Whether to relocate supply or manufacturing from China to another low-cost country or switch to a near-shoring or re-shoring strategy is not a decision to take lightly. That makes the slow but steady increase in the number of large companies doing just that all the more notable.
A combination of geopolitical instability and lessons learned from the COVID-19 pandemic has many companies, large and small, second-guessing their commitment to China as a center for offshore manufacture.
If the exodus continues, will smaller businesses find the cost of near-shoring or re-shoring becoming impossibly prohibitive? Let’s see what the evidence suggests.
Which Large Enterprises are Pulling Back From China?
We’ll begin with a look at which of the larger, most well-known companies have already shifted some of their supply chain activity away from China, are in the process currently, or have announced plans to do so. Some of the most notable include:
- Steve Madden, shoe and bag retailer: Moving production to Cambodia, Brazil, Mexico, and Vietnam. The transition was scheduled to begin this year.
- Nike: The world-famous sportswear brand has been moving manufacturing from China to some African and Southeast Asian countries.
- Under Armour: Another apparel brand forsaking China, Under Armour plans to reduce production in the country from 18% to a mere 7%. Target countries for new production facilities include Vietnam, Indonesia, the Philippines, and Jordan.
- Apple: The mighty tech brand has begun encouraging many of its suppliers to move their manufacturing facilities from China. Contract manufacturers for Apple, including Foxconn, are relocating some production to India, Vietnam, Indonesia, and Thailand. That said, it’s expected that the majority of manufacturing capacity will remain in China.
- Nintendo: One of the world’s most well-known console brands has moved some of its production from China to Vietnam, primarily as a diversification move.
- Samsung: The electronics giant has moved all smartphone, TV, and PC production out of China.
- Sony: Japan’s best-known tech company relocated its smartphone manufacturing from China to Thailand, citing rising costs in China as a primary reason for the decision.
- LG Electronics: Hit by tariffs on its refrigerators for the United States market, this South Korean enterprise re-shored manufacturing of those appliances.
- Intel: A household name in microchip technology, Intel has moved some of its manufacturing from China to Vietnam, and plans to commission some new production facilities in the United States.
- Adidas: Vietnam is one of the countries benefitting most from Adidas’ drawn-out retreat from Chinese manufacturing, which has been underway since 2010. In that time, the company has reduced manufacturing in China by around 50%.
- GoPro: This camera company from the United States began moving manufacturing from China to Mexico back in 2018.
- Puma: Like its rival, Adidas, Puma is reducing reliance on China for manufacturing. US import tariffs and the desire to diversify manufacturing locations are the key drivers of the move, which will see some of the company’s production transferred to Indonesia, Vietnam, Bangladesh, and Cambodia.
- Microsoft: Although it’s not talking much about it, Microsoft was said last year to be moving some of its PC and laptop manufacturing capacity from China to North Vietnam.
- Hasbro: The famous American toymaker has moved a substantial portion of its manufacturing activity from China, relocating it to India and Vietnam.
- Alphabet: The parent company of Google has moved the manufacture of its Pixel smartphone to Vietnam. Other products, such as motherboards and smart-home components, will no longer be produced in China either, as Alphabet plans to move their manufacture to Taiwan, Thailand, and Malaysia.
The above list of large corporations moving production away from China is by no means exhaustive, and remarkably, almost all of them were in the process of doing so before the pandemic struck.
In the wake of COVID-19, as enterprises with global supply chains count the cost of the crisis and consider ways to increase resilience, many more large companies are expected to move at least some of their manufacturing to other low-cost countries, or locations nearer to home.
Key reasons for the steady exodus include lessons learned from the pandemic’s global supply chain disruption, tariffs imposed due to the US/China trade war, rising costs in China, and the worsening geopolitical situation.
The Governmental Influence
Far from staying impartial to China’s fall from manufacturing favour, some national governments are actively encouraging their countries’ large companies to bring production home or at least, to move it away from China.
For example, the United States Government’s imposition of tariffs speaks for itself, even if former President Trump hadn’t repeatedly told companies to bring manufacturing home.
Meanwhile, in Japan
The Japanese government allocated more than $2 billion (USD) of its economic stimulus package to aiding its manufacturers to move back onto home soil. Although there is little evidence that the incentive has stimulated re-shoring to any great extent, some 900 Japanese companies have chosen to begin procuring supplies from countries other than China.
