Trump has ordered US companies to abandon China, but many have already

President Trump agitated Wall Street when he asked US companies to relocate their production out of China. But many have already taken steps to do so, and over the past month, dozens of CEOs have announced plans to further diversify their supply chains in the face of escalating trade warfare.

On August 23, Trump spoke to Twitter, ordering US companies to "immediately start looking for an alternative to China" and urging them to start manufacturing their products in the United States. He cites the International Emergency Economic Powers Act (IEEPA) – passed in 1977 to deal with "an unusual and extraordinary threat to national security, foreign policy, or the US economy." The president's threat disrupted investors, sending equities low on a day when the Dow Jones Industrial Average lost more than 600 points.

Trump doubled Friday, attacking General Motors for its significant presence in China and asking if the automaker should transfer its operations to the United States.

"Sometimes we have to take tough measures," said Larry Kudlow, White House economic adviser, alongside Treasury Secretary Steven Mnuchin on the sidelines of the G-7 summit in France. Kudlow added that US companies should listen to the president's call to leave China.

No US president has invoked the law as a means of pressure in a trade dispute, much less to break its commercial ties with one of its major trading partners. Indeed, over the last century, US administrations have mainly deployed IEEEPA to prosecute drug trafficking or financial terrorism through sanctions or other economic sanctions.

It is unclear how, and under what authority, Trump could implement this directive. If he had to push further, companies would probably contest the order, which would result in litigation. And even in this case, we do not know how a court would rule. Some analysts argue that the law allows the president to carry out certain actions limiting the activities of companies in China, blocking future investments, even if this does not allow the Trump administration to order them to relocate.

US companies had already begun to take steps to diversify production in the face of heightened tension over the past year, but the latter command has forced a myriad of industries to cope with the growing uncertainty of trade.

President Trump announced last week that he would increase existing duties on Chinese products by $ 250 billion, from 25% to 30% on October 1st. In addition, tariffs on $ 112 billion of Chinese products, which came into effect on Sunday, are now 15% to 10%. Penetrated by a protracted trade dispute over the past year, China has given up its first place as the largest trading partner of the United States and is now in third place.

Few companies plan to leave China completely. This would particularly hurt the US industrial and technology heavyweights, which make the Chinese manufacturing base an essential part of their supply chain. China still produces about 25% of all manufactured products in the world, partly because of the difficulty of finding sufficient manpower in the workshops of other countries.

Given the proximity of China, the countries of Southeast Asia, including Vietnam, Indonesia and Malaysia, have attracted attention in recent months as alternative supply destinations. A handful of companies have successfully moved some of their production to these locations, but many have been stifled by the lack of specialized supply chains and labor shortages (in Cambodia). , more than 40% of the goods inspected last quarter did not comply with the inspection standards).

Take Boeing for example – the Seattle-based aircraft builder does not seem to be about to abandon the Chinese market soon after opening a plant for 737 Max late last year. The shift in production could also cause Boeing to lose the risk of giving ground to its rival Airbus, which has strong competition in the Chinese market. Boeing's business is expected to add more than $ 1 billion annually to the Chinese economy. The company delivered 200 new 737 Max aircraft to Chinese company Xiamen last fall.

Apple is another great example. Most of the technology giant's products are manufactured in China and its main supplier, Foxconn, produces most of the company's iPhones in 29 factories in central Zhengzhou Province. In total, about 50% of Apple's supplier sites are based in China, up only 5% over the past four years. It would take years for Apple to leave China and allow competitors like Samsung to reduce its market share. Apple has also notoriously failed to build high-end computers in the United States – blocked by the lack of vendors capable of making the right screw.

Apple would have asked its major suppliers to estimate the costs of moving 15 to 30 percent of their production capacity from China to countries in Southeast Asia. This is partly explained by the fact that its smartwatches and AirPod wireless headphones are now subject to a 15% tariff, while a tax on the iPhone could come into effect on December 15th. .

