The hidden costs of de-coupling manufacturing from China

The sun has not set on manufacturing in the region despite the pressure from global brands to ‘reshore’ production. Here’s what we at Ason Bags have learned during this process in solving a more complex challenge than we ever predicted.

There’s history

It’s nothing short of a global business phenomenon. For several decades, Chinese manufacturing has offered unprecedented opportunities to reduce production costs while maintaining a high level of quality of output. For thousands of companies China has been a reliable source of low-cost labour, a scalable availability of raw materials, industrial clusters or “agglomeration”, tax incentives and favourable rental prices within industrial parks.

The list goes on – China has built a world-leading business ecosystem, logistics apparatus and infrastructure to contain all costs within one supply chain. By 2018, China was the leading trade partner for 120 countries – its exports reached U$D 2 498 trillion in 2019. China’s Logistics Performance Index (tracking countries’ logistics and export performance) is the highest LPI in Asia at 3.61.

A perfect storm has brewed

Nothing lasts forever – good, cheap, reliable, indefinite timeframe… something’s got to give. Resource-intensive manufacturing, low labour rates, competitive pricing and rapid economic growth may well be reaching their limits. What has also changed fundamentally is Chinese society – the population has become wealthier. Add Trade Wars, a global pandemic, the war in Ukraine and political / ideological differences between nations and today we see a deep distrust of reliance on Chinese manufacturing. Companies now expect production at a more ‘palatable source’, still demand a quality product at the same price, with reliable timelines. The decoupling discussion and its deep flaws can be attributed to the myopia that often arises from hegemonic tendencies. It’s just not that simple.

Sure, the Trade Wars seem to have subsided thanks to the One Deal Agreement, yet many major brands continue to follow the de-coupling path motivated by political, social and market pressures to gain control of their own supply chains. However we’re all are facing the true practicalities of what true de-coupling entails. At Ason Bags, we’ve seen it first hand – terms like ‘in-house reshoring’, ‘reshoring for outsourcing’, ‘reshoring for insourcing’, ‘outsourced reshoring’ and ‘nearshoring’ are coming up a lot in our discussions, and mandates too.

It’s not just a sticker

Some brands have moved their final assembly plants from China to other SE Asian manufacturing regions, and added the sticker ‘Made in Vietnam’ for example. But this is not true ‘de-coupling’. The ‘complete supply chain’ is more than just final assembly – in many cases, raw materials, trims, accessories, finished materials and threads are all imported from China anyway. Not only is this superficial, it defeats the point. A pertinent quote: “Firms thought they had a global supply chain and what Covid showed them was that they had a China supply chain.” – Michael Kokolari (senior economist Ho Chi Minh City).

The numbers tell the real story

It’s tempting to look at (for example) Vietnam’s notably high productivity rate coupled with extremely low wages (China’s per hour rate is U$D 2.59 whilst Vietnam’s is U$D 0.60). But fixating on lower labour rates is a deeply flawed strategy, ultimately with adverse effects. Other SE Asia regions seem attractive too, however some have slow, inefficient customs procedures relying on manual operations, inadequate cargo inspections at export depots, costly and congested transport infrastructure with warehousing and distribution centres far from the ports. Looking even deeper, all brands ultimately will face ‘sunken costs’ i.e. buying and shipping machinery to the location, rental prices, environmental laws and in many cases, paying for Chinese skilled labour to train local workers. Also, again, there’s the continued challenge of ‘complete supply chains’ that are still highly dependent on China.

The stats speak volumes – the de-coupling and reshoring drive of the past three years has been cited as a direct contributing factor to global inflation. Yet we are optimistic. We’ve worked hard on more valid strategy for diversifying manufacturing and the supply chain, while still gaining the benefits of efficient production, slick customs clearance, robust logistics infrastructure and a highly skilled and experienced labour force.

China+1 – a realistic solution

Take The Philippines for example, in the current circumstances, this is a attractive strategic location for manufacturing operations. We conducted due diligence studies to better understand the business and manufacturing environment. It takes cargo three to four days by boat, from Xiamen (Ason’s manufacturing HQ) to Manila. Raw materials may be shipped relatively quickly and inexpensively, shortening lead-times. Close proximity means skilled Chinese machine operators may travel easily to train the local workforces. There’s a high level of English, plus there are favourable relations between The Philippines, Australia and the U.S.

Based on the facts, it is difficult to argue a logical business case for a complete de-coupling from China, aside from citing ideological and political differences. Until a single nation manages to completely re-shore and manufacture products using all locally sourced materials, complete de-coupling is virtually impossible. Till then, there’s a far more realistic approach for countries and companies to diversify production – it’s called China+1.