Only recently, when global producers needed something made quickly, they looked as far as China. Their factories churned out consumer electronics, high-tech computers, and fast-food gadgets. They also made heavy machinery, mining equipment, and industrial tools. These manufacturers tapped China’s abundant labor and cheap materials to build their products, making it hard to compete with them in the global marketplace.
The tycoons that owned those factories were happy, too. They reaped huge profits from their offshoring operations, and their investors cheered on their multimillion-dollar investments in China. In the past two years, however, those moods have changed. Surveys show that most U.S. businesses now say they are cutting back or pausing their investment in China, and many more plan to do the same.
Amid the upheaval, many companies that rely on China have been trying to find new suppliers to avoid reliance on one supplier. But this can be a daunting task, especially for small- and medium-sized firms that need more financial firepower from giant multinationals to seek alternatives.
For example, a Canadian company called Danby Appliances got 85% of its parts from Chinese factories five years ago. It has since been wrangling with its suppliers to get those supplies elsewhere. Jim Estill, the company’s CEO, hopes to have that figure down to 50% within the following year.
Another company pursuing alternatives is Iowa-based Vermeer, a 4,000-employee industrial and farm machinery maker. It opened a plant in China about two decades ago and hired Chinese engineers to help it develop machines. But in late 2019, the company began investigating claims that a Chinese engineer at its Freeman, IA, facility was taking advantage of the company by paying kickbacks to an employee at a contractor it used for construction work.
The investigation showed that the engineer sent the contractor confidential project information and arranged for that firm to receive jobs from the construction site, which would then award a subcontract to his own company for masonry work. The company fired the engineer, Bradford, in October 2019. Prosecutors say he and the employee, Draghia, received bribe payments worth several thousand dollars each.
These and other examples suggest that the moods of Vermeer and many other global producers have turned sour on China, and companies seek to cut back or exit altogether. However, many of them still need goods made in China to sell to customers worldwide, and the costs of finding alternative production sites are high. They can include the cost of setting up a factory in a different country, shipping those goods to market, rerouting supplies, and other expenses. These costs can push the price of a product well above its competitors’ prices and, in some cases, make them uncompetitive. In these circumstances, companies need to find ways to reduce their dependence on China while keeping the goods they sell in demand worldwide.