The other largest US technology companies follow the example of Apple. Computer Manufacturers HP Inc. and Dell Technologies plan to transfer 30% of their notebook production to China. Antonio Neri, CEO of Hewlett Packard Enterprise, told CNBC this week that the company has been successful in mitigating pricing effects this past quarter, largely due to diversification of the supply chain. And just yesterday, many outlets announced that Google, owned by Alphabet, is transferring the production of its smartphone Pixel, the fifth largest smartphone brand in the United States, to Vietnam, this fall. Google also plans to eventually transfer production of most of its equipment destined for the United States to Vietnam.

For hundreds of US companies, including names of distributors like Starbucks, the departure and departure of China are not ways that they can afford. Gregory Johnson, CEO of O & # 39; Reilly Automotive, for example, said that even though the auto parts supplier was exploring other sourcing sites, it would not be a short-term change due to lack of capacity elsewhere.

But the trade war, exacerbated by Trump's latest rhetoric, has convinced a growing number of US multinationals – beyond the big tech companies – to shift their production to countries less likely to be hit by tariffs.

"At the margin, I do not know of a single supplier who does not relocate any form of manufacturing outside of China," said Home Depot executive vice president Ted Decker on August 20. "So we have suppliers who transfer their production to Taiwan, Vietnam, Thailand, Indonesia and even the United States."

Admittedly, even before the trade war began, last year, manufacturing production began to leave China, hit by the slowdown in its economy, rising labor costs and the strengthening of environmental regulations.

But, over the past month, the pressure has intensified. As President Trump resumes his rhetoric, many US business leaders have held results conference calls to describe what they see as an emergency. To adapt to an increasingly unstable gaming environment, leaders are being forced to rethink their supply chains.

And, in an annual survey conducted in June by the US Trade Council, nearly 30 percent of the 220 respondents said they had already delayed or canceled investments in China or the United States because of the increasing uncertainty of trade. Although only 13% said they intend to transfer their operations out of China, the number has steadily increased from 10% in 2018 to 8% in 2017. The gap could be even more pronounced now, as the investigation was conducted at a time when representatives in Beijing and Washington were resuming trade negotiations.

"While China remains a priority market for most of the companies surveyed, market optimism is moderating," the survey noted. Of the companies that decided to reduce their investments, 60% cited an increase in costs or uncertainties related to the US-China trade relationship.

United States of America-China Trade Council, 2019 Membership Survey

In addition, US companies have a bleak outlook on their long-term prospects in China: 14% of respondents say they are "pessimistic" or "somewhat pessimistic" about the business environment in China over the next five years years, compared to 9% a year ago. This is the weakest reading since at least 2010.

Different sectors face distinct challenges and varying degrees of uncertainty.

Toy manufacturers, shoe manufacturers and apparel manufacturers have been doing well for decades in China. These companies have been affected by a convergence of factors, including an increase of eight times the average blue-collar salary since 2004. The average hourly compensation of the manufacturing sector in China is 4.12 US dollars, according to a Barclays study, against 1.59 US dollars for example. India.

"Today, many retailers are under pressure from increasing supply costs resulting from their over-reliance on China and other higher-cost supply markets", said Jane Elfers, CEO of The Children's Place, during a phone call with investors.

Some analysts believe that the toy maker Hasbro, which has been relocating its activities outside China since 2012, is a vanguard for the entire retail sector.

"We are seeing great opportunities in Vietnam, India and other countries like Mexico," Hasbro CEO Brian Goldner told CNBC last week. "We're doing even more in the US We brought Play-Doh back to the US last year,"

He added that two-thirds of global business came from China, down substantially from nearly 90 percent in 2012.

"We see an opportunity that will take us, by the end of 2020, to about 50% or less for the US market from China," said Goldner. "We think that by 2023, we should be less than a third."

When calling on Hasbro's results last month, Goldner pointed to the company's increased spending to expand its production footprint globally, particularly in India and Vietnam.

Hasbro is not the only retailer to consider moving the bulk of its business out of China in the near future.

