Mitigating China Supply Chain Issues in 2023

Thought Leadership

Mitigating China Supply Chain Issues in 2023 

Mitigating China Supply Chain Issues in 2023

Today, US companies are more hesitant than ever when it comes to manufacturing in China. Ongoing trade tensions push many US companies to re-evaluate supply chains and diversify sourcing options to remain resilient in the face of uncertainty.

Many companies are actively reducing reliance on Chinese manufacturers. The current sentiment toward China’s supply chain is apprehensive at best.

China’s supply chain risk increased due to the ongoing trade war with the US, the pandemic, and geopolitical upset. Many companies are now looking to countries like India, Mexico, and Vietnam for manufacturing goods.

According to a 2020 survey conducted by the US-China Business Council, the majority of US companies manufacturing in China experience concern about supply chain issues like disruption, quality control, and rising costs. As a result, many plan to diversify their supply chain and/or reshore manufacturing to the United States.

China’s supply chain has also taken a hit from recent US government sanctions and export controls, specifically on companies suspected of human rights abuse, intellectual property theft, and threatened national security.

Despite these risks, China is still a key player in the global supply chain, dominating the technology and electronics industry. For now.

In this post, we’re demystifying the China supply chain risks--what they are, how they came to be, and what you can do to build a resilient supply chain that can withstand disruptions.

How COVID-19 Impacted the Supply Chain So Far

After the initial surge, China’s strict COVID policies allowed them to keep factories up and running. US companies generally perceived Chinese factories as more reliable than Vietnam, India, and Malaysia throughout the pandemic.

This shifted in April of 2022, due to the Shanghai lockdown. The entire region between Shanghai, Kunshan, and west to Suzhou is an IT manufacturing hub. Harsh and wildly unpredictable government policies, combined with Apple’s recent Foxconn factory complex struggle, resulted in US companies being less confident in Chinese manufacturing than ever.

When the Zero COVID Policy met its abrupt end in 2022, an immediate surge in cases hindered production. One auto parts manufacturer reported a third of workers caught the virus at the same time. December exports dropped by 9.9% YoY and production prices fell by 0.7%. One survey deemed December 2022 the worst contraction in manufacturing activity since the beginning of the pandemic in February 2020.

Ni Hong, a finance employee for an electric vehicle component manufacturer in Chongqing, does not predict another major COVID outbreak due to 85% of the factory’s workers having already been infected. Still, they rely on US consumers and fear the potential impact of the US economy entering a recession. Some Chinese manufacturers predict 2023 will be a hard year due to a continuing drop in US demand and the Russia-Ukraine war.


COVID-19’s Current Impact

In response to the serious impact of COVID-19 on processing trade, many are shortening supply chains and diversifying so that they are not reliant on one country. Some countries like India are actively trying to replace China as a manufacturing hub.

Chinese ports are still affected by the COVID outbreak, resulting in delays. Imports are affected more than exports. Transportation within China has also slowed, resulting in even longer delivery times and higher prices. Many factories remain closed. Some companies are shifting their supply chains to other countries to avoid these disruptions. The Chinese government is reducing taxes and providing subsidies to industries affected by the disruptions.

Analytics firm Everstream’s annual risk report gave a 90% risk score to the possibility of delays and cancellations from China-based suppliers.

Countries that haven’t shifted their supply chains out of China mitigate risk by stockpiling inventory, adjusting production schedules, and increasing safety precautions.

How Chinese New Year Impacted the Supply Chain

Most of China’s 170 million migrant workers only return home for the Lunar New Year holiday. The factories officially close for one week, but often end up closing for more than 14 days. During LNY, millions of workers travel home by train and bus. 2020 supply chain disruptions were partly due to factory workers’ inability to return after visiting their families over LNY.

This year’s Chinese New Year (Lunar New Year) closures lasted from mid-January to mid-February of 2023. As many as 40% of factory workers who travel home are determined to remain, and as many as 15% have no intention of returning to the factory. This further exacerbates the existing skills shortage issue.

