The future of manufacturing: What should you consider when moving your supply chain out of China?

A major development resulting from the US-China trade war’s impact is the accelerating shift away from China in supply chain management.  Across industries and countries, a wide spectrum of manufacturers, from household names to new startups, is beginning the process of moving their production and manufacturing operations to Vietnam, India, Taiwan and Malaysia.

 

Although the most immediate factor driving the move is the sudden increase in overhead costs incurred by trade war tariffs, logistics challenges like rapidly rising wages and material costs, as well as predictions of an aging population, have been pushing even domestic Chinese firms like Huafu Fashion to explore the possibility of establishing production facilities in emerging manufacturing hubs in South East Asia. Apple, whose success over the past two decades has been intertwined with the development of P.R.C manufacturing, is testing production of its Airpod wireless headphones in Vietnamese factories. With its close distance to existing supply chain infrastructure in China, skilled workforce and low costs, Vietnam is a natural destination to efficiently transition high tech manufacturing. Meanwhile, Google is moving hardware production to Taiwan and Malaysia, and Sharp is manufacturing printers in Thailand.

 

Malaysia, Thailand and Vietnam are part of the ASEAN Free Trade Area, with strong potential for infrastructure integration and efficient supply chain management between facilities in the region, and growth through foreign direct investment. Any products originating within ASEAN benefit from the regions Common Effective Preferential Tariff scheme, which sets tariffs between 0-5%. As countries in South East Asia and Latin America compete to attract overseas manufacturing and foreign investment, the depth and quality of supply chain solutions outside of China is likely to expand. But major transitions come with major challenges. What is the best way to be prepared?

 

Enterprises should consider the following factors when planning their supply chain management:

 

Language:

Given China’s ubiquity in manufacturing, communicating in Mandarin has been a major requirement for employees. In addition to engineering skills, proficiency in regional languages such as Vietnamese, Thai and Malay as well as English will be a priority for a global supply chain.

 

Staffing:

Existing experienced staff will stay on, particularly while production facilities partially remain in China. However, some staff will also need to assist with production setup in the new region. Enterprises will have to make decisions about which of their staff to retain and reassign, while hiring, training and housing large numbers of factory workers in a country without an established workforce and labor infrastructure poses a logistical challenge.

 

Quality Assurance:

The transition phase will split production between facilities in China and other countries, a logistic challenge requiring coordination across production schedules, allowing for delays due to shipping distance. Any manufacturing problems or defects will scale up with production volume, as will the difficulty of addressing the issue. Stringent quality control mechanisms and more inspections across the supply chain is necessary to avoid unforeseen problems in supply chain management.

 

Equipment costs:

Special equipment will have to be purchased or relocated to the new factories, at significant initial cost. Communications and database software will also have to be adapted or migrated. As sectors develop their industries and infrastructure, local solutions should become more easily available, but the initial phase is likely to be challenging. These expenses may be offset by special incentives, including extensive eligible deductions and tax exemptions provided by regional governments.

 

Local Laws and international agreements:

Setting up facilities in a new country means considering tax rates, corporate structuring, licenses and visas. Working with an experienced business advisory service is essential to planning international transitions, because the areas of concern are extensive and often unpredictable. Depending on where a company is incorporated and where they choose to set up their supply chain, they may benefit from policies such as the EU-Vietnam Free trade agreement, signed on June 30, 2019, which eliminates tariffs, simplifies regulations and improves market access.

 

As the US-China trade war impact spreads across the world, transforming entire industries and economies, adaptation is key to success. Global supply chains are being disrupted to this extent unseen since the rise of China’s manufacturing industry in the 1990’s. Change brings both challenge and opportunity. Contact us with any enquiries you may have about matters related to your China business setup, supply chain management or company registration. We have decades of international experience and we can guide you in developing your proactive supply chain strategy.

 

References:

https://asia.nikkei.com/Business/Business-trends/Goodbye-China-Chinese-manufacturers-follow-multinationals-out-the-door

https://www.forbes.com/sites/annashedletsky/2019/07/02/the-7-problems-manufacturers-will-need-to-solve-to-move-their-supply-chains-out-of-china/#77c78c9e5a13

https://asia.nikkei.com/Economy/Trade-war/Apple-tests-AirPods-production-in-Vietnam-as-it-cuts-China-reliance

http://trade.ec.europa.eu/doclib/press/index.cfm?id=2041

 

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