When Target announced it had reduced its China sourcing from 60% to 30% over the past decade — and was targeting below 25% — it sounded like a supply chain success story. When Gap's CEO said China represented less than 10% of sourcing and was falling toward 3%, it sounded like a clean break. When Walmart reengineered its procurement toward domestic and near-shore suppliers, it looked like strategic foresight.
There's just one problem: it's not the whole picture.
A new analysis published by Fortune this week draws on McKinsey Global Institute research to make a point that should unsettle every retailer's sourcing strategy narrative: China isn't losing its position in global manufacturing — it's moving upstream in the supply chain. Instead of making the finished goods, it's making the components inside the finished goods.
"We may buy fewer 'Made in China' goods going forward," McKinsey senior partner Jeongmin Seong told Fortune, "but more products will have internal components manufactured in China."
The Data Behind the Shift
The numbers illustrate the transformation clearly. Last year, China's exports of finished consumer goods declined by 2%. But its exports of intermediate goods — the processors, memory chips, smartphone parts, lithium-ion batteries, and industrial components that flow into manufacturing elsewhere — rose 9%. China isn't retreating from global trade; it's repositioning within it.
Meanwhile, Southeast Asian nations are absorbing the final-assembly work that used to happen in China. ASEAN exports grew roughly 14% last year, more than double the global average — and much of that growth is built on Chinese-supplied inputs. Vietnam makes the sneakers. Thailand assembles the electronics. Cambodia stitches the garments. But the materials, batteries, processors, and precision parts increasingly ship from Chinese factories to ASEAN facilities before the "Made in Vietnam" tag gets sewn in.
U.S.-China direct trade has fallen by roughly 30% under current tariff regimes. But the U.S.-ASEAN trade corridor is one of the world's fastest-growing. CNBC reported in January that despite this drop, China recorded a record trillion-dollar trade surplus — evidence that the country adapted by redirecting exports through third-party markets rather than absorbing the hit. The tariff effectively rerouted the supply chain rather than eliminating Chinese economic participation.
Why This Matters for Retailers
The practical implication for American retailers is that supply chain de-risking is more complicated than changing the country-of-origin label. A sourcing shift from Chinese factories to Vietnamese ones may have reduced legal and tariff exposure meaningfully — but the underlying dependency on Chinese-manufactured inputs means that any future escalation of trade restrictions, export controls, or disruptions to ASEAN manufacturing will still carry Chinese supply chain risk.
Supply Chain Dive has reported extensively on comments from brand executives at Manifest 2026 in Las Vegas, where sourcing professionals were candid about the pace of change. Rachel Levy, COO of Brooklinen, summed up the challenge: "Shifting sourcing to a new country isn't something that can easily happen overnight."
The difficulty is not just logistical. Factories in Vietnam and Indonesia with the precision and scale to match Chinese manufacturing are operating at or near capacity. Quality control systems take years to build. Supplier relationships that produce consistent on-time delivery at scale require investment that doesn't yield returns for multiple seasons. Retailers who moved sourcing quickly in response to tariff pressure have often learned this the hard way.
A Structural Realignment, Not a Clean Break
The Fortune analysis goes further than tactical supply chain management, framing what's happening as a structural geopolitical realignment. Trade patterns are increasingly shaped by political relationships rather than pure cost efficiency — a dynamic that persists long after any individual tariff regime.
Even as businesses hedge by building "China plus one" supplier networks, the deeper Chinese component integration means that geopolitical risk hasn't been eliminated — it's been distributed. A future trade conflict, export control, or manufacturing disruption in China would still reverberate through the supply chains of companies whose products are ostensibly sourced from entirely different countries.
For retailers who have already communicated their China sourcing reductions to investors and stakeholders as a risk-mitigation achievement, this creates an uncomfortable transparency question. A product assembled in Vietnam with Chinese lithium cells and Chinese processors is a different risk profile than one manufactured end-to-end in a non-Chinese facility — but they carry the same country-of-origin label.
As previously covered on Endcap Brief, the legal battles over Section 122 tariffs and the broader trade policy uncertainty continue to reshape how retailers plan their procurement. The Fortune analysis adds an important layer to that picture: even a "win" on sourcing diversification may not be as complete as the supply chain slides in the investor deck suggest.
The factories moved. The components didn't.