Moving Your Manufacturing Out of China: The Initial Decisions

The uncertainty surrounding products manufactured in China is causing many foreign companies (especially those that sell their products to the United States) to ask us what they can do to mitigate their risks and where else they could look for getting their products made.  See Has Sourcing from China Become too Risky? 

Decisions about leaving China are not without risks, but there is a path forward.  In my role as Harris Sliwoski’s Senior International Manufacturing Advisor, I usually start by reminding people that it (leaving China) is already happening.  You won’t be the first. Companies are already leaving, including Chinese companies looking for other places to make their stuff. Needless to say, other countries are vigorously competing for this business. Your path forward may not be a superhighway, but there are fairly well- paved roads to get there.

Our firm has lately been focused on the ASEAN region as a China alternative, specifically Thailand, Malaysia, Indonesia, Vietnam, and The Philippines. We look to ASEAN countries because: (1) Many of our clients are already familiar with this region, (2) It is closeto China and China’s existing supplier base, (3) It has competitive manufacturing costs, (4) It has a large and diverse manufacturing capacity, and (5) It benefits from government support of manufacturing exporting. It also does not hurt that ASEAN consists of approximately 650 million people/consumers.

ASEAN has a free trade agreement with China. This means a company can find a new manufacturing source in an ASEAN country and still usually obtain needed materials and components from China tariff free and at similar costs. This means you can start to leave China without completely leaving China. But as our international trade lawyers are always saying, you do have to be careful to make sure you are not taking so much of your Made in China products to ASEAN that US customs will still view your product as having been made in China. See US-China Tariff Updates: What You Can do NOW. The last thing you want is to have to pay duties and fines and perhaps even go to jail for illegal transshipment. See Beware the False Claims Act When Importing Products .

When we work with companies looking to move manufacturing from China, it is important we first determine why the company wants to leave China and what they are trying to accomplish by doing so. Increasing costs and tariffs may be driving companies out of China, but other factors should be considered before deciding whether to leave and where to leave to. Every country does different things well.  Every company looking to leave China should decide what is most important for them, their products, markets, IP protection, supply chains, and future direction of their business. A large part of our job then becomes lining up that company with a country and a manufacturer that most closely satisfies that company’s short and long term goals.

Finding a new supplier or location to operate a factory is a significant business decision and it should be treated as such.  Some of our clients are interested in finding new suppliers and some want to start up entire new factories themselves. We need to clearly distinguish between the two. In sourcing, for example, the range of what can and will be done is huge, from a simple purchase of a fungible commodity product all the way to purchasing high tech electronics where the factory is expected to provide substantial engineering input. Some of our clients are highly focused on costs, while others are highly focused on quality. Figuring all this out for each client can be complicated and time consuming and the resulting project is quite different depending on the client’s goals and the result of the analysis.

We have had clients that make products for which Thailand was perfect. We have had other clients that make the same product (but essentially for an entirely different market) for which Mexico was perfect. In choosing a country and a specific supplier, there is rarely a one size fits all answer. And yes, quite often we end up determining the best solution for our client is to stay in China.

Some of our clients believe that finding and choosing and working with manufactures in S.E. Asia is similar to doing these things in China but it very likely will not be. To give just one small example, shipping from Vietnam is much more difficult than shipping from China. Overall logistics rates may also be significantly higher. After all factors are considered, the move can be properly evaluated but ignoring some of these key factors can result in wrong business decisions being made. China is head and shoulders above pretty much any other country in both soft and hard infrastructure. Doing business in China is a piece of cake as compared to S.E. Asia. Trust us on this.

Tariffs or no tariffs, costs are rising in China and it is becoming a more difficult place to do business, especially for American companies, and most indications are that it will only get worse. The last year or so has been brutal for firms whose bottom lines hinge on continuous, reliable, uninterrupted trade. That’s as much from uncertainty—the chance of even more trade barriers—as from the actual duties imposed.

In the end, the decision to move your manufacturing is — of course — up to those who run your company. My job as international manufacturing consultant is to help you plan for contingencies, understand your options, and wisely manage and respond to your existing and future risks. If you are contemplating moving your manufacturing from China, this sort of planning should start today.