We have seen in previous articles that inventory reduction is a priority of lean manufacturers.
The American and Israeli aircraft attacked major government and military targets throughout Iran on February 28th, 2026. A war between a major regional power and a superpower will have rippling effects throughout the region and the world. In this blog, we will look at the possible ramifications of the war on manufacturing operations, focusing on U.S. and Chinese industries. There are few upsides for either country from this war, at least as it pertains to manufacturing; however, it is unlikely to spread into armed conflict or even a major rift between the two largest economies
My Background and Regional Experience
I will keep my analysis focused purely on the business and economic elements of this conflict, yet it is important to mention my own experience in the region. I am an Iraq War veteran, having served in the invasion of Iraq from 2003 to 2004, and as an advisor for the Afghan government from 2011 to 2012. Those wars taught me that war is complex and that there are rarely easy solutions. I believe that this war is a bad idea and will likely destabilize Iran and the region for years to come.
Sino-Iranian Relations
Most people know that the United States and Iran have had a contentious relationship for the past 40 years since the overthrow of the Shah and the establishment of the Islamic Republic of Iran. Fewer are aware of the Chinese relationship with Iran. The countries have warm economic relations and often support each other’s positions on the global stage. They are not allies, nor are they tied together in the way each nation is with its neighbors. China is not pleased with the U.S./Israeli attack on Iran, but it is highly unlikely that it will provide support to the Iranian government—and even less likely that China would join Iran militarily.
The economic relationship is largely based on raw materials, particularly oil, and on infrastructure investment. The Chinese are major buyers of Iranian crude oil, and China provides investment support for infrastructure projects, especially those related to the Belt and Road Initiative.
Both countries generally support each other internationally when either is accused of repressive or aggressive actions. For example, Iran supported China following the 1989 protests in Beijing, and China condemned the U.S. attack on an Iranian passenger plane in 1989. In March 2021, the two countries signed a 25‑year cooperation agreement. The agreement is primarily economic, though it does include increased security cooperation.
China and Iran do not have any treaty obligations to support each other in the event of war, and it is unlikely that China will provide meaningful assistance now.
The Iran War's Effect on the Global Economy
The most immediate economic effects will be contractions in global crude oil supply. Iran is the 5th largest oil producer in the world. While sanctions limit Iranian ability to sell on the global market, it is a major supplier to China. If the Chinese are cut off from Iranian oil supplies, it will have to buy elsewhere which will raise global prices. China is the second largest consumer of oil products, so its habits have significant impact on the global market.
Oil is a global commodity, meaning that it sells at similar prices around the world. The United States is largely self‑sufficient in oil production; however, rising prices will be felt there as much as anywhere else. American companies will sell their products at the highest price the global market will bear, and external price pressure will raise costs for American consumers and businesses.
Manufacturers will face higher energy and transportation costs as a result of the reduction in global supply. These will add yet more cost constraints for American businesses and will raise consumer prices further.
In retaliation for American and Israeli attacks, Iran could threaten to close the Strait of Hormuz, the strategic waterway that connects the Persian Gulf to the Indian Ocean. This would not be a literal closing but rather a threat of attacks, mining, and other disruptions that reduce the willingness or ability of exporters to move their products. Approximately 20% of all global petroleum products pass through the strait. Interruptions to this flow would have severe implications for manufacturing as energy prices would rise rapidly.
Secondary Fronts and Concerns
Iran supports numerous militias and armed groups in the region, especially those composed primarily of Shia Muslims. Groups in Iraq could further disrupt oil exports. However, the bigger concern is the Houthis in Yemen. The Houthis are a religious minority opposed by both the United States and Saudi Arabia. They have announced that they will resume attacks on shipping in the Red Sea. The Red Sea is a major trade artery, and disruptions there will significantly affect shipping.
Shippers will face a difficult choice: sail around the Horn of Africa—greatly increasing transit times and costs—or risk traveling through the Red Sea. Either way, transportation costs will increase.
Global markets will likely contract due to fears of escalation. That would lead to lower overall demand and increase the likelihood of a global recession. It is too early to tell, but the longer the war goes on and the further it spreads, the more likely these outcomes become.
What Should You Do?
Manufacturers have little control over the events unfolding, but there are aspects of their operations they can control:
- Improve energy efficiency. Energy prices are already rising, so reductions in usage will have a larger financial impact than before.
- Invest in energy sources that are less tied to fossil fuels, such as solar panels and wind power.
- Proactively search for alternative suppliers. As transportation costs rise, more local suppliers will become increasingly valuable. Having them established ahead of time reduces risk.
- Reduce operational costs. Lean manufacturing and one‑piece flow are effective ways to reduce your costs and offset higher energy and transportation expenses.
The longer the war continues, the more prices are likely to increase. Efforts that may not have been cost‑effective before may now become attractive. Proactive steps can reduce overall cost increases. Hope for the best but expect the worst and plan accordingly.
