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China’s Oversized Clout in My Supply Chain

It is common knowledge that China has become the world's fastest-growing major economy. It is quickly overtaking the United States, by both nominal GDP and purchasing power parity (PPP).

China's influence in global economy and international affairs is growing rapidly. It is the second-largest importer of goods and the world's largest exporter. China's army numbers around 2.5 million soldiers and they have nuclear weapons. They are only second to the United States in terms of defense spending. China has also launched manned space missions and that puts them almost on par with the United States and former Soviet Union space programs. China has been characterized as a potential superpower by a number of academics, military analysts, and public policy and economics analysts.

So, what does all this mean for the electronics supply chain? China is a leading player in electronics manufacturing and its growing clout means all segments of the supply chain are being impacted by events in the country. Currently, I am working on a bill of material for a 4X6 printed circuit card assembly. I thought it might be interesting to see how many parts on this board were either made by or purchased from China. To make it a bit more interesting, I am including the parts that are manufactured in China for other countries.

So, if Texas Instruments has a manufacturing facility in China, then that part will be included on my list. In order to guarantee that every part listed on the BOM was the part manufactured in China, I looked at each manufacturer's Website. So here is the conclusion of this quick study: Out of 59 unique part numbers and manufacturers, only two did not have a manufacturing location in China. What does this mean for my supply chain on this particular board assembly?

Well, I'll be out of business if China turns up its economic nose at the US. If I cannot source the same or alternate parts from another non-China based manufacturing site, then I am in deep Kung Pao. So, what should I do now? I can get all hot and bothered and start looking for non-China manufactured parts, or I can take the position that most everyone is taking… “If it ain't broke, don't fix it.” Well, because I have other more immediate things to be concerned about, I will let this one boil over on the back burner.

Should I now have to consider my next design with this concern in mind? No. Not yet. Because if my operations go down because I can't get parts from China, it will already be too late for everyone else using parts manufactured in and exported from China. If China decides to increase their manufacturing costs to OEMs reselling parts in top level products, then there will be more pain and less gain for the consumer.

When the OEMs get pinched, they have to pinch their customers or absorb the loss due to the higher cost of goods. Unfortunately, price increases do get passed along to recoup any losses and that is why I am at the mercy of my supply chain. And, that is why every company's supply chain that has links through China should be a major concern and they need to start figuring this into their long-term risk analysis exercises.

The escalating US debt is not just a threat to the residents of the US, but if China believes that the US is getting to the point where we cannot even service the debt, then the backfill for the uncollectable funds will first show up in higher manufactured part's pricing due to import tariffs that have been added to help ease the debt burden. We will not escape some degree of suffering due to the imbalance in our trading with and dependency upon China's goods and services.

Global purchase power parity results will continue to devalue the US dollar and with that my parts' cost can move up. Now, my customers will be enticed to buy a product like mine directly from China and at a much lower price. If this happens across a number of products from a number of companies, then the backbone of our economy, being our combined corporation's strengths and clout, will be put under such a strain that we will not be able to stand up straight and tall for roll call when the world's economic superpowers are summoned to the negotiating tables.

13 comments on “China’s Oversized Clout in My Supply Chain

  1. rohscompliant
    November 9, 2012

    You paint a doom's day scenario that is all too realistic.

  2. dalexander
    November 9, 2012

    @rohs, I thought by analyzing my own BOM, I would see how close to home this concern really was. China's debt to GDP is 25%. The US is calking up 103% debt to GDP. That means if every goods and services for every man, woman, and child for one year went to pay off our debt, it would still not be covered. I heard an analyst on PBS say that 100% is the point of no return. So doomsday is coming unless something really amazing happens and the Dems and Reps start working together right down the fiscal line. Two different directions is no direction at all. You try going in two different directions at the same time. It cannot be done.

  3. rohscompliant
    November 9, 2012

    I have been saying this for years but my peers think I am Don Quixote…………..if we rolled back the corp tax rate to say …..i dont know…….to that of Singapore or other business friendly countries?…………..then companies would come back home ………open up factories which in turn creates JOBS which in turn creates a broader tax base. Then we get goods mfg'd in the USA again. How are we to compete w/ a country who's strategy is to destroy all of it's competiton in the world and plays an active role in the success of it's businesses? If you read this book; Strategic Capitalism (no I am not the author and have no connetion to him) by Richard D'Aveni you will understand what the gvt of China's master plan is……….and how we MUST combat it! D'Aveni has rung the warning bell but no one listens as they whistle past the grave yard……….of what was once a great economic power. This current administration is NOT business friendly no matter how u slice it!!!!

