Manufacturers in highly industrialized nations have been offshoring production to Asia for decades. Production went from Taiwan and Hong Kong to China in search of lower prices. American, Japanese, and European companies jumped at the chance to move production to other countries to produce goods cheaper with fewer regulations. Now the world is changing. More companies see the benefits of reshoring or nearshoring production to counter supply chain challenges, tariffs, and rising costs in Asia.
Even with the move to reshoring, is offshoring still the great opinion? Absolutely! Depending on the product and your specific need, offshoring production is the most efficient and sensible choice.
Let’s be clear on the definition of words before we get started. Offshoring means moving manufacturing (or other services) to another country. An American company moving production to Mexico for the US market is offshoring while a British company building a factory to produce for the Chinese market is not. Nearshoring is moving the country from one lower-cost country to another one nearer to the target market, i.e., moving from China to Mexico to serve the American market.
The Shortfalls of Offshoring
Offshoring is not the clear winner that it once was. As mentioned before, rising costs, inflation, tariffs, etc. all make offshoring to China less attractive than it once was. The other countries are becoming attractive, yet they have their own challenges like complex tax structures. Offshoring also has its own inherent costs.
While moving to lower-cost countries may provide short-term relief, it is not likely to last long. As we have spoken in detail in our blogs about Taiwan and Vietnam, neither of these countries has the vast capacity that China possesses. Cambodia is behind infrastructure and also does not have the capacity to absorb too much business from China. India could theoretically be the next China, but it has not made the investments in infrastructure, nor does it have the savings and manufacturing system as China. India has focused more on white-collar jobs and has made serious inroads in IT and call center services.
Why Still Manufacture in China?
China is still, despite the changing circumstances, one of the best places to manufacture. Two primary reasons for this are highly developed infrastructure and the prominence of contract manufacturing.
1. Highly Developed Manufacturing Infrastructure
Forty years of rapid industrialization have left its mark on China. If there is a product that can be built, there is a Chinese factory to produce it (with the exception of a few high-tech items). Contract manufacturers can produce the product, more on that later, or a new factory can be built to produce a product. If you build a new factory, the necessary supply chain and skill sets will be readily available. Nearly any manufactured product will have at least some component made in China.
2. The Prominence of Contract Manufacturing
China has built its economy on contract manufacturing for other companies. Everyone has heard of Apple, but most people have not heard of Foxconn, the contract manufacturer, the Taiwanese company, that makes a majority of Apple’s products in China. Contract manufacturing does not exist at the same size and scale elsewhere in the world. This means that it is not difficult to find someone who can make your products if you want. The question is not if there is a company that can make your product, it is the question of finding the right company.
Best Types of Products to Offshore
While any product could be offshored to China, some are better fits than others. Start-up companies are better off sourcing products from China as they build their business rather than focusing on building a manufacturing facility, at least in the short run. It is cheaper and easier to have your product made than set up the whole system to make it yourself. Relatively cheap products and inflexible products are best offshored. Toys are typically one of the first products to be offshored or mass-produced. Inflexible products do not need as much customization or need to react to trends in the same way.
Pitfalls to Avoid
The capacity for manufacturing nearly any product is there but it does not mean the process is easy. Numerous companies have come to CMC with product verification challenges and quality and delivery failures. Navigating the complexities of manufacturing in China takes skill and can be best handled by a third party, especially if manufacturing is not your specialty or focus.
Follow up
Once you find a good manufacturer for your production, it is important to follow up with a 3rd party to assess the manufacturer and assist the factory to produce your product. CMC has worked with a number of companies that found good suppliers, but manufacturing challenges and miscommunication caused production delays and quality problems. Sometimes these problems could be solved themselves over time but that is considerable time and money lost before the situation improves.
The Bottom Line: Don’t Do it All Yourself
If you plan on building a factory in China like Cyden, do not handle the search and set up remotely. Local companies can be your liaison and streamline the process. Similarly, if you are looking to buy a factory to produce your product, a third party can assess the factory and look for any red flags and areas of opportunity. CMC has completed this sort of project for a number of clients. Some have moved forward with very successful manufacturing operations. Others were saved from a factory that did not meet their need and purchasing it would have been a huge loss.
Offshoring is still a great option and any company should analyze its needs before going forward.
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