In today’s world of global trade and interconnected supply chains, the effects of events such as a trade war ripple far and wide. With that said, the US-China trade war will have a deep impact on companies with stakes in China. We’re already seeing headlines surrounding substantial tariffs being imposed on Chinese goods by the US and vice versa.
Uncertainty also lies in the fact that these tariffs have not been completely sorted out, exemptions for US companies in China have yet to be outlined, and no one knows how long the trade war will last. Companies should consider China alternatives for these reasons:
Chinese Specialization
As part of the Made in China 2025 initiative, China has been working to increase its industrial competitiveness through specialization in more advanced and technical areas. As Chinese companies improve their expertise and gain their own technology, China is less and less a hub for low-cost mass production. Increased pricing has caused wages to go up over recent years, with shipping charges, and now with the added tariffs, outsourcing manufacturing to China has become much more expensive and underscored with uncertainty.
Labor Costs
Chinese monthly minimum wages have risen to $363/month and show no sign of slowing down. As a comparison point, an emerging hub in South East Asia, Malaysia’s monthly minimum wages have stood steady at $250/month since 2016.
We’re seeing more and more companies shifting their outsourcing to viable alternatives such as South East Asia over the recent years. A CNBC article from 2015 says; “A quarter of the AmCham-China’s 532 member firms taking part in the survey said they had either moved or were planning to move operations out of China by the end of last year, with almost half moving to parts of “developing Asia.” The second and third-tier cities of South East Asia are a favorite for many, not only because of labor costs, but regulations, and ease of communication.
China Outsourcing Alternatives
Due to potential negative outcomes of a trade war and rising prices, companies with stakes in China should consider mitigating risks by mapping out contingency plans. Here are some tips to get started:
Due Diligence
Just like with any other high-stakes undertaking, thorough research needs to be done before moving forward. Manufacturing and supplier directories are a good starting point. One of the largest online directories for the industrial sector is Mfg.com, which houses listings from eight key countries.
Another means to find a new production plant is to order market reports on the country or region of choice and in your specific industry. The online directories only list manufacturers that sign up for them, which leaves a large number of manufacturers out of the picture. Depending on the needs of the company, market reports may be a better option.
Given the stakes and complexity, another option to play it safe would be to turn to professional services. Look for an experienced partner to guide you through uncertainty within convoluted processes.
Narrowing Down the List
Once you have generated a list of new suppliers or manufacturers according to company parameters, it is time to narrow down the list. Following is a list of general questions companies should ask potential suppliers:
What services does the manufacturer specialize in?
Identify the range of services offered by the manufacturer. Are they continually updating and expanding their processes? Do they also produce other items that may be in line with the company’s future interests? Do the manufacturer’s core specializations lie within the company’s needs?
What type of client does the manufacturer generally serve?
This plays into the first question and aims to get a feel for the manufacturer’s history of specialization. A highly specialized company is going to want to seek out a manufacturer that understands the business and has been successful in that industry. Understanding this will cut down on profit losses due to simple misunderstandings in the long run.
Will the manufacturer sign a Non-Disclosure Agreement (NDA)?
If this is necessary for a company’s product development, it is important to be upfront about this piece. Don’t waste time going through the process, only to find out the manufacturer will not sign an NDA. Protecting your proprietary assets is a key factor.
Does the manufacturer take standards seriously?
Standards can be tough to assess with overseas manufacturers that are not required to adhere to specific product development standards by law. Product reviews are few and far between in Asia. Most have never worked with Advanced Product Quality Planning (APQP) standards, or ISO:14001, related to protecting the environment. We rely on periodic audits to assess and monitor supplier quality performance.
What do turnaround times and payment terms look like?
Depending on the needs of the company, ask about turnaround times for anything on the list. Sample delivery, prototyping time, and batch deliveries. Also, ask about how the manufacturer deals with production delays. What are the payment terms? And what happens after the end of a contract term in terms of pricing?
How up to date is their technology?
Again, depending on the product to be manufactured; this may or may not be an essential question to ask. The more high-tech the product, the more up to date the machinery needs to be. You don’t want to go into business with a manufacturer who runs on inefficient production means due to outdated technology.
Vetting Suppliers
Before making the decision, do thorough research on a manufacturer’s background. Take a look at the website. Check on existing or past clients and find product reviews. Insist on current references. Find out if a manufacturer has been in violation of the law or had recalls. Also check environmental licensing, history of violations, remediation, and the latest inspection results. Ask for a business license. Consider a social audit.
Mistakes to Avoid
- Using price alone as the deciding criteria.
- Choosing a manufacturer that does not specialize in necessary equipment to save money.
- Saying yes to the first manufacturer to return an inquiry.
- Not requesting a sample and going straight to production.
- Avoiding due diligence.
Given recent unraveling of the US-China trade situation, companies need to be proactive in risk mitigation. What plans does your company have in place to safeguard against possible trade war outcomes? If you’re ready to build out your contingency plan, let the experts at CMD help. With decades of experience in manufacturing and distribution solutions worldwide, we stand ready to help you accelerate your business safely.