If we said that nothing is changing when it comes to outsourcing manufacturing to suppliers in China we wouldn’t be being entirely truthful. Now that the Covid pandemic is in the past, businesses are starting to look at where their Asian supply chains are now and where they need to be in the coming years. For example, it’s no secret that some US businesses are trying to nearshore manufacturing that is taking place in China now to Mexico largely due to the political landscape between the two giants.
So, where does this leave you? Well, KPMG recently produced a report co-authored by a friend of Sofeast, Prof. Neale O’Connor, titled: Charting a new course in Asia Pacific. So, in this post, we’re going to share and comment on some of its data and information about supply chain moves out of China that could help you make decisions on where you could/should be sourcing and manufacturing.
What are the top reasons that companies want to move away from China?
Around 130 companies that were planning to or had made a move were surveyed. Here’s a breakdown of the countries they relocated to:
As you can see, South and South East Asia are favored which makes sense because the supply chains already exist in Asia, often formerly in China. This also shows that ‘reshoring’ is not a big part of the picture yet, when compared to the moves from one Asian country to another. Clearly, businesses that are currently outsourcing manufacturing to Asia still have a strong appetite to do so (although there is a growing demand to have supply chains closer to the target market in places like Mexico for the USA, for example).
Vietnam in SE Asia takes the lion’s share with 70 companies moving to source there, but movements to India are increasing rapidly and there seems to be the most scope for improvement in a base for supply chains in the South Asian giant in comparison to smaller options like Thailand, Taiwan, etc.
It’s also worth mentioning that a good proportion of the moves away from China include more than one new location, as replacing China’s very mature supply chain infrastructure in just one country is not really feasible and sometimes two or more are required (there aren’t other countries that provide the same infrastructure yet).
But why make the move? The reasons are illuminating:
The top 2 reasons for moving (geopolitical risk, and increase in tariffs) are related mainly (entirely?) to China and make up almost 50% of all responses. Reducing costs also makes up over 10%, so let’s not forget that costs for some manufacturing in China has been increasing and making it less competitive against ‘cheaper’ countries (although this may be most relevant for low-cost products which are often better manufactured elsewhere anyway for this reason).
The country of the companies moving is very relevant here:
It’s unsurprising that American, Taiwanese, and Japanese companies are interested in reducing their dependency on China due to the key reasons outlined above. Politically none of these countries is on great terms with China and, in the case of the USA at least, are subject to punitive tariffs.
You may have noticed that China is also on this list. But why would Chinese companies want to leave China? For exactly the same reasons as those from, say, the USA! Chinese manufacturers don’t want to lose the business coming from countries like the USA, Canada, Australia, the UK, etc, so it makes sense for them to move at least some of their own manufacturing out of the country to avoid the same geopolitical risks that their customers are afraid of. It’s already very common to run into Chinese manufacturers and suppliers of components, etc, in SE Asia, and the trend is even taking off in Mexico now (but not so much in India).
Are companies withdrawing completely from China?
As we saw above, a lot of companies are motivated to source from and do some manufacturing outside of China, but it isn’t a full-scale withdrawal.
Only 8 of the companies in this analysis are shifting 100% of their manufacturing capacity out of China; that’s only around 6%. In fact, the majority of companies moved less than half out of China, so, if anything, we can see that companies are taking a cautious approach to diversifying and not turning their backs on China completely.
As we’ve discussed before, totally removing China from your supply chain is more-or-less a pipe dream as so many materials and components can only be sourced from there. Even if you start sourcing and assembling in, say, Thailand, chances are some of your components are going to be shipped in from China and, quite possibly, sold to you by Chinese-owned enterprises that have been set up there specifically for this purpose (as we mentioned before, even Chinese companies are moving some operations out of China).
Which industries are most represented by moves?
The most commonly moved product category away from China by share are:
- Consumer electronics – 35%
- Household products – 13%
- Industrial products – 12%
- Automotive products – 10%
- Footwear, clothing, accessories, components, etc, make up the remainder in smaller amounts
The following graphic sheds some light on the types of product categories being moved to each country:
Out of all of the countries being moved to, only Vietnam takes a mix of high-value (electronics, industrial, components) and low-value-added (household, clothing, footwear) products which suggests that it provides one of the most varied and mature supply chain when compared to other China-alternatives in Asia. Thailand and Taiwan are also recipients of quite a hefty amount of creation, especially in electronics, with 60k+ each.
