Future Trade with China Means Greater Vetting of Suppliers

As a national security measure, the Biden administration in September proposed a ban on Chinese-developed software in internet-connected vehicles. “Chinese automakers are seeking to dominate connected vehicle technologies in the United States and globally, posing new threats to our national security, including through our supply chains,” a September 23 White House statement reported.

The Department of Commerce issued a notice of proposed rulemaking, the statement said, “that would, if finalized as proposed, prohibit the sale or import of connected vehicles that incorporate certain technology and the import of particular components themselves from countries of concern, specifically the People’s Republic of China (PRC) and Russia.”

The proposed ban follows talk about ending de minimis exemption exploitation by Chinese companies and the passage of the Uyghur Forced Labor Prevention Act (UFLPA). It amplifies what Ram Ben Tzion, CEO and co-founder of Publican/Ultra Global, a digital shipment vetting system provider, calls three prisms that supply management organizations should consider concerning trade with China.

The Three Prisms

Whether or not the proposed ban or some other similar measure is approved, in and of itself it signifies a trade barrier approach when it comes to China, says Ben Tzion, who is based in Israel. “It reflects a mindset, which will definitely prevail regardless of the outcome of the U.S. presidential election,” he says. “It doesn’t matter which administration will step into the White House in January.”

Secondly, very few understand the interconnectivity and complexity of vehicles, adding that there 30,000 and 40,000 different components — from multiple thousands of suppliers — in every car.

For example, Ben Tzion says, think of a non-American, non-Chinese car manufacturer that wants to know if it would be in violation of the UFLPA or the proposed ban. The company has to review that list of thousands of suppliers to see that it’s compliant.

“There are very few vehicles that would not have a component that violates the proposed legislation, so it’s not very realistic,” he says. “The Audis and the Volkswagens that we drive all have the same safety systems, airbags and seatbelts that are manufactured by the world’s biggest manufacturer (which has factories in China and other locations). It’s a ban I think isn’t necessarily feasible within the landscape of the automotive industry.”

The third element to consider is transparency, Ben Tzion says. Organizations likely don’t have visibility into the security and viability of their sub-tier suppliers. “We must keep in mind that with such legislation as the proposed ban, we need to understand who we’re sourcing from and the nature, authenticity and safety of their devices,” he says. “We need to be able to check all the different links of the supply chain. And that can only be achieved if you have a complete visibility.”

Independent platforms and programs that vet suppliers can help organizations gain the visibility they won’t get by using manual processes or onboarding of suppliers, he says.

Rather than looking at the proposed ban, Ben Tzion says, look at the trajectory or trend it is triggering. “If we are to say that no connected cars can use Chinese-made critical components, what about iPhones or CCTV (closed-circuit TV) cameras made in China? What about telecommunication equipment?” he said.

While the proposed ban may be more “political than practical,” he says, “it does reflect the mindset that will shape the way the U.S. and China do business. It will require many different industries to adapt quicker than before to the needs to conduct ongoing, effective supply chain vetting.”

Know Your Customer

For years, the focus was on reducing global trade barriers. But moving forward, environmental regulations are likely to be a greater emphasis, Ben Tzion says. “Whether it’s legislation, tariffs and sanctions, or any other provisions, supply chains must adapt and modify,” he says. “I don’t think every industry will grow and evolve in a similar manner, but we will see more transparency, more data disclosure.”

The banking industry can be a role model, Ben Tzion says. “Financial institutions have been tasked to ensure that the source of income or funds is legitimate,” he says. “Ten years ago, you could walk into any bank with a bag full of cash and deposit it into your account, no questions asked. Today, it’s impossible. Now it’s legislated that banks apply ‘know your customer’ standards, like background checks and diligence checks to make sure that you’re not laundering money or acquiring it illegally.”

Supply organizations also must perform due diligence on their suppliers, he says, adding that the biggest impact won’t be on high tech, high value industries like connected devices and vehicles. “It’s going to be consumer habits that will change — because no longer will it be that you can buy anything made in China without asking about its origin and quality and whether it violates any U.S. trade policy,” Ben Tzion says.

The result will be increased regulatory environment, requiring organizations to ensure their compliance. And that means more tools and processes to do so — and more cost. “It also will take more time, but you will know exactly what you’re buying and who you’re buying it from,” he says.

(Image credit: Getty Images/Vchal)