Overseas Manufacturing Is Changing
Overseas manufacturing is more often than not relegated to China. It has been that way for decades, leading China to become the number one manufacturing country on the planet with $2.95T in total exports in 2018 (the U.S. exported $1.44T, for comparison). Labor is cheap (about one-quarter of the cost of a U.S. worker), the talent pool is diverse and expansive, and they can produce and ship anything quickly because of their access to raw materials, parts and port sophistication. China has manufacturing down to a science.
But things aren’t so simple when it comes to China. In an increasingly complex and changing global environment, one that is dependent on the relationships between multiple political systems that appear to be getting more tense by the day, companies need to consider diversifying their supply chain. Being dependent on one country for all manufacturing is risky, evidenced even more clearly since the COVID-19 pandemic and recent trade tariffs.
President Trump made it a campaign promise to bring manufacturing jobs back to the U.S. and its allies, doubling down on his commitment after the pandemic exposed dependency vulnerabilities. Despite his intentions, shifting companies away from the comfort of Chinese manufacturing is proving to be much more challenging than anticipated. The U.S.-China Business Council found that 87 percent of U.S. firms with operations in China had yet to pull out of China in favor of other overseas manufacturing opportunities. Only time will tell if the COVID-19 pandemic becomes a motivator.
Even though U.S. companies may appreciate the “Made in the USA” sentiment and the assertion that bringing supply chains back within the U.S. is useful for productivity and innovation, cost will always be a driving factor in where products are made. The U.S. still has a way to go before it can compete with China, other overseas manufacturers, and even countries closer to home when it comes to labor costs, specialized labor, and parts supply.
And while recent trade wars with punishing tariffs may have moved the needle slightly, even as they have cost U.S. companies significant losses, the COVID-19 pandemic has only added fuel to the fire.
A recent report on reshoring found that since the pandemic, more companies are ready to diversify their risks. Now seems a good time. Incoming Joe Biden has said he will not remove Trump’s tariffs immediately and will continue to pressure China to play fair, a tactic bolstered by American’s soured attitude towards China.
Unless companies can find inexpensive manufacturing alternatives, China will continue to dominate. But those alternatives are becoming more attractive as days pass. Of the $31 billion in U.S. imports that transitioned away from China in 2019, Vietnam absorbed 46 percent. Mexico has also become a major manufacturing hub.
Related: How to Find a Manufacturer to Make Your Product
While China may never lose its footing entirely, Vietnam, India, Mexico, Thailand, Taiwan, Cambodia and other countries stand ready to take up the slack. These markets are highly interconnected, with many subcomponents for finished goods still coming from China. Still, diversification is a positive step, but it comes with its own set of challenges.
The Transition from China
China still has the best infrastructure, materials, sub-supplier network and logistics. U.S. companies know what they get with Chinese manufacturers and have established long-term working relationships with factories. Shifting to alternative overseas manufacturing facilities means the clock starts all over again. Companies have to find factories with the skills, materials, and trustworthy business practices required to take over. That isn’t always easy.
A transition from China does not have to happen all at once. Keeping production going with minimal interruption may be important for continuity. For instance, some critical components can stay in China for a period of time while you are spinning up a new factory elsewhere. Perhaps you add a second factory in addition to your first. As the manufacturing adage goes, “Launch new products in established factories; launch new factories with established products. But never launch new products at new factories.” This is risk mitigation at work.
When considering alternatives to Chinese overseas manufacturing, it is important to work with an expert who understands the many variables that come with each country’s manufacturing capacity. No matter the country, risks abound. Companies will likely come to understand that it is often harder and slower to work with other countries than China, and not all countries excel in certain types of manufacturing.
By partnering with a U.S.-based sourcing expert, a company can not only become more educated on overseas manufacturing in general but also ensure they understand the risks that come with each country and factory. Gembah, for example, has a network of hand-picked, pre-vetted factories around the globe it recommends for clients, factories they know have good reputations for both their working relationships and quality production. This partnership reduces risks while matching companies with the ideal factory for their specific product. They also offer managed transition risk approaches that are customized to clients’ diverse needs.
Related: 5 Questions to Ask When Vetting a Manufacturing Partner
Where Each Country Excels
It is interesting to see which countries excel with which product categories. While this list is by no means exhaustive, it does provide insight into potential China alternatives.
- Apparel and textiles
- Stainless steel jewelry
- Kitchen and cooking products
India is the current go-to for large corporate diversification, benefiting smaller customers as well as the manufacturing and supply chain ecosystem strengthens. India currently has no additional tariffs, but it is not an option for many products. Even though there is less of a language barrier here, there are often longer lead times and higher minimum order quantity requirements. It is relatively easy to find suppliers online.
- Auto parts
- Machinery and tools
- Apparel and textiles
- Kitchen and cooking products
- Molded plastic products
Thailand is small business friendly with no additional tariffs, lower minimum order requirements, and many, but not all, products can be made here. Design services are often included with manufacturing. It can be challenging to find suppliers online.
- PCBA (Printed Circuit Board Assembly)
- Agriculture products
Vietnam does not have additional tariffs, and while it is good for some products, it is not ideal for many others. It can be difficult to find suppliers online, and the country has longer lead times and higher minimum order quantity requirements. Close geographic nature allows for many diversification strategies that have been employed over the last decade by large manufacturers.
- Aviation and aerospace
- Medical devices
- Apparel and textile
- Consumer products
Because of Mexico’s proximity to the U.S, lead times are typically quite short. Manufacturers also have low minimum order quantity requirements, and the language barrier is minimal as most factories have English speakers on staff. Mexico also offers a highly-skilled workforce; however, it is not able to produce some products.
As you can see with these overseas manufacturing examples, China is a leader when it comes to manufacturing anything. It will remain an excellent source for electro-mechanical products far into the future. Other countries have their specializations, including the U.S., but even products produced in other countries typically have at least some Chinese parts. If China is not the manufacturer, it is most likely a supplier in the supply chain.
Supply chain diversification is likely becoming a high priority for many companies. While not all production may be transitioned away from China, opportunities to expand manufacturing beyond its borders abound. Businesses will need help navigating these new frontiers, partnering with companies like Gembah that can find the best overseas manufacturing alternatives for their specific products and market, as well as help guide them through the often complex product journey.