Boeing, Nike Wrestle With Supply Chain Pressures Over China Risk

Companies including General Electric Co., Boeing Co., and Nike Inc. are wading through a mounting pile of concerns about their China-linked supply chains as geopolitical troubles brew and pressure to cut ties ramps up from the US government and investors.

Geopolitical risk is rising as recent tensions between China and Taiwan add to companies’ long lists of supply chain worries. There’s a hangover from the Covid pandemic and shutdowns in China, tariffs on Chinese imports, sanctions on Chinese businesses, and a new US human rights law targeting forced labor in China, lawyers and supply chain experts say. And it’s all happening as the Biden administration and Congress—continually hawkish on China as an economic and national security threat—hope to incentivize manufacturing closer to home.

GE, Boeing, and automakers General Motors Co, and Ford Motor Co. are among the companies disclosing in financial filings how US-China frictions pose business risks. There’s also pressure from investors. Walt Disney Co., Apple Inc, Starbucks Corp. and Boeing faced China-related shareholder proposals in recent weeks, asking the companies to weigh the reputational risk of doing business in the country.

“There’s a mountain of risk that continues to get larger,” said Lisa Anderson, a supply chain expert at LMA Consulting.

On Capitol Hill, the newly-formed Select Committee on China sent warning shots to companies including Nike and Adidas AG earlier in May, pressing them on how they avoid using goods made with forced labor in China. The new bipartisan committee has promised to “restore supply chains and end critical economic dependencies on China.”

Some companies are shifting where they make their products or source their materials. Apple, for example, is planning to move more of its iPhone production from China to India. But the process of revamping supply chains that took years or even decades to build can be both time consuming and costly, lawyers and consultants say.

“It’s very challenging because, first of all, supply chains are created over many years,” said Carl Valenstein, a partner at Morgan, Lewis & Bockius. “People think you can easily change your supply chain—you can’t. It doesn’t happen overnight.”

‘Unique Risks’

Companies with significant business tied to China are putting investors on notice about the continued or increasing risks.

GE’s April quarterly 10-Q filing noted the risks imposed by “an escalation of sanctions, tariffs or other trade tensions between the US and China or other countries, and related impacts on our businesses’ global supply chains and strategies.” Boeing, in an April 10-Q filing, said that “the current state of US-China relations remains an ongoing watch item,” noting the dueling US and China import tariffs on airplane parts and components.

The automotive industry, especially, is on alert. Ford said in a February filing that “China presents unique risks to US automakers due to the strain in US-China relations, China’s unique regulatory landscape, and the level of integration with key components in our global supply chain.” And GM pointed out in its January annual report that “continued US-China trade tensions” among other factors could impact its business.

Boeing declined to comment. GM and GE didn’t respond to requests to comment. A Ford spokesperson downplayed the unique risk posed by the company’s China operations—at least in comparison to other risks that investors need to know about.

“Federal law requires us to disclose material factors—including everything from pandemic conditions to geopolitical factors—that could introduce risk to our business operations,” Ford said. “It is common—and expected—for multinational companies to do this, including other global automakers.”

A number of companies frequently reference the hit their supply chain’s production took from the Covid-19 pandemic and lockdowns in China.

“Covid made it quite brutally visible that having an undiversified supply chain meant losing market share at lightning speed,” said Gregor Stühler, CEO of supply chain AI platform Scoutbee.

Intelligence Warning

Then there’s the specter of China potentially invading Taiwan, and the US sanctions that would surely follow.

“That’s the big fear,” Valenstein said, noting that an invasion of Taiwan would be far more disruptive on US supply chains than Russia’s war in Ukraine has been, because of how intertwined the US and Chinese economies are.

The US intelligence community has voiced its supply chain fears. The most recent annual threat assessment, published in February, laid out the US worries that China’s dominance in the tech, semiconductor, battery, solar panel and pharmaceutical sectors “could pose a significant risk to US and Western manufacturing and consumer sectors if the government of China was able to adeptly leverage its dominance for political or economic gain.”

