Last month, on behalf of Newmark Knight Frank, I attended and presented at the US-China Trade Tension Forum in Minneapolis, where some of Minnesota's largest corporations, investment firms, trade organizations, public sector entities and law firms gathered to discuss the present state of affairs and strategies for navigating the shifting trade and tariff landscape moving forward. Of course, the topic reaches far beyond Minnesota's borders, but with $12 billion of its economy attached to that relationship the state puts the scale of the issue in context. This wasn't a political meeting; it was a standing-room-only gathering of leaders and industry subject matter experts asking, 'What do we do?' and they were there to listen.
I found two presenters - Dwight Nordstrom, Chairman of PRI, a management & consulting company with over 30 years of experience doing business in China and John Evans, Managing Partner of Tractus Asia, Newmark’s strategic partner in AsiaPac with respect to corporate strategy and site selection services to be particularly pragmatic and their answers to the question compelling.
Nordstrom and Evans laid out 10 strategies U.S.-based multinational corporations (MNC) doing business in China should consider:
- Look beyond China. China can't be a single source anymore. Organizations need to start looking at alternative sourcing options for materials and consider establishing supply chains in such as Indonesia or the Philippines. This supply chain redundancy has been in motion for a while, now in the face of many small and medium enterprises.
- Make products in China for China. The Chinese economy is growing at 6%-7% per year, and its population is hungry for consumer products. Many American companies, like 3M, have become wholly-owned subsidiaries and continue to partner with Chinese companies, producing goods for the domestic Chinese market.
- Make products in China for non-U.S. markets. Reference the July 26, 2019 article in the New York Times entitled, China Needs New Places to Sell Its Mountain of Stuff. Market access was an expertise of U.S. companies in their foray into Asia for decades. Now China, with its industrial prowess and also subsidiaries of many MNCs, can seek out new channels in Southeast Asia, and potentially Australia, India, and Japan with the Regional Comprehensive Economic Partnership (R.C.E.P) free trade agreement.
- Delay tariffs. With governments just now beginning to put tariff payment protocols in place, companies can work their legal counsel to exploit the lag and delay tariff payments by taking orders at the dock right in the warehouse, for example, or adjusting trade zones. Trade zones aren’t a loophole for avoiding tariffs on products destined for the U.S. market, but they can be a way for companies to avoid duties on goods shipped to the United States and subsequently exported.
- Apply for exclusions and/or reclassify products. Organizations can lobby Washington to exclude a commodity from tariffs, based on its Harmonized Tariff Schedule (HTS) code, which is a six-digit code for classifying goods for global trade and international shipping. Companies can (and have) lobbied to have a product recoded to an HTS code not subject to tariffs. Many U.S. firms have applied to do this especially in technology, high value raw materials and heavy industry sectors like steel and aluminum.
- Negotiate with suppliers for price decreases and prepare your customers for price increases. As tariffs rise, parties throughout the supply chain, from suppliers and consumers, feel the pain. Suppliers should understand the expectation that they will absorb some of the cost increase by adjusting their prices accordingly. Likewise, companies have an opportunity to strengthen customer relationships by sitting with them as a team to discuss the impact of tariff costs and develop solutions and strategies for operating in this new environment.
- Reducing the cost of goods sold. This is a good time to get better. It's an opportunity to hedge against tariff costs by improving operational efficiencies - analyzing their workflows and supply chain management - and renegotiating contracts with shippers.
- Change your product's 'made-in' country. Some companies have adopted the practice of assembling their product in China, but shipping it out of another country not subject to China's tariff levels - Taiwan, perhaps – and labeling it as 'Made in Taiwan.' Companies can maneuver around tariffs by changing ports-of-entry and registering their products to other countries before shipping to the U.S. It's a strategy that companies can use across their supply chain.
- Examine how your company is structured legally. Consult with corporate governance experts and legal advisors to understand your options. What impact might the designation of a wholly-owned subsidiary or a partner of a Chinese company or some other legal entity have on your tariff obligations?
- Relocate or evaluate location strategy. Companies need to be asking if China is still a viable part of a low-cost manufacturing strategy. Manufacturing costs in China are rising and labor markets are tightening, driving 15-25% wage inflation. There are other options – Vietnam, Thailand, Indonesia, and Mexico – though each may have its challenges in terms of workforce skills and infrastructure. You might also realize significant cost reductions by optimizing your portfolio within China, perhaps by relocating a facility inland from a coast, for instance. As in the U.S., labor, real estate and operational costs vary by region in China. Understand your location options and take time to develop a dynamic location strategy for your company and suppliers.
This trade confrontation is just the most recent in a decades-long battle for economic supremacy between the U.S. and China. I've been to China over 10 times in my career. Following my most recent visit in March, I came away with a stronger-than-ever belief that the country's leadership will not blink. It is steadfast and determined to win this latest round of the trade war, portending extended uncertainty for multinationals. Like an Ali and Frazier heavyweight fight, this will go to the 15th round.
The dominant message I heard at the Minneapolis forum was this: Uncertainty need not cripple organizations. They can choose to seize the opportunity to be more efficient, leaner and to develop closer relationships with customers and suppliers. Partner with subject matter experts in everything from international trade law to real estate and investigate your options across the globe. Now is not the time to sit back and do nothing.
Robert Hess
Vice Chairman, Global Strategy Team Lead
rhess@ngkf.com