How Tariffs Impacted the Supply Chain

Back in 2018, tariffs on Chinese goods reduced products, raised prices, and increased domestic production. Data on the impact of these tariffs for 2018-2021 shows that:

  • Steel imports fell by 24%, with US production increasing by 1.9% and prices rising by 2.4%
  • Aluminum imports fell by 31.1%, with US production increasing by 3.6% and prices rising 1.6%
  • The value of cut and sew apparel imports fell 39.1%, while the value of US production rose 6.3%
  • The value of semiconductor imports and electronic components fell 72.3% and the value of domestic production increased by 6.4%
  • Furniture and kitchen cabinet imports fell in value by 25.4% and domestic production value increased by 7.5%
  • Vehicle parts imports fell 50.1% by value and domestic production value increased by 3%

The consensus is that despite US steel and aluminum industries benefiting from increased production and prices, the effects were negative for manufacturers purchasing the metals as inputs downstream. For these downstream industries, production fell by nearly 3% (as much as $469 million for some). The tariffs created $1 billion in direct costs for apparel and furniture imports, nearly $800 million in 2022 for travel goods, and over $450 million in 2022 for footwear.

Watch: China Exit Strategy in Asia Network Design Model


Forced Labor in the Uyghur Region

Chinese automotive supply chains are also experiencing scrutiny in connection with forced labor in the Uyghur Region. Chinese government subsidies and incentives attracted the world’s largest steel and aluminum producers to the Uyghur Region. As a result, companies are at risk of unintentionally sourcing metals from this region. To avoid the associated legal, ethical, and reputational risk, the auto industry must trace its supply chains all the way back to raw materials.

The Senate Finance Committee is currently investigating both US and foreign auto manufacturers and suppliers for connection to forced labor in the Uyghur region. According to the Uyghur Forced Labor Prevention Act Congress passed last year, goods made in Xinjiang cannot be imported to the United States without proof that no slave labor was involved.

While the supply chain’s complexity makes confirming this extremely difficult, Senator Ron Wyden, Chairman of the chamber’s Finance Committee, says “This complexity cannot cause the United States to Compromise its fundamental commitment to upholding human rights and US law.”

View map of potential supply chain connections between the Uyghur Region-based companies and automotive manufacturers

CHIPS and Science Act of 2022

China responded to the CHIPS and Science Act of 2022 by announcing a $148 billion package last December, aiming to subsidize the purchase of Chinese equipment and factory construction.

While the CHIPS and Science Act of 2022 originally aimed to support reshoring and bolster America’s supply chains, the Commerce Department’s recent additions stated that subsidy recipients cannot expand semiconductor manufacturing in countries of concern (including China) for 10 years. Because China remains central to the chip industry, this stipulation will likely deter some chip makers from applying for aid in the US. According to the Semiconductor Industry Association, China’s chip sales totaled nearly 40 billion in 2020– that’s 9% of the world market. The total is projected to reach $116 billion (17% of the world market) in 2024.

Supply Chains Leaving China

“It’s official--the “Great Supply Chain Shift” has begun,” says Greg Schlegel, founder of the Supply Chain Risk Management Consortium (SCRMC). “It’s taken 40 years to migrate low and medium manufacturing capabilities to Asia-PAC countries, due to one key aspect--low labor costs. Shifting the supply chains will take time.”

C-Suite conversations are comparing the historical supply chain efficiency to its effectiveness with the goal of identifying whether the cost is worth the risk.

In March of 2023, India outlined a target of $2 trillion in annual exports by 2030. Apple is working to move some production out of China. Major iPhone supplier, Foxconn, is currently working on a large factory presence in Bengaluru, India.

Kearney’s latest Reshoring Index indicates that 96% of CEOs are considering reshoring, have decided to reshore, or are already reshored. Additionally, US imports of manufactured goods from the 14 Asian LCCs and regions tracked by Kearney in 2022 totaled 14.1% of US gross manufacturing output, 14.49% lower than the previous year.