Germany’s Pullback From China
German companies, it seems, don’t need too much governmental incentive to persuade them to pull back from China.
In 2019, close to 25% of all German companies, including Adidas and Puma, had announced plans to remove operations from the People’s Republic.
Nevertheless, it’s no secret that the German government is keen to see its nation’s businesses become less dependent on China as a supplier, so some of those enterprises considering a move may well be doing so in the expectation of future state-sponsored initiatives.
Opinions differ as to whether the trickle of companies reducing or eliminating their presence in China will become a flood. However, given recent events in the political arena, it’s conceivable that even those companies in China as much for access to its vast domestic market as its manufacturing prowess might think long and hard about the choice to remain or pull out.
SMEs With China Manufacturing: Is There a Danger in Staying Too Long?
With all the moving and shaking going on among the larger corporates with manufacturing facilities in China, it’s clear that other nations will continue to see an influx of manufacturing activity.
Whether these giant enterprises choose to pull out totally or partially, re-shore, relocate to alternative near-shore or offshore locations or exclude China from future manufacturing plans, there will be some effects on the new destinations chosen.
A Tough, But Necessary, Decision for SMEs
So, where does that leave smaller enterprises with a will to pull back from China? After all, a significant number of SMEs have contracted their production out to Chinese manufacturers. They’re also subject to the same problems and issues faced by their corporate brethren.
Tariffs, geopolitical troubles, pandemics, rising labour costs; none of these ills spare a business based on its size. However, if anything, smaller businesses will be the ones to feel the effects more acutely—and will have fewer options to reduce or avoid them.
Recognition of that fact seems abundant. According to one survey, more than half the small businesses in North America with suppliers in China are looking to end their relationships, with Mexico being a popular—and closer—alternative under consideration.
For many SMEs, now might be the time to decide whether to make the move imminently or wait a while and see how things develop.
Is There a Cost for Those That Wait?
On the one hand, SMEs have several advantages over larger enterprises when it comes to moving out. They are more nimble than large conglomerates, probably haven’t invested large amounts of capital into Chinese manufacturing, and are less likely to experience punitive retaliation from Beijing—all of which make relocation more practical, not to mention faster.
On the other, it’s unwise to underestimate the costs of switching procurement from one country to another. Smaller companies may find relocation unaffordable, especially while battling with pandemic fallout.
For those SMEs that wait, though, sourcing costs might become an even more significant factor in the pullback from China. American SMEs, for example, might find the cost of sourcing from Mexico to be less attractive in a couple of years than it is right now.
The same might be said for Japanese and Australian firms that choose to wait before relocating procurement, production, and manufacturing to countries like Indonesia, Vietnam, and Thailand.
After all, with larger companies pouring investment into these countries and creating demand for industrial real estate, labour, raw materials, components, and other resources, price increases are likely to be inevitable over time.
Not an Easy Call to Make
In reality, there are so many factors in play that it’s not realistic to predict how the exodus of larger companies from China will impact the cost of sourcing elsewhere for smaller businesses.
For example, while an increase in demand for labour could push wage costs up, the pace at which automation and commercial robotics is developing could help to curb such a demand. Moreover, for SMEs that choose to near-shore, some additional sourcing costs could be offset by transport-cost reductions.
Similarly, there is always the possibility that labour rates in China could fall again as demand reduces or that the rate of increase slows compared to other outsourced manufacturing destinations. In that case, companies deciding to wait might find that the incentive to keep their manufacturing in the People’s Republic actually grows in the interim.
What Are Your Business’ Plans for Future Sourcing?
As the dynamics of international sourcing continue to play out, it seems that the only sure thing is the continuation of uncertainty.
Should SMEs turn their backs on China as a supply source, or merely reduce reliance on the country and diversify their supply chains? Is it better to move now before costs start to increase too much, or to stick with China and see what happens?
What’s to say the next black swan event won’t disrupt sources in a different country or region, and who knows when that event may occur? Perhaps a re-shoring policy, or strategy in which future sourcing will all be domestic, is the only safe route to take?
What do you see as the future of sourcing for small to medium-sized businesses? Do you believe the cost to relocate to suppliers or manufacturers in other countries will increase? Is it viable to pull away from China?
I’m always interested to know the views of supply chain professionals when it comes to the dynamics of globalization, so please do share your thoughts in the comments section below.