Diversification vs. Dependence: Finding the Balance
Western companies have long benefited from China’s electronics supply chain, but recent uncertainties drive a reevaluation. The goal is often to diversify sourcing (“China+1”) without losing China’s advantages. Striking the right balance is key.
High-profile cases illustrate this tension. Dell Technologies decided to drastically cut reliance on China-made chips by 2024, insisting that even chips from non-Chinese brands be fabricated outside China. They and peer HP also pushed suppliers to move assembly and components (like PCBs and modules) to places like Vietnam. These moves, spurred by U.S.-China tensions, are meant to reduce risk. However, such aggressive shifts come with trade-offs – Chinese experts noted Dell’s production costs could rise and potentially “hurt its competitiveness” if not carefully managed. In fact, Dell’s strategy was viewed as very ambitious and surprised industry insiders with its breadth.
The lesson for other companies is that while diversification is prudent, completely decoupling can be costly and challenging. China’s supply chain is deeply entrenched and efficient; moving everything out can “hurt the bones” of a company’s operations as one expert put it. A more measured approach is often favored:
China+1 (or +2, +3): Maintain primary suppliers in China for cost and capacity, but develop secondary sources in other countries as backup. For instance, continue buying passives from a Chinese manufacturer, but also qualify a plant in Malaysia. This way, if trade issues hit one, you have the other.
Regionalization: Some companies produce closer to end markets (e.g., build in Mexico for Americas, in Eastern Europe for EU) but still source many components from China to those regional factories. This reduces some tariff and shipping factors while still leveraging Chinese parts.
Joint Ventures and Partnerships: Engage in joint ventures with Chinese suppliers to open production in other regions. We see Chinese PCB and battery companies setting up factories abroad — often in partnership with local entities. As a customer, encouraging your trusted Chinese supplier to establish capacity in, say, India or Vietnam could give you the best of both worlds (Chinese know-how, non-China location).
In summary, diversification doesn’t mean abandonment. It means ensuring you’re not single-sourced or over-exposed to any one country’s risk. Given China’s significant share in many components (50%+ in PCBs, ~70% in some consumer components), a pragmatic approach is to keep using China as a main source while actively cultivating alternates.
The “China+1” Reality Check
Implementing a China+1 strategy comes with its own challenges. Many alternative manufacturing hubs (Vietnam, India, Mexico, etc.) cannot fully replicate China’s ecosystem yet. Often, when companies move assembly out of China, they find themselves still importing most components from China to the new site. For example, a factory in Vietnam might still rely on Chinese PCBs, ICs, and connectors – essentially making it “China+0.5” in effect.
Interestingly, Chinese suppliers themselves are making China+1 easier by following their customers. As noted, dozens of Chinese electronics firms have opened factories in Southeast Asia. So your alternate “non-China” source might actually be a Chinese-owned factory in Thailand. This can be good – you get the same quality and relationship, just out of China’s geopolitical crossfire. Keep an eye on which of your Chinese partners have global footprints and leverage that.
Additionally, consider Taiwanese companies as a bridge. Taiwan has many electronics manufacturers with facilities in China and outside (e.g., in ASEAN countries). Partnering with them can grant flexibility; they can often shift production between sites based on your needs. However, be mindful that cross-strait relations is another potential flashpoint – diversifying between mainland China and Taiwan alone is not geographic diversification; include a third locale if possible.
Ensuring Quality and Reliability from Chinese Suppliers
One concern that arises in diversifying away from known Western suppliers is quality consistency. Over the years, Chinese suppliers have significantly improved quality and process control. Here’s how to ensure you receive top-notch components:
Audit and Qualification: Treat a new Chinese supplier with the same rigor as any supplier. Conduct on-site audits (or virtual audits, using third-party auditors within China if travel is an issue) focusing on quality management, process controls, and traceability. Many Chinese factories are ISO9001 or ISO/TS16949 certified – request those certifications and audit reports. Qualify their parts through your engineering tests, line trials, and reliability testing. Once they pass, you can be as confident in them as any supplier.
Start with Less Critical Items: If you’re wary, begin sourcing less critical or non-core components from China, gain experience, then ramp up. For example, use Chinese resistors or plastic enclosures first (lower risk items) before sourcing high-end processors. Success with simpler components builds trust and understanding to move to more critical ones.
Lot Traceability and Supply Chain Visibility: Work with Chinese suppliers who offer good lot traceability and openness. The best suppliers will let you track lot codes, provide failure analysis if something goes wrong, and maintain open communication. This is important for quickly solving any quality issues. It’s a good sign if a supplier has international customers – it often means they’re accustomed to meeting strict requirements.
Cultural and Communication Understanding: Build a strong relationship and clear communication channel. Language isn’t as big a barrier as it once was; many sales and technical staff at Chinese firms speak English. Even so, establishing regular calls, WeChat communication groups, or using bilingual project managers can prevent misunderstandings. Chinese business culture values relationships (关系 guanxi); taking time to visit their facility (when possible) or inviting them to yours can foster goodwill, which often translates to them going the extra mile for you on urgent requests or solving problems.
