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Trump ordered US firms to ditch China, but many already have

Employees Work on Solar Panel Production at Risen Energy Co., Ltd on February 21, 2019 in Ningbo, Zhejiang Province of China.

Zhejiang Daily | Visual China Group | Getty Images

President Trump rattled Wall Street when he demanded U.S. firms move production out of china. But many have already taken steps to reach, and, in earnings calls just over the past month, the executives have signaled plans to further diversify their supply chains amid the intensifying trade war.

On Aug. 23, Trump took to Twitter, ordering American companies to "immediately start looking for an alternative to China" and urging them instead to start making their products in the U.S. In doing so, he cited the International Emergency Economic Powers Act (IEEPA) ̵

1; passed in 1977 to deal with an "unusual and extraordinary threat to national security, foreign policy, or the economy of the United States." The president's threat unsettled investors, sending stocks to session lows in the day when the Dow Jones Industrial Average shed more than 600 points.

Trump doubled down on Friday, attacking General Motors for its significant presence in China and questioning whether the automaker should move the operations to the US

"Sometimes you've got to take such measures," White House Economic Advisor Larry Kudlow said alongside Treasury Secretary Steven Mnuchin at the G-7 meeting in France. Kudlow added that American companies should head the president's call to leave China.

No U.S. The president has invoked the law as a leverage in a commercial dispute, flying alone to north commercial ties with one of its largest trading partners. Indeed, over the past century, U.S. administrations have mainly deployed IEEPA to prosecute drug trafficking or financial terrorism through sanctions or other economic penalties.

It is not clear how, or under what authority, Trump could implement this directive. If he were to push further, companies would likely challenge the order, leading to litigation. And, even then, it's uncertain how a court would rule. Some analysts argue that the law allows the president to carry out certain actions limiting companies' business in China, by blocking future investments, even if it did not allow the Trump administration to outright order them to relocate.

Business plans upended [19659010] US companies have already started taking steps to diversify production amid flaring tensions over the past year, but this latest command forces a myriad of industries to grapple with escalating trade uncertainty.

President Trump said last week he would raise existing duties on $ 250 billion in Chinese products from 25% to 30% on Oct. 1. Additionally, tariffs on another $ 112 billion of Chinese goods, which were set to take effect on Sunday, would now be 15% instead of 10%. Weighed down by a protracted trade dispute over the past year, China has relinquished its top spot as America's largest trading partner and now sits in third place.

Few companies are planning to move completely out of China. Doing so would prove particularly disruptive to America's industrial and technology heavyweights that rely on China's manufacturing base as a critical part of their supply chain. China still makes roughly 25% of all manufactured goods around the world – in part because of the difficulty in finding a sufficient workforce on other countries' factory floors.

Given the proximity to China, Southeast Asian countries including Vietnam, Indonesia and Malaysia have attracted attention in recent months as potential alternative sourcing destinations. A handful of firms have successfully shifted some of their production to these places, but many have been stifled by a dearth of specialized supply chains and labor shortages (in Cambodia, over 40% of all goods inspected last quarter did not meet inspection standards).

Take Boeing for instance – The Seattle-based aircraft maker doesn't look poised to leave the Chinese market any time soon after opening a plant for the 737 Max jets late last year. Moving production could also put Boeing at risk of ceding ground to rival Airbus, which is competing heavily in the Chinese market. Boeing's business is estimated to add more than $ 1 billion to China's economic each year. The company delivered 200 new 737 Max planes to the Chinese airline Xiamen last fall.

Apple is another prime example. Most of the technology giant's products are built in China, and its largest supplier Foxconn produces the lion's share of the company's iPhones in 29 facts in the central province of Zhengzhou. Taken in total, roughly 50% of Apple's supplier locations are based in China, up 5% just in the past four years. It would take years for Apple to leave China altogether and could clear the way for competitors like Samsung to eat into its market share. Apple also notoriously failed to build high-end computers stateside – stymied by a lack of suppliers that could make the right screw .

