New emerging risks of the Chinese supply chains

Filed in archive Point of view on March 8, 2009

I read a very interesting article in International Herald Tribune on the new risks associated with chinese supply chains (full article here).

The main discussion line of the article is that, the period of recession and falling demand in the Western countries, has created a serious challenge to Chinese companies and many of them specifically the small and mid-size ones are in the risk of bankruptcy. Therefore companies operating in the U.S. or Europe should be careful about continuity of their supply flow and the money they have with their suppliers:

"Adding to the problem is that many owners of small businesses in China are running away and leaving their companies in legal limbo, often just posting a notice on the factory door. Customers are left in the lurch with no chance of getting back any money owed or receiving goods they have ordered".

The article also highlights the fact that similar risk exists for big Chinese companies about their Western partners. Some of them like Li&Fung couldn't cash their accounts receivables as their European counterparts went out of the business:

Fung was also caught last year when an Italian wholesaler suddenly went out of business. The Hong Kong company is still awaiting payment for goods, but does expect to be paid eventually, which is not the case with its bankrupt Chinese suppliers.

While rising bankruptcies are raising the risk of doing business in China, the country is unlikely to lose its status as a low-priced global trade center, not least because many companies are focused on the country's huge domestic market in the long run.

What do you think companies should do to reduce these risks?