Risk Mitigation: IP, Geopolitics, and Logistics
Working with any global supplier comes with risks that must be managed. Here are specific tips relevant to China:
Intellectual Property Protection: When outsourcing manufacturing or buying custom components from China, protect your IP. Use NNN agreements (Non-disclosure, Non-use, Non-circumvention – often used in China instead of standard NDAs) before sharing designs. If it’s a very sensitive product, consider splitting manufacturing steps (for instance, do final firmware programming in-house). That said, the vast majority of Chinese suppliers in B2B electronics are professional and have no interest in stealing IP – their business model is high-volume manufacturing, not selling your design. Still, precaution is wise.
Geopolitical Risk Monitoring: As discussed, monitor trade policy. Also watch currency fluctuations – RMB changes can affect component costs. Have contingency plans if a certain component suddenly can’t be sourced from China (e.g., plan how quickly you could shift to an alternate vendor in Malaysia or the US, even if at higher cost, to keep production running). This might involve keeping a safety stock of parts that are at risk of becoming constrained. For example, when the US was expected to tighten chip rules, some companies stockpiled Chinese-made chips in advance to buffer any disruption.
Logistics and Inventory: Ensure robust logistics since components will cross borders. Diversify your freight forwarders and consider using Hong Kong as a buffer – many companies route components through Hong Kong distribution hubs, which can serve as a neutral staging ground even if direct shipments face delays. Hong Kong maintains a separate customs regime and is a major electronics re-export center. Also, factor in longer lead times if you add a second source outside China; you might need to adjust reorder points accordingly.
Compliance and Documentation: Work closely with suppliers on compliance paperwork. For instance, if you need conflict mineral declarations, environmental compliance (RoHS, REACH), or export classification numbers, ensure the Chinese supplier can provide those. Many can, but it may require explaining your needs. Also make sure they understand labeling and traceability requirements for shipping into your country (proper HS codes, etc.). A little extra guidance up front can prevent customs hiccups.
Collaborating with Chinese Suppliers as Strategic Partners
Instead of seeing Chinese suppliers just as transactional low-cost vendors, many Western companies are now treating them as strategic partners. This means involving them early in product development, co-engineering when appropriate, and developing mutual trust. Here’s why and how:
Co-engineering Benefits: Chinese component makers often have deep expertise in their domain and can contribute to design optimizations. For instance, engaging a Chinese connector manufacturer while your product is in design can lead to a custom connector that is cheaper and better optimized than an off-the-shelf one. They might suggest tweaks that simplify manufacturing or improve performance. Since they have a vast base of past projects, they can draw on that experience. Some Western firms even set up R&D centers in China to tap local engineering talent and proximity to suppliers.
Forecast Sharing and Commitments: Treat your key Chinese suppliers as you would major ones anywhere – share forecasts, enter supply agreements, and even consider VMI (Vendor Managed Inventory) if it fits. If a supplier knows they are part of your long-term plan, they can allocate resources to you preferentially. For example, many big EMS companies secure committed quantities from Chinese passive component vendors over 6–12 month periods to avoid allocation issues. Chinese companies appreciate reliable customers as much as you appreciate reliable suppliers.
Payments and Financing: Be mindful of financial terms – Chinese suppliers might request deposits for custom or large orders, which is normal in Asia. Building trust can move you to open account terms over time. Also, leveraging trade financing or payment platforms can streamline cross-border payments (RMB is increasingly used in trade, but USD is still common; confirm what currency they prefer to avoid exchange risk surprises).
Cultural Sensitivity: Small gestures go a long way – learning a bit about Chinese holidays (like knowing the Lunar New Year shutdown period, or sending greetings during Mid-Autumn Festival) can strengthen the relationship. A strong relationship can sometimes mean your orders get priority in a crunch.
Remember that Chinese suppliers are navigating the same turbulent environment – they too face raw material swings, policy hurdles (like being on US entity lists), and pandemic after-effects. A collaborative approach, where you see each other as in the same boat, can yield flexibility. For instance, if shipping is delayed due to a sudden lockdown (as seen in past years), a good partner will work overtime after reopening to meet your needs, or even find creative solutions like chartering a flight for critical parts.
Western Procurement Teams: Adapting Mindsets
Lastly, it’s important that procurement teams update any outdated perceptions about Chinese suppliers. It’s no longer just about “cheap prices for low-end goods.” China produces some of the most advanced electronics components in the world now – and often is the only source for certain items at volume. Many Chinese companies are publicly listed, adhere to global ESG standards, and are as professionally run as any international firm. A procurement strategy that treats them with the same rigor and openness as any supplier will yield the best results.
Encourage your engineering teams to keep an open mind too. Sometimes engineers specify a brand out of habit (“we only use Japanese capacitors or American ICs”). Challenge that when appropriate by suggesting a comparison with a Chinese part. Data and experience should guide decisions, not old biases. Indeed, numerous Western companies have found Chinese suppliers to be highly responsive and eager to please to win business – which can mean excellent customer service and flexibility.
Call to Action: If you haven’t recently reviewed your sourcing strategy regarding China, assemble your team and do so. Map out critical components and identify where China stands in each. Develop a clear plan: where to maintain strong China sourcing, where to diversify, and how to engage suppliers. By implementing a nuanced strategy – neither over-dependent nor needlessly avoiding China – you can secure a resilient, cost-effective supply chain. In today’s environment, the companies that manage this balance best will turn supply chain management into a competitive advantage rather than a headache.