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SUMMARY:

The Coronavirus pandemic has raised concerns over China sourcing, accelerating the trend in businesses around the world seeking secondary sourcing countries.

Heading the list of alternative manufacturing hubs are Vietnam, India, Thailand, and Mexico.

Small businesses may be nimble enough to rapidly shift away from China, but larger businesses may take longer to turn the ship onto a different trajectory.

With China’s manufacturing capacity being the largest in the world, and the country boasting significantly lower production costs than those in the West, it will take brave entrepreneurs to completely shut down their China operations—especially those with access to China’s gargantuan consumer market.

Instead, most companies seeking to make their supply chains resilient from future shocks are looking at a China+1 option—in other words, to expand their operations from China into other low-cost regions.

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For now, it remains a trickle, but there is a definite move by companies around the world whose supply chains were ravaged by the COVID-19 pandemic either to pull out of China completely or to explore secondary sourcing options.

    smes and China Sourcing    

Larger businesses may take longer to ‘turn the ship’ onto a different course. To do so will entail massive changes and investment due to the volume of supply and potential disruptions that come with change.

It’s more likely then, that smaller, more ‘nimble’ businesses will lead any accelerated trend away from China sourcing.

 

Balancing Costs, Risks, and Resilience

Around three decades ago, Western companies began moving manufacturing and sourcing to China for one reason: costs.

The benefits for companies were enormous because not only could products be manufactured for significantly lower sums of money than at home, but shifting production to China gave access to the Asian giant’s colossal consumer market.    

China sourcing & Smes  

And then the US-China trade war erupted…


    From July 2018, when US President Donald Trump began imposing tariffs on goods made in China, and Beijing began reciprocating, American companies in particular suddenly realised how risky their offshore ventures had become.    


Thus began the exodus from China.


   

A Kearney study showed a “particularly sharp decline” in manufacturing imports from China to the US in 2019. It also showed that US manufacturing in that year commanded a significantly greater share versus 14 Asian low-cost countries.

    Smes stopping China Sourcing  

In other words, manufacturing and sourcing is returning to the US.


   

The study also found that US companies were sourcing their traditional imports from China in other Asian countries instead, notably Vietnam, and, closer to home, Mexico, as they weighed surety of supply against costs.    

Companies changing China Sourcing  

And then the Coronavirus pandemic swept through the world…


   

While the Kearney study was published before the full impact of the pandemic had been assessed, its authors said they expect the Covid-19 fallout to swing companies’ focus toward resilience in their global supply chains to safeguard against future such crises.

Companies are now left with the intricate task of balancing cost, risk, and resilience. For some, it may mean leaving China completely. For others the option would rather be to expand from China into other regions.    

SMEs shifting China sourcing  

Small Businesses are Leading the Way Against China Sourcing

 

With China accounting for 35% of global manufacturing output, global supply chains were badly clobbered when the Coronavirus disease forced the Asian country into lockdown in December and January.  


A total of 56 percent of 635 US small-business owners surveyed by Australia-based money transfer operator OFX said they are pondering moving supply out of China, or had already done so.


   

The main reason they gave for wanting out was the supply chain disruption caused by the lockdown.

Those planning to leave said they were looking at other countries in Asia, particularly Vietnam and India, as well as at Mexico, where labour is as cheap as China’s and where auto-makers, textile firms, and lighting manufacturers have already set up shop.

 

Why Is It Easier for SMEs to Quit China?

Small businesses have a number of advantages over large multinationals when it comes to shifting key components of their supply chains. These include:

  • Smaller is simpler: It is not for nothing that they are known as SMEs (small to medium-sized enterprises), because they are exactly as their name suggests. Unlike multinationals, SMEs don’t have large factories in China with vast amounts of machinery, moulds, and equipment that would need to be moved if they chose to relocate. SMEs can typically pack up and leave with a minimum of fuss.
  • There are millions of SMEs in China: Each year, an estimated five million new SMEs—local and international—set up shop in China, with the total number of small businesses in that country estimated at around 38 million in 2019. China is well geared towards facilitating the comings—and goings—of SMEs.

  Stopping China Sourcing small companies

   

  • Punitive measures less likely: While large firms could face punitive measures if they pull out (e.g. Beijing could make it difficult for them to source Chinese-made components or raw materials for their future operations), SMEs are less likely to experience any backlash.

 

But Will They Really Leave?

When push comes to shove, will companies really pack up their China operations and leave, lock, stock, and barrel? To do so would cut them off from China’s gargantuan consumer base. Can they afford to take this drastic step?

A survey by the American Chamber of Commerce in China, conducted jointly with PricewaterhouseCoopers showed that, in fact, most US companies plan to retain their supply chain and/or procurement activities in China, but indicated that they would now focus on risk management.

The majority of respondents (70 percent) said they would not shift their production or procurement activities outside of China, while 24 percent said they plan to shift their procurement, and 12 percent intend to relocate production.

 

India Eyes China-based Companies…

India is making a not-too-subtle attempt to woo internationals based in China, offering incentives to 1,000 US companies to relocate.  However, India’s complicated trade and labour laws and its inability to match China’s production capacity are likely to deter companies from relocating their entire operations.

 

As Does Japan …

The Japanese government in April announced a $2bn (USD) stimulus package in an attempt to lure Japanese companies based in China to shift production home. The response has been muted, with, as far as is known, only one firm—which makes medical face masks—taking advantage of the offer.

Other Japanese companies say that shifting production back home is impractical and makes no economic sense since most of their products are mainly aimed at the Chinese market.

 

Vietnam, India, and Thailand are Favoured…

Some multinationals, such as Google and Microsoft, have accelerated efforts to shift the production of their phones and computers from China to Vietnam and Thailand due to the COVID-linked supply chain disruptions. But no one expects that they will risk shutting up shop in China altogether.

   

New countries instead of China sourcing  

A recent survey of 350 Japanese companies in China found that only 2.9 percent of respondents plan to move their business out of that country due to the pandemic.


   

Those planning to move indicated that they were looking at Vietnam, India, and Thailand as new bases for their operations.

 

The Most Likely Near-term Scenario

Aside from a few thousand SMEs who are expected to make good on their decision to move manufacturing out of China, most foreign companies are expected to adopt the China+1 policy. That’s a less radical departure in which they will expand their sourcing horizons beyond China and into additional low-cost countries, rather than pull the plug completely on the Asian Tiger.

Nevertheless, while a true exodus may not materialize, there’s little doubt that changes in sourcing strategies are on the horizon, and that China may find itself in tougher competition against alternative offshoring and outsourcing destinations.

 

What To Do Next

If you were thinking about sourcing from different countries, feel free to contact me on the details below and I would be happy to help.


 
 

Contact Rob O'Byrne
Best Regards,
Rob O’Byrne
Email: [email protected]
Phone: +61 417 417 307

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