In our last blog, we discussed how the Novel Coronavirus (2019-nCoV) will likely affect manufacturing in China in the foreseeable future and what your business can do to mitigate this risk — namely, make improvements to your manufacturing process in China.
However, you may be considering whether relocating your plant out of China is a viable solution. In this blog, we’ll discuss offshoring contingency plans: their advantages, disadvantages, and considerations you might have to take. But first, it’s important to understand the motivation behind this decision.
Why are you looking to relocate your manufacturing from China?
The 2019-nCoV outbreak—like most crises—has highlighted the weaknesses in the global production system. Many companies went all-in for manufacturing in China and are now finding themselves unable to meet production or have a valuable piece in their supply chain network rendered unavailable for an unknown period of time.
Many clients are now asking us if they should relocate their facilities to Vietnam or Thailand to mitigate the risk and save money.
While diversifying is an excellent idea, it is important to first understand the costs and benefits, and how it will best serve your business. If the only goal of setting up operations in another country is to protect against the risk of China shutting down, then, by all means, do so. Setting up your factory in a new country can be fairly easy. Opening a small facility in a new country with a few machines and a couple dozen workers may provide the mitigation you need, especially if you set up the new manufacturing facilities using the LEAN principles.
Where should your factory move after leaving China?
A more difficult question than the ‘why’ is the ‘where’. And deciding where to move outside of China is unexpectedly difficult. Too many companies look to find the next ‘China’, a place with abundant cheap labor, and often the first place that comes to mind is Vietnam.
Depending on the industry, that can be an excellent idea, but every company should think about their biggest cost, the supply chain network, and the distance from their target market. We’ll explain each of these considerations below:
3 Key Considerations in Choosing Your Next Manufacturing Location
1. The labor costs in other parts of the world
Labor is the most important factor when it comes to manufacturing electronics, clothes, and other consumer goods. But it’s not the biggest factor for heavy industries, metals, and any other industry that is energy-intensive, rather than labor-intensive.
If energy is the most important element, then neither China nor Vietnam are good choices as both have relatively high energy costs. A better option might be the United States or Mexico, or even the UAE.
It is also important to remember that labor prices can rise rapidly especially when there is a surge in movement to a new location.
2. Supply chain networks outside of China
If you have a complex supply chain with many local suppliers, moving completely or even partially out of China can be a headache. As new relationships must be forged in another country, the supply chain network will grow further apart—increasing both costs and the likelihood of delays.
Despite Vietnam having low labor costs and a good labor pool, it does not have a network of sub-suppliers and sub-sub-suppliers. So while moving to Vietnam could save money on labor, you might end up spending more on the individual components of your product.
3. Proximity to target market
Companies are finding it more and more valuable to have shorter lead times and increased flexibility with orders by producing closer to the home market. Zara, for example, manufactures its clothing in Spain and Morocco, which allows it to be highly flexible when changing its product line.
On the other hand, its competitors, such as H&M, must place huge orders with suppliers and will often need to mark down products based on trends, which hurts profit. Similarly, auto parts suppliers often produce in Mexico to supply manufacturers the US and have shipping speeds of 1 to 3 days instead of the 6 weeks it takes to get products over from Asia.
Is moving my factory out of China the best option?
While diversification of production is almost always a good idea, it’s difficult to say what may cause a partial shutdown even in countries outside of China. The best way to diversify is not always easy, so you need to consider your own situation before deciding what would work best for you.
Though we cannot give specific advice without seeing your operations, we can help you figure it out for yourself and make the best decision for your company.
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