In this graphic, we can see the difference between labour capacity sourcing moves between two different time periods: 2018-19 and 2020-23:
The electronics, footwear, and automotive industries were the earlier movers to Vietnam and India in particular during 2018-19. In more recent times, you can see that the amount of labor being moved to India and Vietnam has slowed somewhat (with the exception of electronics going into Vietnam), but there has been an acceleration of moves to Mexico, Taiwan, Indonesia, Thailand, the USA, and other SE and East Asian countries, especially for automotive manufacturers, but also the household, clothing, component, industrial, and footwear sectors.
Vietnam has become a rival to Guangdong Province faster than expected
Vietnam has been pushing hard for foreign investment and building a lot of industrial parks to accommodate the new industry. It’s probably the only Asian competitor to China that can offer a high-tech electronics supply chain right now.
In the past 10 years, Vietnam’s primary exports went from footwear, rice, and cashew nuts to electronic components and computer equipment, and the country bears a striking resemblance to China’s ‘silicon valley,’ Guangdong Province and has overtaken powerhouse city Shenzhen’s total exports in Q1 of 2022:
At the moment Vietnam promises similar manufacturing capabilities to Guangdong, but with lower wages. That’s a clear advantage and shows why it has become an attractive destination for electronics manufacturing. However, the report suggests that this advantage may be fleeting because by 2024 the country is expected to be compliant with the CPTPP and EU-Vietnam free trade agreement which will push wages upwards. Vietnam’s problem, which is not shared by India, is its relatively small size. Competing with Shenzhen and Guangdong Province is all very well, but that’s just one Chinese province. We’ve already seen evidence that Vietnam is nearing full capacity and it’s becoming hard for SMEs to pick up new suppliers there due to them being too busy.
India is good for labor-intensive work and increasing in popularity among electronics companies
In terms of the number of people employed by the moves, Vietnam has had 300k jobs created with India second with 100k; yet India received four times fewer moves from businesses out of China. This shows that fewer companies are using Indian manufacturing for more labor-intensive projects involving more operators and factory staff, especially in the automotive and electronics sectors. We know that most foreign car marques manufacture in India, and large electronics giants such as Apple have made the headlines recently by moving production of the famous iPhone to India, too, partly to avoid customs duties and so increase sales to India’s growing middle classes, as well as diversifying some capacity out of China. Due to Vietnam’s lack of capacity for some sectors, India is increasingly interesting for SMEs.
How about reshoring?
Reshoring is where a business moves its sourcing and manufacturing capacity back to its own country. The 36 companies that decided to reshore were from the USA, Japan, South Korea, and Taiwan and gave the following reasons:
Most of the companies reshoring are in the automotive, industrial, and components industries, many already having an established factory to take the strain. Reshoring is attractive for those who want to avoid the geopolitical risks associated with China and be close to their domestic market, but it must be said that it requires a higher investment, a better-trained workforce, and an established ecosystem for support.
How much can we trust this information?
This is by far one of the best reports we’ve read on this topic and it does give us a great indication of which way the wind is blowing when we look at many of today’s businesses that are interested in moving some sourcing and manufacturing out of China. We see this topic written about in the press quite often, but this report is worth far more than almost any newspaper article you’d be able to find.
However, it’s still worth noting that the sample size was only around 130 companies and a big limitation of such a study is the unwillingness of many companies to announce publicly that they are implementing a plan to leave China, for fear of reprisals from their Chinese employees, the local government, their key suppliers, etc. China can be swift to protect itself, as we have seen with foreign businesses like Uber, Samsung, Facebook, Google, Dolce & Gabbana, and more, who have been ‘cancelled’ in China and no longer have much/any presence or love from the population there.
Once again, please allow us to give credit for much of this information and the graphics shared by KPMG’s report: Charting a new course in Asia Pacific.