U.S. Manufacturers Seek Alternates to China like India as Tensions Rise

Makers of watercraft and ventilators reconsider Chinese supply chains, balancing risks against lower costs

· After the 2022 invasion of Ukraine prompted companies to sever ties with Russia, sometimes taking huge write-downs.

· Chinese authorities recently questioned workers at Boston-based consulting firm Bain & Co. and raided the Beijing offices of Mintz Group, a due-diligence firm based in New York.

· Major Chinese firms barred from buying products made by U.S. semiconductor company Micron Technology, citing national-security risks.

· Growing tensions have unnerved businesses like Grey Duck Outdoor. The Minnesota-based watercraft maker contracts with Chinese factories to produce paddleboards, taking advantage of the country’s low costs and efficiency.

· PPG, a Pittsburgh-based paint and coatings company, has 15 factories and about 4,000 employees in China. Almost all of the products made there are used there, putting China in the top three countries for PPG sales

· Substitute parts sometimes get into the supply chain, he said, which is a problem when a product needs the authorization of the U.S. Food and Drug Administration.

Fears of military conflict and increasing security worries have some U.S. manufacturers re-evaluating their reliance on China.

Executives are plotting alternate supply chains or devising products that can be made elsewhere should China’s hundreds of thousands of factories become inaccessible. That prospect became more conceivable, they said, after the 2022 invasion of Ukraine prompted companies to sever ties with Russia, sometimes taking huge write-downs.

U.S. companies were further rattled after Chinese authorities recently questioned workers at Boston-based consulting firm Bain & Co. and raided the Beijing offices of Mintz Group, a due-diligence firm based in New York. The government has also barred major Chinese firms from buying products made by U.S. semiconductor company Micron Technology, citing national-security risks.

Foreign companies have had issues in China for years, but the growing tensions have unnerved businesses like Grey Duck Outdoor. The Minnesota-based watercraft maker contracts with Chinese factories to produce paddleboards, taking advantage of the country’s low costs and efficiency.

Owner Rob Bossen said all of his paddleboard suppliers, including companies that make foam, resins and injection-molded plastics, operate within a few miles of each other in the Shenzhen area. Bossen has good relations with his business partners, he said, but Russia’s invasion caused him to imagine what might happen if a similar disruption took place in China.

“There’s risk to having all your eggs in the China basket,” he said.

Companies like Grey Duck are in a bind, industry officials said. China’s access to raw materials and ability to produce components for finished goods remains unmatched, and its dense supplier networks have yet to be replicated elsewhere.

China accounts for 31% of global manufacturing, according to the United Nations Industrial Development Organization, nearly twice the 17% share of the U.S. It is also an important market for many U.S. companies.

Some executives say that the business interests of the U.S. and China remain aligned. According to China’s foreign ministry, Elon Musk said during a trip to China this week that the countries’ economies shouldn’t be decoupled. Apple Chief Executive Tim Cook said during a March visit that Apple and China have helped each other grow over recent decades.

PPG, a Pittsburgh-based paint and coatings company, has 15 factories and about 4,000 employees in China. Almost all of the products made there are used there, putting China in the top three countries for PPG sales, CEO Tim Knavish said.

The company has strategized about how to take appropriate action in China if needed, Knavish said. PPG last year took a $290 million write-down on most of its Russia business after the Ukraine invasion.

Knavish said PPG is being extra cautious with its intellectual property and data within China. A revised espionage law allows authorities there to inspect a company’s facilities and electronic equipment.

“We’re not putting our head in the sand here,” he said. “We see what’s going on, and naturally it’s very concerning to us. We’re being extremely prudent about any additional investments that we make in China.”

Dan Harris, an attorney who advises companies doing business in China, said other executives remain blasé about the possibility of being targeted by authorities.

“It’s very difficult to care about a raid on the Mintz Group when you can have your widgets made in China for 15% less and it’ll cost you a fortune to move,” he said.

Mintz has said the firm is licensed to operate in China and follows the law there. Bain has said it was cooperating with Chinese authorities. A representative of the Chinese Embassy in Washington, D.C., said authorities had carried out “normal law enforcement actions” meant to safeguard national security and development interests.

“Foreign companies and their products are welcome to the Chinese market as long as they abide by Chinese laws and regulations,” the spokesman said.

Harris sees other bad omens, such as a court system that he said has become increasingly unfriendly to U.S. companies. Some businesses are plotting a departure, he said, but are finding no easy equivalent to their setups in China. Vietnam, for example, has become so popular that manufacturing space is now hard to find, he said.

David Alexander of Florida-based Baysource Global, which connects American companies with Asian contract manufacturers, said it remains “business as usual at the factory level” within China, though companies looking to set up new ventures are now considering other destinations instead of defaulting to the country.

“It’s politics on both ends that are really impacting all the rhetoric,” he said. “These factories still need to stay in business.”

Ventilator company CorVent Medical relies on Chinese plants for the stamped sheet metal, micro-blowers and other components that go into its products. But CEO Richard Walsh said that process hasn’t always gone smoothly.

Substitute parts sometimes get into the supply chain, he said, which is a problem when a product needs the authorization of the U.S. Food and Drug Administration. CorVent once received 1,300 bag valve masks that weren’t FDA-approved, and thus couldn’t use them. The company ended up donating them to a Ukrainian relief group, Walsh said.

That headache came on top of spiraling costs and shipping that stalled during Covid-related logjams. CorVent is opening its own factory in Fargo, N.D., to assemble the ventilators, but with 60% to 70% of the parts coming from China, Walsh said it would likely take years to switch to domestic sources.

CorVent is trying to assemble that supply chain with help from the Reshoring Initiative, a nonprofit that advocates for the return of U.S. manufacturing jobs. The company is braced for higher prices and slower service than it receives in China, but Walsh said medical devices such as ventilators are too important to be cut off by the threat of war or a trade embargo.

“The quicker we can get away from the Chinese components the safer we’ll all be,” Walsh said.

Grey Duck is seeking to blunt its China exposure with new products made in the U.S. It has begun making canoes in a facility near the Twin Cities, and Bossen said he might add other domestically produced watercraft to the lineup.

The ease of manufacturing in China is prompting Bossen to stick with the country for his paddleboard production. Though he has grown leery of China’s surveillance practices, such as hotels that take photos of guests during check-in, he said he would probably visit again.

“When you’re boots on the ground there, you get a feel for the factory’s health and the general business health of the people you’re working with,” he said.