Still, Apple has reportedly asked its major suppliers to evaluate the cost implications of moving between 15% and 30% of their production capacity from China to countries in Southeast Asia. That's in part because its smartwatches and AirPod wireless headphones could face a 15% tariff starting Sept. 1, while a tax on the iPhone could take effect on Dec. 15. America's other largest technology firms are following Apple's lead. Computer makers HP Inc. and Dell Technologies are reportedly contemplating moving up to 30% of their notebook production out of China. Antonio Neri, CEO of Hewlett Packard Enterprise, told CNBC this week that the company managed to mitigate the tariff impacts this past quarter in large part due to a diversified supply chain. And, just yesterday, multiple outlets reported that Alphabet-owned Google is moving production of its Pixel smartphone, the fifth largest smartphone brand in the US, to Vietnam, starting as early as this fall. Google also plans to eventually move production of most of its hardware that is bound for the US to Vietnam.

"On the margin, I am not aware of a single supplier who is not moving some form of manufacturing outside China."

Ted Decker

Home Depot Executive Vice President of Merchandising [19659021] For hundreds of American companies, notably retail names such as Starbucks, up and leaving China isn't something they can afford to do. O'Reilly Automotive CEO Gregory Johnson, for example, said that while the car parts supplier is exploring alternate sourcing locations, it won't be a short-term change because of the lack of capacity elsewhere.

But the trade war , heightened by Trump's latest rhetoric, is a convincingly growing number of US multinationals – beyond big tech firms – to shift production to countries less likely to be hit with tariffs.

"On the margin, I am not aware of a single supplier who is not moving some form of manufacturing outside of China," Home Depot Executive Vice President Ted Decker told investors on Aug. 20. "So, we have suppliers moving production to Taiwan, Vietnam, Thailand, Indonesia, and even back to the United States."

'Made in China' loses its luster

The trade war started last year, factory production fled to leave China, stung by the country's slow economy, rising labor costs, and tighter environmental regulations.

But, over the past month, the pressure has intensified. As President Trump ratchets up his rhetoric, many American business leaders have taken to earnings conference calls to describe what they see as exigent circumstances.

And, in an annual survey conducted in June by the US-China Business Council, nearly 30% of the 220 respondents said they have already delayed or canceled investments in China or the US due to mounting trade uncertainty. Although just 13% said they had plans to specifically move operations out of China, that's steadily increased from 10% in 2018 and 8% in 2017. The shift could be even more pronounced now as the survey was conducted at a time when officials in Beijing and Washington were restarting trade talks.

"While China continues to be a priority market for most of the companies surveyed, market optimism is moderating," the survey noted. Of those companies that have decided to reduce new investments, 60% cited increased costs or uncertainties from [US-China Trade Relations.]

] Moreover, American businesses offered a glimpse of their long-term prospects in China: 14% of respondents said they were "pessimistic" or "somewhat pessimistic" about China's business environment over the next five years, compared to 9% a year ago . This is the weakest reading since at least 2010.

Retail, industrial companies in the crosshairs

Different sectors face distinct challenges and varying scales of uncertainty.

-long shift out of China. These companies have been hit by factor confluence, most notably an eight-fold rise in average blue-collar wages since 2004. The average hourly manufacturing compensation in China sits at $ 4.12, according to Barclays research, versus, for instance, $ 1.59 in India.

"Today, many retailers find themselves under the strain of rising cost sourcing resulting from their over-reliance on China and other higher-cost sourcing markets," Children's Place CEO Jane Elfers said in a call with investors on Aug. 21.

Some analyst see Toymaker Hasbro, which has been shifting its business out of China since 2012, as a vanguard for the broader retail industry.

"We're seeing great opportunities in Vietnam, India and other territories like Mexico," Hasbro CEO Brian Goldner told CNBC this past 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 comes out of China but that's down substantially from nearly 90% in 2012 .

"We're seeing an opportunity that will lead us, by the end of 2020, to be at about 50% or under for the U.S. market coming out of China," Goldner said. "We believe by 2023, we should be under a third."

On Hasbro's earnings call last month, Goldner underscored the company's increased spending to expand its footprint globally, specifically in India and Vietnam.

Hasbro isn't the only retailer planning to move most of its business out of China in the near future.

