Lately, there has been discussion around the impact of trade disputes, pandemics and exchange rates on the supply chains of middle-market manufacturers and distributors, as well as those selling products within China. In this article, our experts offer six perspectives for U.S. Manufacturers & Distributors with relationships in China.

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CBIZ Manufacturing
& Distribution
OCTOBER 2020
By THOMAS BONNEY, SENIOR MANAGING DIRECTOR,
CBIZ CMF and JAY BOYLE, FOUNDER AND MANAGING
PARTNER, ECFO SERVICE LTD
L
ately, there has been discussion around the impact of
trade disputes, pandemics and exchange rates on the
supply chains of middle-market manufacturers and
distributors, as well as those selling products within China.
Industry experts Tom Bonney and Jay Boyle assembled their
points of view from their respective advisory and accounting
work for U.S.-based middle-market businesses and China-
based firms.
Ground Level Data from China
We begin with a sample of the latest “official” data from China:
■ Second-quarter GDP growth rate of 3.2%, with the
economy showing substantial improvements month-
over-month since February 2020.
■ May unemployment was at 5.7%. However, this
excludes workers who migrated from the Chinese
countryside to the cities and industrial parks, as well
as to other countries, to work on projects funded by
the Chinese Belt and Road initiative. Many of these
migrant workers returned home or were stranded in
the destination country and are not included in the
official unemployment figures.
■ By June 2020, 93% of industrial state-owned
enterprises and 84% of state-owned construction
enterprises reopened.
■ Nearly 800,000 companies are expected to close for
good by the end of 2020.
■ By late April, nearly 75% of Chinese companies were
back at work in the office or plant with masks and
other precautions.
■ China’s interior suffered severe flooding this summer
that has impacted production and manufacturing
supply chains, particularly along the Yangtze River,
affecting Wuhan and Chongqing. This flooding, along
with an outbreak of swine flu, has caused food
shortages and inflation pressures.
■ The trend of foreign direct investment into China has
been improving since February 2020 as international
investors see China as one of the first countries
recovering from coronavirus.
Potential Shift Projection
A significant shift
to home office
operations
Very low likelihood. Not in line with
the Chinese management style. By
late April, 75% of companies were
already working onsite.
China-U.S.
Decoupling
Politically prioritized and low-value-
add supply chains can be moved, but
others are much more difficult. The
China demand market is a factor; not
only the supply side. It’s not a “Cheap
China play; it’s quality and cost-
effective economy of scale; difficult to
recreate in other countries.
Other countries
also moving
supply chains out
of China
Not much higher ratio than before the
pandemic. Even so, some companies
have increased their presence in
China during the last couple of
months.
A massive
exodus of foreign
investment
On the contrary,
China’s actual utilized FDI increased
by 15.8% in July 2020, and there is
an expected increase in MA in the
next year. China is now considered
much more stable and recovered
than other countries.
■ In an April 2020 Ernst Young survey, 57% of
Chinese companies thought they would be involved in
some aspect of MA in the next 12 months.
(Continued on page 2)
PerspectivesonChinafrom
theMiddleMarket

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(Continued from page 1)
The National Association of Manufacturers China Briefings
The National Association of Manufacturers was engaged by
the U.S. House of Representatives China Task Force to provide
input on key topics such as strengthening manufacturing
supply chains in the United States, and promoting workforce
development and immigration policies that close the
manufacturing skills gap. They also worked together to devise
targeted approaches to strengthen national security and
promote effective strategies to level the playing field on trade
for manufacturers to compete with China.
The recently released task force report includes:
■ Trade agreements – Congress and the Administration
should ensure the aggressive enforcement of the
U.S.-China “phase one” trade deal and set a clear
strategy for “phase two” negotiations. The report also
broadly supports trade agreements and negotiations
as a tool to strengthen global relationships and better
compete with China.
■ World Trade Organization (WTO) reform – The
report explicitly calls for Congressional passage
of a bipartisan resolution supporting the WTO. It
also encouraged the development of new rules and
reforms at the WTO to address China’s problematic
trade behavior, while calling for a WTO Director-
General’s election.
■ Supply chains – The report includes various
measures and recommended legislation to strengthen
domestic production in specific sectors, including
defense, rare earths, semiconductors, medical
equipment and pharmaceuticals. It calls on the
administration to expand partnerships with the
private sector to support supply-chain shifts and
make securing supply chains a priority in trade and
economic discussions with other countries.
■ Technology and export controls – Congress should
fully implement all recent changes to export control
laws and regulations, including swift implementation
of the Export Control Reform Act. The reform act
includes the implementation of export controls on
emerging and foundational technologies.
■ Export financing – The report supports critical U.S.
export finance efforts, such as those at the Export-
Import Bank and the U.S. International Development
Finance Corporation, as part of efforts to counter
China’s Belt and Road Initiative.
6 Perspectives for U.S. Manufacturers Distributors
with Relationships in China
1. Historically, China has been a manufacturing
destination due to its low cost and large labor
supply. Many U.S manufacturers that had substantial
investments in Chinese supply chains are now
diversifying to low-risk and cost-effective locations
such as South East Asia and Africa. While seeking
diverse supply chains, businesses must also
remember to double-check country risk for even the
smallest component used in production.
2. Notwithstanding number one above, most U.S.
manufacturers and distributors are not pulling out
of China. In some instances, they are investing
more in China to serve the local market. In other
situations, where there is a need for a massive scale
and in some applications quality, China remains the
preferred destination.
3. The weakest link in the post-COVID supply chain is
not getting people back to the production floor but
rather the overall logistics associated with getting
product through China and on to maritime vessels.
Transportation was hit hard during the pandemic,
with many ships sitting idle. We expect the shipping
capacity to be tight and freight rates to rise as
port bottlenecks develop. Companies should issue
purchase orders and book shipments as early as
possible. This additional cost of transportation could
add pressure on consumer prices.
4. The fragility of “Just in Time” and lean manufacturing
were highlighted during the pandemic. Manufacturing
operations can reduce this risk by carrying additional
raw material inventory. However, maintaining high
levels of finished goods poses its own risk as
consumer demands are likely to be volatile in today’s
environment.
5. Have your compliance house in order. Local Chinese
governments’ tax bases were severely eroded during
the crisis, leaving many foreign-invested enterprises
the subjects of audits by their local tax bureaus.
China’s laws are often intentionally vague. The tax
code is likely to be reinterpreted as local governments
become desperate for funds. Secondly, verify the
integrity of your supply chain. U.S. agencies have
recently issued new rules requiring the U.S. not
to receive any goods made with forced labor from
Xinjiang or Tibet.
6. For U.S. manufacturers and distributors with
operations in China, your business will be the last to
be considered for a loan or any trade credit from the
Chinese government in difficult times. Cash is the
ultimate insurance policy in any crisis. U.S. businesses
in China should reassess their transfer pricing and
dividend repatriation policies. They might also need to
pay deposits to keep afloat small suppliers that supply
critical components to production.
For Further Discussion
Reach out to Tom Bonney
(tbonney@cbizcmf.com) or
Jay Boyle (jay.boyle@ecfo.
asia) to share your thoughts
and ongoing perspectives on
this topic.
OCTOBER 2020