What Should USTech's Sourcing Strategy Be?

Greg should consider himself lucky. The cozy relationship between USTech and TaiSource was speeding toward a crisis even before he hired Morris. But thanks to what he learned from that questionable decision, Greg now has an opportunity to fix USTech's sourcing strategy before disaster strikes.

USTech and TaiSource have become so interdependent that USTech must establish either a more formal alliance with the supplier or a more strictly defined arm's-length relationship. Given the distrust on both sides, the only real option is the latter. Greg can now choose to diversify USTech's ODM relationships; source directly in China and Taiwan, which would require quickly mastering certain management and assembly tasks; or combine these approaches, thereby enabling USTech to expand in China at a safe pace. Greg can afford no illusions: Whatever the choice, USTech's costs will increase. The era of free-rider collaboration for a firm this size is over, and the sooner USTech recognizes that fact, the better.

Greg's next step should be to gather the USTech team for an honest postmortem. In retrospect, the degree to which USTech trusted TaiSource will seem shockingly naive. All interdependent relationships are competitive. Absent a clear ownership structure, or the social constraints that exist within certain Asian societies, such competition will eventually destroy even mutually beneficial relationships.

Although the relationship with TaiSource looked great on the bottom line, the result was to empower a new competitor. TaiSource has deep knowledge of USTech's products and the ability to manufacture in both Taiwan and China, and it plans to open a U.S. R&D office -- another name for a sales office.

A review of USTech's sourcing system, if truly complete, will reveal that the company is still hugely vulnerable in at least one area: political conflict. In the event of political turmoil within China, or between China and another industrial nation, the flow of components on which USTech depends would be cut off. Direct entry into China by USTech would do nothing to lessen this risk. And no matter which ODMs Greg links up with in Taiwan, all rely on work done in China.

Sure, Thomas Friedman and other trade utopians insist that industrial interdependence prevents conflict among nations. But this is rank foolishness. The entirely unregulated industrial relationship between the United States and China is analogous to the fuzzy "collaborative" relationship between USTech and TaiSource. Eventually, there will come a struggle for a greater share of the profits, or for control of the system itself.

Unfortunately, Greg's options are few. Suppliers in the United States, Japan, Korea, Malaysia, and Singapore would all cost more. Given that the biggest immediate threat to USTech is posed by direct competitors, all of whom source extensively in China, the executive team has no alternative but to depend on China and hope for the best.

Which means that Greg's next call should be to Washington. When any company discovers a political risk that no firm on its own can afford to address, it is time to sit down with the people who shape the market. After all, if no one company can mitigate the dangers, then the political risk has shifted from the level of the firm to the level of the societies that depend on those firms. At this point, Greg must cease to act as an executive and act instead as a citizen.

When Greg makes his call, he may be tempted to speak in anger. After all, it will seem to him that the politicians have screwed up once again, this time by pretending that incredibly complex global markets could somehow be self-regulating. Greg should use his own mistakes to help politicians understand what must be done. After all, just as USTech realized it could not rely safely on one supplier, so too must the United States.