By: Michael Hotchkiss, Director of Sales, SB&W
“Hope for the best and plan for the worst.” It’s a simple, oft-used saying and the wisest course of action for most situations.
When it comes to China-based performers in a supply chain, putting that adage into action becomes challenging, because the current climate of trade with China makes it difficult, if not impossible, to know what the “best” or “worst” scenarios might look like.
This uncertainty is the main problem facing manufacturers who have developed complex supply chains over several years, as they face key questions such as:
“Exactly what are the plans and contingencies moving forward?”
There is a huge problem when the only prudent answer to this question is:
“I don’t know.”
The last six months of the Dow Industrial and the Shanghai Stock Exchange show extreme volatility. (Left: NYSE; Right: SSEC)
The most widely recognized barometer of an economy is its major stock market, but that doesn’t bring any certainly to the equation—the NYSE and Shanghai Exchange have bounced around like Gumby on a trampoline over the last six months.
When this level of uncertainty continues for a prolonged period, the only outcome is stagnation. Plans are put on hold. Capital projects are delayed as everyone falls back into a wait-and-see mode. In the long term, the unknown becomes the worst-case scenario for manufacturers who must plan and make sourcing decisions in the absence of any concrete idea what they’re actually planning for.
In the world of contract manufactured goods, there is no option to scale back to see what happens. Any significant adjustment is a long and expensive process, like moving a large volume of manufactured products in China.
So until the real impact of tariffs on China-made goods reaches the consumer level, most manufacturers are dealing with tariffs by instituting minor tweaks, like getting suppliers to deliver fewer quantities more frequently.
When Joe Consumer starts seeing the prices of everyday items like cookware, window treatments, or lawn and garden equipment increase by 10% to 20% at the beginning of 2020, domestic manufacturers will lower forecasts, buy less and deliver unsatisfying economic report cards.
The result will be a consistent, predictable bear market that, while not positive, will at least make planning for the worst more manageable. The only way to stop this from happening is for the world’s two largest economies to come to a sustainable agreement—if not to equalize an imbalance in trade dollars and practices, then to enable companies to understand and adjust to the new reality.