How the Trade War And Coronavirus Show Western Business Is Too Reliant On China

Sourcing in China became easy and fast. Then it became too costly and disruptive to switch.

But if there is anything management experience teaches, it is that an organization which becomes too dependent on any one contributor to its success eventually surrenders its strategic capabilities to that factor. China has built up the technological, financial, operational and logistical expertise to make itself the go-to global export platform. Western companies are now beginning to understand the hidden cost in that equation. And changing will be difficult. JL


Kevin Stankiewicz reports in CNBC:

20% of the retail supply chain is exposed to China, (including) 90% of all footwear under $100 at retail. Apparel is particularly at risk of disruption because inventory turns over around four times per year. “Lead times are about six months so the summer product and increasingly the back-to-school and fall product will be at risk as this continues.” Retail companies will take further action to diversify their supply chains but "that will happen over time, that’s not going to happen in 2020. "

The trade war and coronavirus outbreak helped demonstrate that retail supply chains have become too reliant on China, former  CEO Terry Lundgren told CNBC.

“The answer is yes. It is too much,” Lundgren said on “Closing Bell.”

Lundgren, who retired from the Macy’s board in January 2018, noted different categories of the retail industry face varied levels of exposure. For example, the beauty industry is less exposed than footwear, which is “greatly” impacted by any supply chain issues in China, he said.

“Something like 90% of all footwear under $100 at retail are coming out of China,” said Lundgren, who was Macy’s CEO from 2003 to 2017. “And we all need to diversify that strategy.”

Large portions of the Chinese economy have been effectively shut down in recent weeks as the coronavirus outbreak grew, sending financial ripple effects across the globe.

Tech companies such as Apple and Microsoft have warned about impacts to their business, as have retail companies such as Under Armour. Under Armour said it expected not only sales declines in China but also shipping delays.

Macy’s current CEO, Jeff Gennette, told investors on Tuesday the department store chain is preparing for coronavirus impacts.

“While still too early to estimate, we anticipate that there could be a small impact on first-quarter sales from international tourism,” said Gennette, who also is chairman. “With respect to the supply chain, we are working with our vendor partners to minimize any possible disruption.”

Businesses also experienced disruption from the U.S.-China trade war, during which the countries placed billions of dollars worth of tariffs on each other’s goods.

Some businesses responded to President Donald Trump’s tariffs on Chinese imports by moving manufacturing out of China. In fact, Trump demanded in August that U.S. companies move production out of China.

Trade tensions between the countries have appeared to quiet after a phase-one deal was signed in mid-January, reducing some of the uncertainty for business leaders. Many tariffs remain in place, however, and the coronavirus only added a new layer of disruption and uncertainty for companies.

Overall about 20% of the retail supply chain is exposed to China, Cowen analyst Oliver Chen told CNBC earlier this month.

“Earnings cuts are very likely” due to the coronavirus, Chen said, adding he thought apparel was particularly at risk of disruption because inventory turns over around four times per year.

“Lead times are about six months so the summer product and increasingly the back-to-school and fall product, that will be at risk as well as this continues,” Chen said on Feb. 18.

Lundgren said he believes retail companies will take further action to diversify their supply chains, but he cautioned against immediate action.

“I know that that will happen over time, but that’s not going to happen in 2020,” he said.