INDIANAPOLIS (Inside INdiana Business) — With the continuing concerns of trade war tariffs and the COVID-19 pandemic, U.S. companies are re-evaluating their reliance on Chinese made products and raw materials.
Manufacturers, including many with operations in Indiana, are gearing up to diversify some of their supply chains out of China.
“Automotive parts, without a doubt,” says Craig Seidelson, assistant professor of operations and supply chain management at the University of Indianapolis. “One of the leading manufacturing industries in Indiana, not only in terms of revenue but in terms of profit. This is one where you’ll see the Indiana-based companies try to find the China Plus One approach.”
The China Plus One strategy suggests that instead of investing only in China, companies should diversify into other countries as a more economical and safer long-term option.
“It’s a scenario where you still have your China supply chain, but you have alternative supply chains. in case something happens to that supply chain, what you said about the pandemic, but also it could be political.”
Seidelson spent 16 years in China, using his background as an engineer, to construct multiple factories. Four years ago, he returned to the U.S. and now teaches supply management at UIndy.
Another Indiana industry paying close attention is pharmaceutical. China is the largest source of U.S. pharmaceutical imports accounting for $1.5 billion in 2019, according to Seidelson.
Seidelson says COVID-19 has highlighted an issue with U.S. dependence on Chinese-made pharmaceuticals when the country enacted export restrictions on personal protective equipment. He says it’s not only about Chinese supply, it’s also about demand.
“China makes up 20% of the world’s population but only 1.5% of the global drug market.”
Seidelson says Indianapolis-based Eli Lilly and Co. (NYSE: LLY), like many other drugmakers, is aware of the “huge opportunities selling drugs to Chinese consumers.”
Seidelson is a leading national authority on China trade and business and recently published a book on the topic, “Operations Management in China.”
“The reality is U.S. supply chain managers need Chinese-made products because prices are among the world’s lowest.”
Seidelson says it is not just about inexpensive labor. He says there are numerous Asian Pacific nations where manufacturers can get inexpensive labor.
He says China has subsidized infrastructure, subsidized lending, and access to massive amounts of raw materials at unmatched prices.
“I think the challenge of that will be making sure that the alternative source has the same cost structure as the China source,” says Seidelson.
The UIndy professor says another challenge for U.S. manufacturers could be a recently-enacted Hong Kong national security law imposed by China. The law gives the Chinese state new powers over the city to prevent pro-democracy protests seen in Hong Kong.
Seidelson says the majority of U.S. investment in China is through Hong Kong. But the security law means Hong Kong could lose its special status in terms of investment and trade. He says it may force how they do business in China.