"The United States is our number one manufacturing country given the importance of personal care and beauty in our business," L Brands CFO Stuart Burgdoerfer told investors on Aug. 22. "In terms of our total sourcing activity, China represents less than 20% of our total sourcing activity and has moved down almost 10 percentage points over the last three or four years based on very deliberate efforts by the sourcing and production teams in our business to make sure we continue to have a well-diversified supply base. "

Carter's, an Atlanta-based children's apparel company that owns OshKosh B'gosh, is another retailer that has accelerated its product shift from China to the US, from 26% last year to 20% this year.

Some notable manufacturing names, such as Minnesota-based snowmobile and ATV-maker Polaris, are also relocating to the US CEO Scott Wine describes company plans to move $ 30 million of machine parts from China to U.S. suppliers as an "excellent example" of its mitigation efforts. Wine noted that Trump administration's trade policies had $ 110 million a year in tariff-related costs.

Out of China, but not back to US

But, as more and more companies shuffle operations, a small minority are moving back to the US According to the most recent U.S.-China Business Survey, only 3% plan to move their China operations stateside.

For companies like Honolulu-based Matson, moving back to the U.S. has proven too difficult despite China's dour business outlook.

"Very little of what we are hearing is what is possibly leaving China and is coming back to the United States," Mattson CEO Matthew Cox said on Aug. 7. "I Think That Ship Has Sailed For A Lot Of Commodities We Deal With."

Even as it struggles to build out its high-tech supply chain, Vietnam has proven to be one of the biggest beneficiaries of the trade dispute between the US and China. And it's being reflected in recent data. Vietnam's economy grew 6.7% in the second quarter of 2019, outpacing China's 6.2% growth. Last year, Vietnam saw the largest pickup in manufacturing activity compared to every other major economy in Asia, according to IHS Markit. Foreign investment permit applications have also surged, up 26% in the first half of 2019 compared to a year ago.

Clico retailer Chico's, fragrance maker Sensient Technologies, auto parts supplier Genuine Parts Company, and industrial machinery maker Ingersoll-Rand have

Carthage, Missouri-based Leggett & Platt, meanwhile, has relied more heavily on Vietnam, but conceded that the country still notably lags China's manufacturing capacity. Chinese imports fell 55% in May, the latest published data when Vietnam contributed 109,000 mattresses. Last year, Chinese units averaged 475,000 mattresses a month.

Other countries in Southeast Asia could soon get a boost.

iRobot, the company behind the Roomba robot vacuum cleaner, is planning to move its initial line of robots to Malaysia , expecting to produce products there by the end of the year, in part to combat the impacts of the ongoing trade war. CEO Colin Angle said last month that tariffs would weigh on the company's numbers throughout 2019. Long Island City-based fashion designer Steven Madden began shifting handbag production from China to Cambodia in 2015. Executives recently told investors it expected Cambodia to account for 30% of its total production by the end of the year.

The Minnesota-based Fastenal, for its part, moved aggressively last fall to shift its production from China to Taiwan. The largest fastener distributor, which boasts a $ 17 billion market value, said in its earnings release last month that the company had also raised prices, but that was not enough to offset tariffs and related inflation.

of that fairly aggressively last – late last fall, and so we moved a chunk of our product out of China.

Workers sewing shoes at a factory in Qingdao, China's eastern Shandong province.

AFP | Getty Images

Mexico, too, has garnered more attention from company c-suites in the past month, particularly among auto parts and technology firms. Juniper Networks and Microchip Technology have both moved production there, helping to offset tariff-related costs.

Cooper Tire & Rubber is manufacturing more tires both in Mexico and the U.S.

"We're extremely confident that by the time we exit 2020, the majority of [truck and bus tires] will be coming from outside China," President and CEO Bradley Hughes said on July 29.

While the aforementioned plans are in full swing, some manufacturing firms, like Masco's home supplier, are just starting to shit their production lines, highlighting how recent tensions have cast a pall on further investment in China.

"As it relates to tariffs, our near-term mitigating action has largely been priced," Masco CEO Keith Allman said on July 25. "However, we continue to work with our suppliers and internal teams on cost reduction opportunities and have fugitive moving limited production out of China, as a longer-term solution. "

Nick Wells contributed to this report.

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