The data back up just how many companies are mulling such concerns. A KPMG survey of 132 companies on Asian Pacific sourcing moves said 23% of supply chain shifts were prompted by geopolitical risk. The March report lists Vietnam, Taiwan, the US, Mexico and India among some of the top destinations for such shifts from China between 2018 and 2023.

“The costs have become so significant that it’s not a surprise to see efforts, slow though they may be, to shift away from China,” said Ryan Fayhee, a partner at Hughes Hubbard & Reed who previously worked at the Department of Justice’s National Security Division.

Supply chain experts say there’s been an increase in clients mulling potential manufacturing or sourcing shifts, but much depends on the industry. The solar panel market has made a “remarkable shift” out of China, Valenstein said, but the life sciences industry “is not going to abandon” the Chinese market.

The Biden administration has been trying to boost US manufacturing, for example through incentives in the Inflation Reduction Act to encourage domestic sourcing of components and critical minerals for EV batteries. While China dominates the EV battery supply chain, Ford and Tesla have plans to build new battery plants in the US.

For many other companies, though, “cutting China out of their supply chain is not realistic—at least in the short or medium term,” said Richard Mojica, a partner at Miller & Chevalier.

Nike, Adidas Pressed

There are also human rights concerns about sourcing materials in China. A new US human rights law targeting Chinese goods made with forced labor, the Uyghur Forced Labor Prevention Act, assumes that any product made with goods even partially sourced from the Xinjiang region of China has been made with forced labor—unless a company can prove otherwise.

“One of the key concerns and challenges among numerous industries right now is the need to trace their supply chains and map them way back to the Nth degree,” Mojica said, explaining that the broad swathe of government scrutiny is driving a lot of these assessments. “That is a humongous challenge,” he said.

The new law, which took effect in June, has caught some companies off guard. US Customs says on its website that it has denied 490 shipments into the country to date under the law; 291 of those were from apparel, footwear and textiles companies.

Lawmakers this month pressed Nike, Adidas, and Chinese-based shopping platforms Shein and Temu, questioning them in public letters about how they avoid using goods made with forced labor. The letter to Nike, for example, asks the retailer for a “detailed description” of the steps it’s taken since the UFLPA took effect—to examine its supply chain, if its contractually obligated its garment suppliers to ensure that no materials from Xinjiang are used in clothes to be sold in the US, and what audit methods it uses to verify that suppliers in China are not exploiting Uyghurs.

The companies didn’t respond to requests for comment. The lawmakers are warning businesses to make changes now: Rep. Chris Smith (R-N.J.), chairman of the Congressional-Executive Commission on China, encouraged companies at an April hearing to “scour their supply chains.”

Proxy Action

Shareholders have also pointed to forced labor concerns and the worsening US-China relationship during annual meetings.

Recent resolutions at Apple, Disney, Starbucks, and Boeing were brought by the National Legal and Policy Center, a conservative shareholder proponent. The group asked the companies to look into potential risks to their reputations and other areas of operating in China. While the proposals typically received less than 10% of support, Paul Chesser, who has presented the proposals for the group, said in an interview that he believes “this is an issue for which those on the left and right can come together.”

A March report on the 2023 proxy season from environmental, social and governance proponents strikes a similar bipartisan sentiment. The report from shareholder advocate As You Sow, partnered with the Sustainable Investments Institute and Proxy Impact, said concern about corporate ties to the Chinese Communist Party is “a shared concern with progressive groups.”

Companies have mainly argued that they already report on such risks. Boeing said in the proxy statement for its April annual meeting that “singling out particular countries or groups of customers for scrutiny would be misleading to shareholders and potentially damage our relationships with customers, suppliers, and regulators.”

While at least some corporate boards are finding their China operations a growing area of concern and alerting investors, most companies still aren’t completely ready to pull the plug, supply chain experts say.

“There’s certainly movement but it’s strategic and it can be piecemeal,” Mojica said. “There’s not this rush to get out of China.”