China has become the world’s factory, with its huge manufacturing industry providing a constant supply of nearly every kind of consumer goods imaginable. The honeymoon is coming to an end, however, and there is growing tension between China and other countries. This tension, along with more expensive labor costs, supply chain disruptions, and data privacy concerns are leading many companies to reconsider outsourcing to China.
Major companies like Apple, Samsung, Hasbro, Adidas, and Nike are all moving manufacturing to India or Vietnam. Volvo recently announced plans to open its first European factory in 60 years in Slovenia. As China loses market share in manufacturing and export of things like clothing, footwear, furniture and more, it’s important to look at what is fueling this trend and whether it might be a good idea to follow the lead of the large enterprises.
The End of the Affair? Why Companies Are Turning Away From Beijing
There are several reasons why companies are moving their manufacturing operations away from China, including the following:
Friendshoring: Moving Out of the Firing Line
The US-China trade war and other geopolitical tensions have created uncertainty for businesses operating in China, prompting some companies to consider reducing their risk exposure by moving production to other countries. Companies are growing nervous as there have been several recent instances of Beijing targeting foreign companies in response to perceived slights or actions.
For example, in 2020 when Sweden decided to ban Huawei from its 5G networks, Swedish telecommunications company Ericsson faced the consequences. Ericsson’s operations in China were reportedly disrupted, and the company was subject to increased scrutiny and long delays in securing various permits and licenses. In 2021, Lithuania was hit with a trade embargo from China after allowing Taiwan to open a representative office in that country using the name “Taiwan” and not “Chinese Taipei.”
The risk of falling foul of Beijing’s political and economic policies and the resulting fallout is leading companies to seek the shores of more amiable lands – in a practice that is now being called “friendshoring.”
Money Talks – The Financial Formula Is Shifting
In general, companies that look for offshoring opportunities are focused on the potential financial gains. For many years, the low cost of labor in China provided great appeal for manufacturers wanting to cut production costs. The influx of jobs boosted China’s economy, helped upskill the labor force, and ultimately actually increased the cost of wages. While good for the Chinese people, this change has eroded the cost advantage that China once held for manufacturers, who are now looking elsewhere to find those savings.
In addition to rising wages, the cost of production in China is also increasing due to stricter environmental regulations that have been put in place. Add to that, the impact of China’s zero-Covid policy on supply chains in which strict lockdown rules confined workers to their homes, factories were shut down, and shipping and logistics were disrupted. The Covid pandemic itself highlighted the vulnerability of global supply chains and led companies to try to diversify and reduce their dependence on China.
The Concern Over Intellectual Property
Adding to worries about strained relations, manufacturing costs, and supply chain stability is concern over the safety of Intellectual property (IP). There are many reports of companies in China having their trade secrets stolen, patented technologies infringed upon, and counterfeit goods produced and sold. There are even cases of Chinese companies being accused of stealing IP from foreign companies to gain a competitive advantage.
Even if companies aren’t stealing the IP, it is common practice for Chinese companies to require foreign firms to share their technologies as a condition for doing business in China. This forced technology transfer is often criticized by foreign governments for giving Chinese companies access to technologies without any compensation and can be used to undermine the competitive advantage of the foreign firms.
Companies in industries that rely heavily on IP protection such as technology and pharmaceuticals are among those rethinking decisions to manufacture goods in China.
Where Should You Be Looking Next?
So if not China, where? Several countries have become popular destinations for manufacturing operations as companies seek to diversify their supply chains, including:
- Vietnam – Becoming known as the “New China,” Vietnam offers lower wages than China and its minimum wage is rising more slowly than other countries in the area despite consistent economic growth. In a bid to attract foreign investment, the government has passed reforms allowing foreigners to own property and majority holdings in Vietnamese companies.
- India – With a large labor force and low labor costs as well as an English-speaking population, it is easy to conduct business and communicate effectively in India. The country’s large domestic market also offers significant growth potential for companies looking to expand their consumer base.
- Mexico – Mexico has lower labor costs, open trade agreements, and a skilled workforce. The country is already known for high quality production in industries including aerospace, automotive, electronics, and medical devices.
- Thailand – The well-developed infrastructure and stable political environment along with low labor costs and strategic location make Thailand attractive to companies looking to offshore their manufacturing operations.
- Malaysia – With the third largest economy in Southeast Asia, Malaysia is open to foreign trade and investment. The country offers a highly skilled and educated workforce, and the lack of value-added tax (VAT) on exports also lowers costs for importers.
Other countries that are becoming popular destinations for manufacturing operations include Indonesia, the Philippines, and Bangladesh.
It Could Be Time For A Change
With the words “Made in China” a familiar refrain to consumers around the world, it’s no wonder that companies assume that China is the cheapest and most reliable place to manufacture or source goods.
Trends have been shifting, however, and it’s time for manufacturers to look at other options available to them today. Some companies have already begun moving their operations out of China completely or at least adding some diversity to their supply chain by developing manufacturing hubs in other countries too.
As tensions with China continue to rise, it seems likely that this trend of leaving China will continue to gain momentum in the coming years. It is time for your business to make the shift?