacts day-to-day business, I think home offices can easily miscalculate both the risk and opportunity.”
Visiting suppliers and factories, talking with them face to face, not only gives buyers and their executive teams a better sense of the health of the company, but it also reveals opportunities to improve the relationship that might not otherwise be captured on a video call. It seems hard to imagine in today’s hyper-connected world, but even in China certain communication and technology barriers persist. For instance, Chinese suppliers might not have access to the same digital or communication platforms commonly used in the West. All the more reason, Jeffrey says, for companies to invest in boots-on-the-ground insights to get a better understanding of how their suppliers are coping with China’s evolving supply chain.
“Unless someone from the head office comes over to China to talk with their factories, they’re not going to know the kinds of localized versions of apps and communications technologies in use,” said Jeffrey, and that can change the way a business interacts with, manages, or assesses that supplier. “But, without coming over here and sitting down with your counterparts, you’re probably not going to learn many things like that that could be of value to the business.”
