Foreign companies have used low-cost country sourcing strategies for decades with a strong focus on China. In the past years, we’ve seen a new trend where increasingly more companies look for alternative sourcing markets in Asia.
Why are companies moving manufacturing from China?
Increasingly more companies have understood the importance of diversifying their supply chains from China, a trend that was accelerated during the pandemic.
The increasing labour costs are a major concern, which is around three times higher in China compared to Vietnam, and five times higher than Indonesia on average. Between 2009 and 2014, the Chinese minimum wage almost doubled, resulting in slimmer margins for foreign companies.
Another reason is the supply chain disruptions caused by the pandemic that sent shockwaves to global manufacturers, urging businesses to rethink their procurement strategies. Some companies have decided to move their production to other countries completely, while many adopt the so-called “China plus one” strategies. This means that production is kept in China, while parts of the production are allocated to other countries.
The increasing import duties due to the ongoing trade war have also aggravated the struggles of businesses that are manufacturing in China. As China faces these and many other problems, Southeast Asia simultaneously rises fast and gains attention as an alternative market to China.
Companies Moving Out of China
Let’s review some notable companies that have moved parts of or all of their production from China, and their future plans for the new manufacturing destinations.
Apple
Under the trade war pressure, Apple has been encouraging its suppliers to move production out of China. Parts of the iPhone’s production lines have been moved to India, some MacBooks are now assembled in the U.S, and Vietnam has been rising as an essential hub to produce Air Pods.
It plans to have 30% of its classic Air Pods produced in Vietnam instead of China. Foxconn for instance, the major supplier of Apple, invested 270 million USD in a plant to manufacture laptops and tablets in Vietnam in 2020. In fact, Apple tried to move more production to Vietnam in 2021, but the plan was postponed due to the pandemic, but the plan was resumed in 2022.
Samsung Electronics
Samsung stopped its smartphone manufacturing in China in 2019, and its TV and PC factory in 2020. Its global production is now based in Vietnam. The revenue of Samsung Vietnam is equivalent to roughly 20% – 25% of Vietnam’s total GDP in 2021 and the company is also the main contributor to FDI flows from South Korea.
Nike
Nike’s suppliers have been relocating production to Southeast Asia and Africa for a few years. The brand used to have much production in China with an estimation of 35% in 2006 but the brand has reduced its dependence on Chinese suppliers. In 2021, 51% of Nike’s shoes were made in Vietnam while only 21% were made in China.
Adidas
Nike is not the only apparel and footwear giant to shift its production location. About 25% of manufacturers for Adidas in China were shut down as foreign businesses stopped their partnerships with Chinese factories. The reason behind this was the penalty tariffs due to the trade war. Opportunities, therefore, open for counterparts in Vietnam, Thailand, Bangladesh, and Indonesia thanks to low-cost benefits.
HP
HP, Dell, and other tech firms planned to reallocate up to 30% of their notebook production out of China. HP has reportedly planned to shift 20%-30% of its Chinese production to Taiwan and Thailand to mitigate the risks of rising costs and disruptions, the US tariffs on tech products also reduced profits.
Considerations before moving manufacturing from China
It’s undeniable that China is still crucial for the global value chain, and the country has significant advantages that make it competitive in manufacturing. Let’s review some important items to consider before relocating manufacturing from China to Southeast Asia.
Manufacturing capabilities
It’s easier to say what products cannot be manufactured in China than the other way around. Anything from clothing, machinery, electronics, telecommunication equipment, vehicles, and chemicals are produced here. Not only can you find products that require labour-intensive manufacturing at low costs, but also advanced manufacturing.
Manufacturing is also concentrated in different regions such as Guangdong province being particularly strong in electronics manufacturing, just to give an example.
Experience with foreign companies
Chinese suppliers are flexible and generally more experienced in working with foreign customers. They are nimble, fast, and understand Western standards well. The availability of skilled labour in China still also outweighs other Southeast Asian countries. It’s easy to come across suppliers who happily provide both OEM and ODM products, according to customers’ specifications.
The business ecosystem and mature supply chain
The supply chain in China has developed for decades. Foreign companies rely much on Chinese suppliers that are located. Therefore, moving out of China means moving the entire manufacturing and network from the country, which takes a great deal of effort, time, and money. Moreover, manufacturers around the world still depend a lot on Chinese raw materials and semi-final products. For example, clothing producers from Vietnam and Bangladesh must import most of their fabrics and threads from China; European manufacturers of cars must import wiring from China. This ecosystem makes China dominant in global manufacturing.
Relocation costs
With the strong concentration of manufacturing in China, relocations to other countries require much capital and resources. Simply speaking, if you have your factory set up in China and want to shift to Vietnam, much capital is needed to set up a new factory, recruit workers, train the workers, and send specialists to Vietnam for quality controls and inspections. You also have to add the work needed to deal with local authorities to get approvals and relevant certificates prior to operations.
China’s consumer market
Some enterprises hesitate to move from China due to its large consumer base. With a population of 1.4 billion, China remains the biggest consumer market for many products. If a company already has manufacturing in China, it is also easier to get access to the domestic market and distribute products locally.
Otherwise, you would need to export the products to China, which comes with tariffs, customs clearances, additional shipping costs, and more.
What countries are companies moving to in Asia?
While China will remain an important manufacturing destination, there are a handful of countries in South and Southeast Asia that gain much attention. Let’s review the most notable ones.
Vietnam
Vietnam has traditionally attracted companies in furniture and textile production. Nowadays, multinationals set up production for more advanced products, including electronics, telecommunication equipment, and machinery. The benefits of choosing Vietnam as a manufacturing destination include its low labour costs, many trade agreements, enhanced manufacturing capabilities, and large labour pool. Even if Vietnam won’t replace China as a global manufacturing hub, it gains significantly as companies seek to diversify and set up manufacturing operations here.
Indonesia
With a population of 275 million, Indonesia is the most populous country in Southeast Asia and with a workforce of around 135 million. With rapid urbanization and a median age of 29.7, the country is set to become a leading manufacturing hub in Asia.
Its domestic market is expected to see great growth as disposable incomes increase and more people get access to smartphones, the internet, and modern financing options. At the same time, the country struggles with infrastructure issues, red tape, and regulations that tend to be unclear and change frequently.
India
The manufacturing industry is India’s most important. ‘Make in India’ is a program to put India on the map as a manufacturing hub and attract more businesses and investors. India’s main products include automobiles, chemicals, clothing, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products, and shipbuilding.
Notably, India has lower labour cost compared to China, yet you will have to deal with weaker infrastructure, inefficient transport system, and lower domestic consumption.
Summary
In general, companies are moving from China due to the increased labour costs, supply chain disruptions, and trade wars. At the same time China faces these issues, other countries like Vietnam, Indonesia, and India become more interesting and capable.
If you are considering a relocation from China, you should consider relocation costs and inefficiencies in new markets, not only looking at labour costs. China also possesses a business ecosystem that cannot be replicated in the short term.
Southeast Asian suppliers highly rely on imports from China, which drives logistics costs and final prices, so these rising countries can be one of the sourcing bases but cannot completely replace China.
Source: CCIPV / Aia Perspective
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