Where is the new China?

When President Trump called on U.S. companies to pull out of China, panic ensued in the business community. That potential edict blew over, but the ongoing threats and enaction of tariffs are a major reason American companies are looking to shift manufacturing and sourcing out of China. A survey this summer from the American Chamber of Commerce in Shanghai showed 26.5% of its 333 respondents said they redirected investments initially planned for China to other regions in the past year. That figure was 6.9 percentage points higher than the previous year.

Fitbit announced it’s leaving China by January 2020, due to tariffs. And U.S.-based Procon Pacific recently moved about 90% of its manufacturing out of China, due mostly to tariffs on their flexible intermediate bulk containers (FIBCs), heavy-duty propylene bags to transport products like fertilizer, flour and sugar.

When the Chinese depreciated the RMB currency 10% in August as a response to Trump’s tariff announcement, it effectively canceled out a 10% U.S. tariff increase. But if the tariffs continue to rise, it will be harder to recover from those punitive damages, Dan Krassenstein, Procon Pacific’s global supply chain director, told Supply Chain Dive.

It’s not just tariffs

The trade war is accelerating the potential exodus of U.S. manufacturing from China, but the writing has been on the wall in terms of rising costs in China, Krassenstein said. “Anyone caught with their pants down is not paying attention,” he said.

Procon Pacific has manufactured FIBCs in China for decades, he said, though the cost of labor quadrupled in the last 10 years. “They’re moving up the food chain. It’s good for China,” Krassenstein said. In addition, the social welfare tax and compliance costs for Chinese environmental rules drove up factory operational costs.

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“Anyone caught with their pants down is not paying attention.”

Dan Krassenstein

Global Supply Chain Director, Procon Pacific

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While better wages are good for China, they’re not necessarily cost-effective for manufacturers. In response to labor costs, Procon Pacific shifted 20% of its production to India and Vietnam three years ago. And with U.S. tariffs rising, the manufacturer then moved about 90% of its remaining Chinese orders out of the country, mostly to India.  

A lot of manufacturers have been absorbing the costs, “but they’re getting big enough that you have to pass them along or have some alternate plan,” Willy Shih, a professor at Harvard Business School, told Supply Chain Dive.

Those manufacturing in China that want to sell in the U.S. are looking at how to diversify their supply chain, and tariffs are just a short-term indication of that, he said. Shih said the trade war is not a short-term event, but a sea change in the environment and the U.S. and Chinese relationship.

Location, location, location

Whether to move production partly depends on the customers’ locations. The American Chamber of Commerce in Shanghai recommends that American companies operating in China split their sales strategy into three markets: manufacture for the domestic Chinese market, for the U.S. market and for markets outside these two countries, said Krassenstein. That helps companies ride out any economic and political storms.

Aside from the U.S., Procon Pacific sells to China, Germany, Canada and Japan. The Chinese market is a good one for many American manufacturers, as they can take advantage of Chinese consumer liquidity and U.S. reputation. “U.S. companies have a good reputation in China. They don’t care if [the products] are made in China or in the U.S. They like the integrity of U.S. production and the responsibility behind their products,” Krassenstein said.

To save on labor costs, American manufacturers focusing on Chinese sales can move manufacturing from the Chinese port areas to the middle of China. Some interior regions have great railroad and airport infrastructure. “The Henan province, if you took it out of China, has the population [equal to] the fifth or six largest country in the world,” Krassenstein said, a reason Apple chose it years ago for production.

Pros and cons of other locations

There’s not one answer for the best country to move production when leaving China, and China may not be the only country facing additional tariffs in the future, Krassenstein said. The U.S. government may add tariffs to India for lack of U.S. market product access, and Vietnam for a trade surplus. Even with a party change at the next presidential election, these initiatives could continue, Krassenstein said. There is supply chain disruption and expense to moving manufacturing. It’s important not to put all the eggs in one basket, he said, and “be aware of politics and keep your eye on it.”

Companies will need to determine whether the new country has the supply chain that goes with the industry, or whether they’ll need to bring it. With electronics, for example, a company may need to import components anyway. Most who are manufacturing in China today have suppliers in a supplier park nearby, so they can get deliveries daily or more often, said Shih. Companies should see if they can get suppliers to move with them or if they’ll have the logistical support to import what they need. They may also need specialized tools, he said.

The nature of the industry matters too. Moving garment manufacturing is easier, said Shih, because the level of workforce training is relatively low. “That’s one that always moves first, because the barriers to the workforce are not that high and it’s sensitive to price,” Shih said.

Before making any decisions, Krassenstein recommends an internal assessment of a country’s or area’s capabilities. “A lot of U.S. companies have been buying from China for a decade,” he said. “Chinese markets have become mature” with reduced or mitigated risks. Those looking at new countries will need to make exploratory trips to get to know vendors and ensure freight forwarders know how they work. He recommended hiring someone knowledgeable in procurement or manufacturing in the ground, until the company learns the market enough to handle direct procurement itself.

Click a location to learn the pros and cons of sourcing and manufacturing.

Lead time: How Procon Pacific handled its move to India

Procon Pacific faced lead time/total delivery time (TDT) problems when moving manufacturing to India, as TDT increased and was more erratic (a 90-day TDT for China operations is 120 days in India). “It’s not just the length of time, but the unpredictability,” Krassenstein said. The company doesn’t know the estimated arrival time until the cargo is on the final line-haul vessel.

That affects customers. “If one of our customers runs out of bulk bags, it shuts down their operations,” he said. Customers were used to China’s 12 weeks TDT, with a one-week variation. “When we shifted to India, the TDT went up to 15 weeks and the variation was about 3 weeks.”

Cargo shipping schedules

After researching the problem, Procon Pacific found the time from order placement to cargo readiness-to-load at the factory was the same in both countries. So was the time from line-haul ship departure until container discharge in North America.

What changed was the Kolkata manufacturing in eastern India only had access to feeder vessels, and the river port is subject to drought and congestion. Containers must be transferred, usually in Colombo, Sri Lanka, he said. Procon met with its freight forwarder and studied feeder vessel options. It’s now better matching the production schedule to the vessel cut-offs.

Port changes

The other shipping problem was congestion in the New York port, delaying container transfer time to Chicago-bound trains, Procon’s main U.S. destination. “As many U.S. importers shifted production from China to South Asia and Southeast Asia, it resulted in a sudden increase of container ships routing via the Suez Canal to the U.S. East Coast,” he said. Chinese cargo primarily ships on Transpacific routes to the U.S. or Canadian West Coast. Procon is now running trial shipments to Halifax and Norfolk to avoid New York port congestion.

Vietnam’s shipments also have delays. They’ve suddenly expanded due to the U.S.-China tariff escalations, and the country’s highway and port infrastructures are maxed out, Krassenstein said.

Manufacturing

Procon Pacific limited the types of products manufactured at the India factory to match its machine capabilities. It shaved a week off the timeline by eliminating manufacturing bottlenecks. Vietnam, where it also manufactures FIBC bags, has similar issues with the machine types used to weave the fabric and sew and assemble the products.