Ongoing tensions between the US and China has impacted many companies around the world, including those in Canada.
Canada’s relations with China have suffered due to legal saga involving Huawei CEO Meng Wanzhou. The COVID-19 pandemic has also made it very clear that dependence on Chinese suppliers – for companies everywhere – can have catastrophic consequences when these supply chains are disconnected.
In this challenging and uncertain time, many companies are trying to reorganize their supply chains and reduce dependencies that are vulnerable to political tensions and rising costs.
Mens pandemic has already forced many companies to become more agile – for example, by increasing their number of suppliers – business leaders must now begin to think about the long-term consequences of increased uncertainty in the markets, as volatility is likely to continue.
Our ongoing research suggests that two factors are most important when deciding how to respond to the US-China trade war: location and supply chain dependence and technology.
End addiction on two fronts
The first factor is about how much dependence companies have on Chinese suppliers and customers. China offers a unique complete combination of supply chains and a growing middle class which creates great demand for almost all goods.
According to a UN report, China is home to almost every industry and its companies offer almost complete range of products and services in each of these industries.
The second factor is technology dependence. In some industries, paving the way for the technology frontier is key to success. North America is still leading region for many of these technologies (including biotechnology, cultivated meat and artificial intelligence), and it is increasingly concerned that its intellectual property is falling into Chinese hands.
Recent restrictions on Chinese researchers at Canadian universities are an example of this protectionist acts spurred on by these concerns.
In the future, companies dealing with North American technologies in cutting-edge areas will probably have to avoid delivering to China or using this technology in collaboration with any Chinese companies.
Low vs. high Chinese dependence
Companies with varying degrees of dependence on Chinese supply chains and North American technologies are likely to behave very differently. We review the four scenarios.
Companies with low dependence on both North American technology and Chinese supply chains tend to relocate their production facilities to a third low-wage country, such as Vietnam and India, because it is easy to find alternative production sites and access technology.
Samsung’s display company, which offers digital signage and hospitality displays, is an example. Samsung’s dependence on Chinese supply chains is low because it owns a relatively complete supply chain, ranging from upstream activities (inputs to products such as chip design) to downstream activities (outputs such as products such as smartphones).
In short, Samsung designs, manufactures and markets its own products. The dependence on North American technology is also low because the technology required to produce display units is not limited to North America. As a result, Samsung has moved its manufacturing of IT and mobile screens from China to India, avoid tariffs and higher wages in China.
But companies with high dependence on Chinese supply chains may have a hard time leaving China. Take Google’s Pixel phone as an example.
In 2019, Google decided to move the manufacturing of the Pixel phone from China to Bac Ninh in northern Vietnam to avoid tariffs to the United States, an important market for its phones. Two years later, Google reversed the decision and began producing the new smartphone in China due to supply chain problems amid rising uncertainty from pandemic-related restrictions.
Moving to North America
Companies with high dependence on North American technology and relatively low dependence on Chinese supply chains, on the other hand, are likely to move production to North America.
E.g, TSMC, one of the world’s leading semiconductor foundriesuses significant U.S. technologies and equipment, including advanced equipment for ultraviolet lithography. Therefore, the Taiwanese company decided to build a new one advanced chip factory in Arizonaa decision closely linked to its reliance on both US technology and customers.
Companies with high dependence on both North American technology and the Chinese supply chain face the biggest challenges. They have no choice but to continue operating in both countries while navigating political risks and market turbulence.
Tesla is a good example. Although China’s supply chain relies on its research and development in the United States to strengthen its leading technology position, China’s supply chain benefits Tesla with production speed, cost, and proximity to the Chinese market. It leaves companies like Tesla with no choice but to navigate political tensions and remain present in both markets.
As a result, Tesla has built and expanded one factory in Shanghai. In addition, it has promised to perform more research and development activities in China and recruitment of local talent for local design.
The COVID-19 pandemic has been another wake-up call for business leaders that should have made them consider the importance of technological advancement and supply chain security. Although we do not know how long the pandemic and its restrictions will last, successful companies are thinking ahead and building resilience and flexibility into their operations.