Two Executives Speak about the Risks and Rewards Beyond China

Overview

Last month, NGS Global released this article discussing impacts of the trade war between the US and China on global manufacturers and their customers, as well as Asia’s supply chain.

To give more of an insider’s perspective, NGS author Lee Brantingham interviewed two executives.

• An Industrial Manufacturing Executive. The first is an Asian-based founder of a leading producer of solar systems, with a top-line sales revenue of more than USD $300 million, who has been active in China and Malaysia for more than 15 years.
• An Electronic Manufacturing Services (EMS) Executive.  The second is an Asian-based Executive Vice President for one of the global top 10, multi-billion USD EMS players. This individual is responsible for leading global manufacturing in Asia.

Both requested to remain anonymous so they could speak candidly.

Why are manufacturing companies looking beyond China?

At first, the notion was that the 20-25% tariffs would be temporary, and that eventually things would stabilize. However, now it is evident that these tariffs could continue for the next five to ten years, and that we are in a more permanent time of unpredictability for trade between the US and China. With continued tariff uncertainty, it’s difficult to understand what the future holds. Could these tariffs someday increase to 100%? It’s a concern we laughed off and largely dismissed 18 months ago.  Not anymore.

The EMS Leader said, “Our customers feel that the friction with China is a long-term issue and several want to relocate manufacturing out of China to avoid these tariffs.”

Moreso, labor rates in China have been consistently rising, leading to higher costs in addition to the cost of tariffs.

That said, there are also many benefits to keeping operations in China.

Why stay in China?

Manufacturers no longer move their processes to China because of the cheap labor, that has not been the case for a long time. The real benefit is the low cost of goods in China, particularly steel. High tariffs may cancel out the monetary benefit, but moving operations to a different country with lower labor costs is no easy task. Moving operations is expensive, and may end up costing more in the long run, especially if the raw materials and/or parts are still purchased from China and shipped to a different country for assembly.

China also has a large volume of vendors that are ready to compete for your business. This is the opposite of what you will experience in smaller countries with less infrastructure and vendors. In many scenarios, you will need to compete with other businesses over a small pool. As the Industrial Manufacturer mentioned in the article, “In China, there are nine to ten different vendors competing for our galvanizing business…the competition for our business keeps prices down.”

China has unmatched scale and reach in manufacturing. Just one province of China alone can exceed the size of an entire Asian country. Government investment in developing  logistics and infrastructure over the past 20+ years has resulted in competitive advantages for China.

Pros and cons of manufacturing in Asian countries other than China

Diversification is beneficial, if done correctly

Diversification into other countries throughout Asia has benefits. In some cases, we are seeing around 10 – 15% in savings for total landed cost, compared to product with tariffs.   This savings can erode quickly if quality and delivery are not carefully monitored.

For larger Contract Manufacturers, cost is at best on par with China – so the play is more of tariff mitigation and diversification. If product was going to and from China / USA there are tariffs both directions. However, if the supply chain can be developed in SE Asia and supplied to customers in both the USA and China, there are low or no tariffs to both China and the USA.

For a global brand which supplies to most major markets, doing the manufacturing and/or assembly in SE Asia positions them for the coming decades through a competitive cost basis for major global markets, and from a strong manufacturing base with competitive labor and overhead costs.

Final Thoughts

Moving operations away from China will be no simple task. There are many factors that need to be considered, as there’s more to it than simply cost reduction.

The bottom line, as we see it, is this: companies with a high degree of China exposure are increasingly looking at a “China +1” strategy to diversify risk. Blended models are emerging – whereby strategic components from China are shipped to a manufacturer in SE Asia, who is able to achieve “significant transformation” in order to address country of origin.

China is still a major player in the overall strategy, and will continue to be for a very long time. Many are taking a blended approach because moving entirely away from China isn’t an option for all of the reasons listed above.

Moving away from China can be tricky and expensive, but diversifying your manufacturing to extend past China with a blended approach will put you in a good position for years to come.

Let us know your thoughts, and read the full report here.