In 2022, Whirlpool announced a $120 million investment in its Coahuila, Mexico production plant. Bosch Rexroth also announced plans to build a $215 million facility in Queretaro. Toy maker Mattel invested $50 million in its Nuevo Leon plant after closing two factories in Asia and one in Canada. Lego began construction of a $1 billion new factory in Vietnam to serve major markets in the region (India, Indonesia, and the Philippines) announcing their China factory will exclusively serve the China market.

The following companies have also expressed plans to diversify sourcing away from China in response to supply chain risks:

  • Dell
  • Google
  • Microsoft
  • Hewlett Packard
  • Intel
  • Amazon
  • Cisco
  • Nike
  • Walmart

Some cite lower costs and proximity to distribution centers as the reason for the change. However, there is a clear pattern of companies building redundancy and resilience into their supply chains.

Other reasons for reshoring include government incentives, affordable automation reducing the need for skilled labor, and ESG expectations.

How to Monitor and Mitigate China’s Supply Chain Risks in 2023

The SCRMC advocates strongly for digitizing the supply chain. This enables modeling the supply chain to run “What-if” risk event scenarios that show how a supply chain will respond before the risk event occurs. Scenarios render risk assessments using techniques like Risk-Priority-Numbering and Value-at-Risk calculations.

According to SCRMC founder Greg Schlegel, “When supply chain modeling tools like Cosmic Frog are exercised, every scenario displays the financial impact of a risk event and potentially a risk assessment. Companies can use this data to develop risk mitigation plans. The SCRM Consortium calls this “Stress-Testing the Supply Chain” and deems it an SCRM exemplary company best practice.”

The SCRM Consortium has advocated the use of FMGlobals’s Risk and Resilience Country Index. They rate 130 countries and rank their risk and resiliency every six months. The rank is based on three major sectors driven by 12 critical infrastructure indicators and includes an evaluation of the country’s supply chain infrastructure.

Because China is so large, the Index has segmented the country into three sectors: Central, West/North, and East. All three sectors were ranked in the 70s as of 2022. A high rank means low resiliency and increased risk.

Potential China supply chain disruptions to prepare for in 2023 are:

  • Natural disasters
  • Geopolitical issues
  • Cybersecurity threats and data breaches
  • Trade conflicts and tariffs
  • COVID-19 surges

How to Quantify China Supply Chain Risk in Global Supply Chain Decisions  

Identifying risky aspects of your network, understanding the impact of potential disruptions, and creating risk mitigation scenarios is an essential part of creating a resilient supply chain. The Cosmic Frog supply chain design platform is an ideal way to evaluate China sourcing and production and balance trade-offs across a multitude of factors.

What is Cosmic Frog, anyway?

Cosmic Frog is the only supply chain design platform that is 100% SaaS-based and balances cost, service, and risk for more resilient supply chains amid volatility.

Supply chain design technology enables you to evaluate strategic, systemic changes. It does this by creating digital models of the future supply chain to test the impact and performance of multiple alternatives.

Because Cosmic Frog is the only supply chain design solution that offers optimization, simulation, and risk analysis across an end-to-end supply chain in a single platform, you can start making more informed decisions beyond just cost.

How to Model Your China Exit Strategy

In this video, we showcase the process of modeling your China exit strategy using Cosmic Frog.

This model answers the question: Should we exit China and if so how do we reduce this dependence while still maintaining production within Asia?


Cosmic Frog models allow you to not only identify existing risks within your supply chain but optimize and simulate various scenarios that could reduce risks going forward. Get side-by-side comparisons of scenarios to visualize the trade-offs across financials, service, risk, and sustainability metrics to make smarter decisions.

4 Ways to Mitigate China Supply Chain Risk

1. Diversification

Diversify your supplier base by sourcing materials and products from multiple suppliers. Further reduce dependency and lessen the impact of potential disruptions by spreading the suppliers across multiple regions or countries.

2. Risk assessment

Conduct a comprehensive and proactive risk assessment to proactively identify and address potential disruptions using a modeling tool like Cosmic Frog.

3. Collaboration

Collaborating with suppliers and other stakeholders to create contingency plans that reduce the negative impact of predicted disruptions.

4. Redundancy

Incorporate redundancy by keeping safety stock, identifying alternate transportation routes, and establishing backup suppliers.