     

  4. dalexander
    November 9, 2012

    @rohs, when I look at politicians in general, they have become the hand puppets of lobbyist representing big money and private interests. The pie is only so big, and with that shrinking, who do you think will be the first to grab the biggest slices for themselves. If China is at the table and trying to snatch the whole pie, then it is soon going to be an international free for all with the biggest pieces going to the preemptive grabbers. This skill is particularly fitted to politicians. Most of us will be scurrying around for the crumbs.

  5. dalexander
    November 9, 2012

    RoHS, the corporate tax rate has driven businesses to shelter profits overseas in store front “headquarters” with maybe one person resident to answer the phone. When Halliburton took their HQ to Dubai to escape US audit of their practices in IRAQ, they set a precedent that became very enticing for others to follow. It is not just tax sheltering, but information sheltering as well. The SEC's hands are tied behind their backs. Who really controls the money supply? The answer to that is…. The people with the most money. Follow that trail and let the conspiracy talks begin. If they removed the word “conspiracy” and just used “piracy” as the operative term, then people might take what is happening in our economy a little more serious.

  6. SP
    November 9, 2012

    Someone was telling me that now China has more USD than US themsleves. Wont be surprised. You go to any big retailer in US and pick up any product everything is made in China.

  7. rohscompliant
    November 9, 2012

    Agreed! Would it not be nice if our politicans were citizen patriots first………………folly to think that i know! Your article is good and hopefully it opens peoples eyes…….

  8. dalexander
    November 9, 2012

    RoHS, “citizen patriots” is a beautiful combination of words. I think the appropriate response is, “would to God that was the case”

  9. Roberto Varela V
    November 9, 2012

    Very interesting post. I remember an upper manager asking me if we could know where are the parts in the AVL coming from, I said yes but probably would take a serious amount of effort. I never did that investigation but I'm sure we will be above 80% of parts manufactured in China.

    Now, with current distribution channels maybe an internal issue in China will not kill us immediately but I agree this is something that bugs in the back of the mind. My team is working on a 2nd source project..should we put into the mix parts not from China..mmmm.

  10. dalexander
    November 9, 2012

    Roberto, Every US manufacture has a code on the parts identifying place of manufacture. You can make a list of those codes and then cross check with your suppliers. It is a lot of trouble if you don't have the parts on hand, but companies like Intel, manufacture the same wafers in different foundries as a risk management tactic. If you have the manpower for this kind of research, it is probably a resource better spent in more pressing concerns for Component Engineering. Even if your final number was up around 80%, what could you do if you can't control the OEM's supply chain? I think it is a matter of time before the crisis will be upon us, and unless we regain our fiscal integrity, I think our money supply is going to get more expensive and less attractive to trading partners and affiliates around the world. Would you lend to someone who could not pay you back? You would probably want collateral. In our case, that collateral is our future economic well being. Watch what happens to the US credit rating in the next two years. When we can't borrow anymore or have to pay higher interest rates to borrow, then the hole we are in will just get deeper and deeper. I heard when I was a kid, if we dig deep enough, we will hit China. I think this puts a new spin on the old adage.

  11. ITempire
    November 11, 2012

    For long term survival, the rational risk management should suggest that the businesses find out non-Chinese suppliers despite that they sell on higher prices. It is important to diversify risk to ensure business continuity while making it a priority over maximum profit. It is not necessary to follow what the other market players do as it is not feasible to drown if other players drown as well.

  12. ITempire
    November 11, 2012

    Sp, that's an interesting news and I heard that as well. With US govt in debt, it is possible that somebody is the leader when it comes to international money which is dollar and China is the most likely candidate being the world's largest exporter.

  13. _hm
    November 11, 2012

    Do not worry about Chnia's clout. China earned this with very hard work. They do provide diligent and prompt service. There is not point in creating problem that does not exsist. US  should worry moer to provide better quality, value added, innovative products.

     

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