Renaud Anjoran, CMC partner, sent me this article by Dan Harris of Harris Bricken. It is worth your time to read it. Go ahead and come back to this blog.
Have you read it? Great. Now, let’s dig into the issues it raises.
Much like Harris Bricken, we have advocated for years for companies to take a hard look at manufacturing in China and the costs and benefits that entails. While there has been some movement, we still find that most companies like to talk about it while hoping that things return to a pre-COVID state.
That is understandable. People would instead hope for a return to the status quo than grapple with the difficult and changing realities. Change is always difficult, but it is the only certainty in business. Companies that thrived half a century ago no longer exist, and new political changes can alter the landscape. While I was just a boy at the time, I remember the fear that Japan would dominate the economic world.
There are a few ways we have seen clients react to the changes.
First Solution: Go Back to China and Fix it Yourself
One proposed solution we have heard is companies thinking if they can return to China now that COVID restrictions have been lifted and push their suppliers in person so that it can return to the way things were.
There are several reasons that this is not true.
1. The underlying economic and political conditions have not changed.
The tariffs are unlikely to go away any time soon, prices are rising in China, the animosity towards China is not likely to decrease, and your IP is no safer.
2. It is not likely that this was ever reliably effective.
While several companies forge strong relationships with their suppliers, we have seen much more push relentlessly for cost savings and other benefits only to find very few changes after the company representatives have left China. Many of these are looking to re-shore or onshore their manufacturing.
Second Solution: Move to the next “China”
The second solution is to move production to Vietnam. Or India. Or Mexico. Or etc.
Now, this is not necessarily a bad solution to the challenges of relying on China as your primary manufacturing location. However, we have found that many companies go to these other locations with the expectation that this will be the next China.
There is no “next China”.
Do not, to borrow Mr. Harris’s metaphor, drink the Kool Aid. Each potential new manufacturing location offers unique advantages, costs, and opportunities, but none are the new China.
China from the early 1990s to 2019 was in a unique situation in the global history of a massive country with a large potential demographic dividend and an accommodating government that, coupled with a changing global order and financial regulations, was able to develop faster than any country in history.
However, many of those advantages that China had do not exist anymore. Now China is the second largest economy in the world and again a major player in global politics. It will remain a major part of most supply chains but its day as the only game in town is changing.
What Now?
I recommend following Mr. Harris’s advice when it comes to any move, not just to Mexico.
a. Think about the target economy
This is a variation of what Mr. Harris has described. Think about what you want to accomplish, your target audience, and what is needed for your supply chain. You may want to move all manufacturing back to North America but, depending on the product, you are just as vulnerable to supply chain shortages if Asia is the primary supplier. If your market is the Middle East, Europe or India may be a better option.
b. Have a plan
While Mr. Harris focuses on Mexico, what he writes applies to any location. It is foolish to make a move without a strong plan. From personal experience trying to expand to India and the Middle East, we can tell you that a strong plan is essential to future success. MTG Global’s (parent company of China Manufacturing Consultants) plans were poorly thought out and tested, and our expansions were unsuccessful. Thankfully neither was a major investment.
You should not go into any new country as many companies did to China in the 1990s and 2000s. The environment does not exist to repeat that process. The days of finding an enterprising factory willing to build from nothing is no longer there. That does not mean that the other manufacturing destination countries do not have enterprising individuals willing to find a way to make things work. There are plenty of those.
c. Sooner is better than later
We do not recommend running out after reading this blog and moving your manufacturing to Vietnam – especially if most components will still come from China! However, we recommend that you start exploring the option of moving your manufacturing facility to Vietnam (and India and Mexico, etc.). It is quite doable if you have a good plan and you take matters in your own hands, rather than simply looking for a local manufacturer to accept your orders for the right price. Just as planning is important, so it researching locations and finding one that best meets your needs and your future plan. Our series on factory relocation gives a lot of good information.
The Bottom Line
The world is changing and the companies that succeed will be the ones that understand these changes and find the best solutions for their business and their future goals. Mr. Harris is correct that now is the time to act. What are you planning for your company’s future?
Looking to improve your factory processes in China? Here's how CMC's manufacturing consulting services can help.