"The United States is our first country of production given the importance of personal care and beauty in our industry," said L Brands CFO Stuart Burgdoerfer on August 22. investors. % of our total sourcing activity and decreased by almost 10 percentage points over the last three or four years due to the deliberate efforts of our industry's procurement and production teams to ensure we maintain a base of well diversified supply. . "

Carter's, the Atlanta-based children's clothing company owned by OshKosh B & gosh, is another retailer that has accelerated the transfer of its products from China to the United States, from 26% to last year to 20% this year.

Some well-known manufacturers, like the Minnesota-based Polaris snowmobile and ATV manufacturer, have also joined US CEO Scott Wine, describing the company's plan to transfer $ 30 million worth of machinery parts from China to suppliers. Americans as an "excellent example" of its mitigation measures. efforts. Wine noted that the Trump administration's trade policies generated $ 110 million annually in tariff-related costs.

But more and more companies are mixing their activities, a small minority is coming back to the United States. According to the latest US survey of economic conditions in China, only 3% plan to relocate their activities in China.

For companies like Matson, based in Honolulu, the return to the US has proved too difficult, despite China's poor economic prospects.

"Very little of what we hear about what China could potentially leave is coming back to the United States," said Matthew Cox, CEO of Mattson, Aug. 7. "I think this ship has borrowed a lot of the goods we sell."

Despite struggling to develop its high-tech supply chain, Vietnam has emerged as one of the biggest beneficiaries of the US-China trade dispute. And this is reflected in the recent data. The Vietnamese economy grew 6.7% in the second quarter of 2019, exceeding China's 6.2% growth. Last year, Vietnam experienced the strongest recovery in manufacturing activity compared to all other major economies in Asia, according to IHS Markit. Foreign investment permit applications also increased, up 26% in the first half of 2019 compared to a year ago.

Chico's apparel retailer, perfumer Sensient Technologies, auto parts supplier Genuine Parts Company and industrial machinery maker Ingersoll-Rand have all indicated this month that they are pursuing growing production in Vietnam .

Leggett & Platt, of Carthage, Missouri, is more reliant on Vietnam, but admits that the country is still lagging behind China's manufacturing capacity. Chinese imports fell by 55% in May, according to the latest published data, while Vietnam supplied 109,000 mattresses. Last year, Chinese units produced an average of 475,000 mattresses per month.

Other Southeast Asian countries could soon benefit from a boost.

iRobot, the company behind the Roomba vacuum cleaner robot, plans to move its first line of robots to Malaysia, with the aim of producing products by the end of the year, partly for fight against the effects of the ongoing trade war. The CEO, Colin Angle, said last month that tariffs would weigh on the company's numbers in 2019. Long Island City-based fashion designer, Steven Madden, began transferring handbag production to the company. China in Cambodia in 2015. The leaders recently announced to investors that they accounted for 30% of Cambodia. its total production by the end of the year.

For its part, Fastenal, Minnesota, acted aggressively last fall to transfer its production from China to Taiwan. The largest distributor of fasteners, which has a market value of $ 17 billion, said in its press release last month that the company had also raised its prices, but that was not enough to offset the tariff costs and related inflation.

"So we moved to the action quite aggressively at the end of last fall," said General Manager Daniel Florness. "So we transferred some of our product out of China, and most of it was exported to other Asian countries, including Taiwan."

Mexico has also attracted more business attention in recent months, particularly from auto parts manufacturers and technology companies. Juniper Networks and Microchip Technology have shifted their production there, helping to offset the costs of rates.

Cooper Tire & Rubber manufactures more tires in Mexico and the United States.

"We are very confident that by the end of 2020 the majority of [truck and bus tires] will come from outside China, "said Bradley Hughes, president and chief executive officer on July 29.

While the aforementioned projects are in full swing, some manufacturing companies, such as national supplier Masco, are just starting to change their production lines, pointing out that recent tensions have dampened investment in China.

"As far as tariffs are concerned, our short-term mitigation measures have essentially consisted of prices," said Keith Allman, CEO of Masco, on July 25. "However, we continue to work with our suppliers and internal teams to reduce costs and have started production outside of China as a longer-term solution."

Nick Wells contributed to this report.