Moving Manufacturing from China to Other Southeast Asian Countries

China has been the world’s biggest exporter since 2009, with hundreds of millions of workers producing and exporting trillions of dollars worth of products around the globe. Recently, global developments have driven up the cost of doing business in China, raising the demand for having products made in Southeast Asian countries like Vietnam, Cambodia, Laos, Bangladesh and the Philippines.

Discover how China became the global manufacturing superpower, why businesses are moving manufacturing out of China and the benefits your business may gain by manufacturing outside of China.

The rise of Chinese manufacturing

Before its modernization, China’s centrally-controlled and globally isolated economy made manufacturing inefficient. Since 1979, China has rapidly grown to become the world’s most prolific manufacturer. Economic reforms like decentralized trade and trade liberalization, along with foreign investment spurred unprecedented growth. On average, China’s GDP has grown 9.5% every year since 1979, according to the Federation of American Scientists. This growth prompted the World Bank to declare China “the fastest sustained expansion by a major economy in history.”

As the world’s most populated country, China was able to activate a massive labor force. Currently, 13% of China’s population works in manufacturing (182 million workers), compared to 13 million manufacturing workers in the U.S. (4% of the U.S. population). During the rise of supply chains in the past 40 years, China has dedicated billions of dollars to developing ultra-efficient infrastructures to satisfy the demand for cheap products.

Why businesses are moving manufacturing out of China

China’s hold over the manufacturing world is currently being disrupted. Developing countries in Southeast Asia have stepped up their manufacturing and supply chain offerings to compete with China, while changes in wages and trade policy throughout the region impact supply chains around the world.

Rising wages in China:

Compared to other countries in Southeast Asia, Chinese labor is expensive. Between 2009 and 2014, the Chinese minimum wage almost doubled, which raised labor costs and made profit margins thinner.

At scale, the rising wages of Chinese factory workers can have a huge effect on your bottom line. The rising wages have spurred brands to move their manufacturing out of China for decades, especially in labor-intensive industries.

Diversification of supply chains:

Brands have been moving manufacturing out of China since the early 2000s, especially for high-labor products like footwear. As of 2006, Vietnam produced 29% of Nike’s footwear, compared to 31% in China. In 2017, Vietnam accounted for nearly 50% of Nike’s manufacturing.

Brands are not abandoning Chinese manufacturing altogether, but diversifying their supply chains. The United States Fashion Industry Association reports this development reflects “a change in the sourcing trend, from ‘China Plus Many’ to ‘China Plus Vietnam Plus Many.’” Different aspects of manufacturing and supply chains occur in different countries to take advantage of the diverse benefits of Southeast Asian countries. For example, high-labor manufacturing is the most cost-effective in low-wage countries, electronics manufacturing relies on technology-specific infrastructure and high-volume production benefits from countries with the capacity for mass production. Diversifying your supply chain may be the best way to maximize profits and efficiency for your organization. 

Tariffs:

The United States and China have had a complicated trade history, from mutualistic trade deals in the early years of the 21st century to today’s escalating trade war. Recently, the U.S. has imposed tariffs on $550 billion dollars worth of Chinese products and China has retaliated with tariffs on $185 billion worth of U.S. goods, China Briefing reports.

Since the 1960s, supply chains have decimated the costs of transporting goods between countries. With the supply chain development over the past decades, China has formed specialties in manufacturing that other countries lack. Tim Cook defends Chinese assembly of Apple products despite the trade war.

 “The products that we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skills is very deep here. In the U.S. you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China you could fill multiple football fields.” -Tim Cook, Apple

The trade situation has been complicated by a China-specific 25% tariff, impacting $34 billion dollars worth of products. Businesses that rely completely on Chinese manufacturing are likely to see a massive rise in manufacturing costs due to tariffs, on top of the rising wages. To mitigate the expenses imposed by tariffs and the trade war, businesses can diversify their manufacturing supply chains to other Southeast Asian countries or cut down on transit costs. 

Diversifying your supply chain can introduce complex new challenges and opportunities. Values of materials, labor, quality and colour differ by country, creating a nuanced business environment. Proactive organizations work with packaging experts to ensure they have control over the factors that impact their bottom lines.

Compliance:

When diversifying your supply chain or moving manufacturing out of China, compliance issues are a major consideration. Different countries have different safety standards within their production environments, along with methods for enforcing safety standards. Before working with a new manufacturing partner and having products made in Southeast Asia, make sure the organization meets all compliance standards necessary for business.

Work with packaging optimization experts

As manufacturing is a key component in the viability of your supply chain, fluctuations in labor costs and tariffs can have a resounding effect on your bottom line, causing you to start producing manufactured goods in the southeast region. At Billerud, we provide expertise in packaging optimizations within Southeast Asian supply chains, and have the ability to simplify the complex packaging relationships to a single point of contact.

Contact us to find out how much you could be saving with our managed packaging solutions.