a Kallenius, CEO of Mercedes-Benz, recently told the German tabloid Bild am Sonntag that ‘cutting ties with China is unrealistic’, according to Reuters. “The major players in the global economy, Europe, the US and China, are so closely intertwined that decoupling from China makes no sense,” he was quoted as saying. In the case of Mercedes-Benz, China accounted for 18 per cent of revenues and 37 per cent of car sales in 2022, and Kallenius believes there is more to come. China’s major role According to Rhyan Stephens, partner at McGrathNicol, China continues to play a major role in the global supply chain and influence the world’s flow of goods, both in terms of retail goods production and domestic retail consumption. “For 2022, China exported goods worth circa 24 trillion yuan (A$5.1 trillion) with the United States being the largest importer of Chinese merchandise. 2022 also saw imported goods flow into China with a value of circa 18 trillion yuan (A$3.8 trillion),” he told Inside Retail. However, there are still systemic risks in China’s supply chain that have not been resolved since the days of the pandemic. These include factory closures, material shortages and imbalances in trade lanes and infrastructure congestion.  At the same time, he believes that attention should not be lost on other embedded risks such as IP protection, quality control and production reliability, safety, and a sluggish adoption of environmental and sustainability goals. Risk management Stephens feels that trade disputes and political risks between China and other countries, especially the United States, have made retailers appreciate that robust risk management strategies are needed to address these potential pitfalls. “Supply chain professionals must be tasked with effective commercial outcomes, guarantee reliability of supply, and effective working capital management. The need to balance risk and profitability should also include optionality and contingency planning,” he added. According to him, in recent years, there has been a growing trend of companies diversifying their supply chains away from China and towards other countries in Southeast Asia, such as Vietnam, Thailand, and Indonesia.  “According to QIMA’s Q1 2023 Barometer, the relative share of China within the sourcing portfolios of Western companies is now at a five-year low,” he noted. He said that Vietnam has recently emerged as the top alternative to China for sourcing in Asia, with a 32 per cent increase in inspections conducted in the country in 2021 compared to the previous year. “Manufacturing activity has benefited elsewhere in Southeast Asia as evidenced by the double-digit expansion in demand for inspections and audits in Malaysia, Thailand, Cambodia, and the Philippines,” he stated. Strategies for the future Historically, Stephens believes retailers may have prioritised improved earnings through procurement leverage over supply chain flexibility.  He feels it remains critical that management does not over-correct and shift the bias towards resilience instead of an efficient supply chain. “One hurdle for improved transparency is a company’s reluctance to expose their competitive advantage and supply sources. While some tools exist, technology has struggled to provide simple and readily available solutions to capture these key metrics,” he opined. Stephens feels that by prioritising supplier relationships and collaboration, retailers can identify and mitigate risks in the supply chain while also maintaining cost efficiency.  This approach also helps to build trust and transparency with suppliers, which can lead to more sustainable and ethical sourcing practices over the long-term. Ultimately, commentary around exiting China, or at least diminishing its concentration, should not be oversimplified, in his opinion.  “Some procurement professionals fail to realise that the challenges faced in securing finished goods from China (or elsewhere) may be similar to those challenges faced in securing raw materials and production inputs when shifting to more localised production,” he added. At the end of the day, retailers can leverage a sophisticated sales and operations planning process, and appropriate scenario modelling, to help determine whether nearshoring, offshoring, onshoring, insourcing, or dual sourcing are more appropriate for their organisation.  “Overall, many retailers will need to maintain some capability in China to service the domestic, and commercially important, consumer regardless,” he concluded.