A recent Forbes article included a quote that caught my eye: “China may soon replace Detroit as the world’s rust belt.” It was the latest example of a growing number of business media and analysts apparently believing that China’s days as the world’s largest manufacturing nation are numbered.
As strategy+business magazine reported in February, the steady rise in China’s labor costs combined with rising oil prices and volatile exchange rates has Chinese business leaders concerned to the point that at last year’s World Economic Forum in Tianjin, the chairman of one of China’s largest companies privately assessed it as “the worst manufacturing crisis in the country’s history.”
The numbers supporting this concern are real and significant, with some models predicting freight costs and wages will increase annually at 5 and 30 percent, respectively. Studies substantiate a growing trend of manufacturing moving to Central and South America, and cite compelling incentives provided by Vietnam, Indonesia and newly emerging countries in Africa.
Although China’s growing internal consumer base alone should keep its manufacturing engines well-oiled for some time, even modest upticks in costs can quickly diminish profits and competitiveness for those companies with supply chains connected to China. Companies dependent on Chinese contract manufacturers for large production volumes, as well as those with their own brick-and-mortar plants in the country, are at highest risk and should pay close attention because the growing combination of rising costs and emerging competition soon could reach the tipping point that starts a truly concerted movement away from China.
Although I wouldn’t necessarily start packing my steamer trunk yet, advisers are nonetheless calling it prudent for corporate planners to at least review their existing commitments to China-based sourcing, if not actually starting on the first draft of a potential exit strategy.
Their supporting rationale is that those companies best prepared to recognize and act on coming sea changes will be best positioned to negotiate the most favorable deals within a new manufacturing country. Conversely, as one analyst quipped, “The position you absolutely don’t want to be caught in is to be the last one left to turn the lights off.”
A related study by strategic advisory and consulting firm The Hackett Group reported U.S.-based companies it surveyed were exploring pulling up to 20 percent of their offshore manufacturing completely back to the U.S. (“reshoring”), with a majority acknowledging that near-shoring continued to provide many attractive opportunities.
In a global manufacturing scenario, the obvious benefits from closer proximity to destination markets include reduced transportation time and freight costs, reduced inventory-carrying costs, faster speed-to-market and service turnaround times, and ease of doing business.
Deceptively simple in concept, companies considering near-shoring still must weigh a full range of factors against their individual business needs before reaching any immediate conclusions, including systems capabilities, political volatility, violence and supply chain security, and a vendor’s ability to provide adequate business continuity and disaster recovery plans.
Latin American countries are reported to be the biggest emerging players in near-shoring, and represented nearly a quarter of all of the countries included on the Tholons’ 2013 list of the top 100 outsourcing locations. For the U.S. market, the consistent winner as the top re-sourcing option to China was Mexico, as determined by 50 percent of manufacturing executives interviewed by AlixPartners, a global advisory firm, despite concerns related to drug cartel violence and organized crime.
As a near-textbook example of a near-shoring option, Mexico offers all of the traditional benefits defined earlier, as well as its maquiladora program. Having several decades of maquiladora-related experience under its belt translates into accelerated start-ups for new business with reduced risk of unknown regulatory, operational or logistical issues. When combined with Mexico’s inclusion in the North America Free Trade Agreement and the eligibility of its finished goods to qualify for duty-free entry into the U.S., the advantages over China widen further.
Because change itself is the only real constant, performing these analyses should be standard procedure within any corporate supply chain operation. And right now, a trip south of the border may be in order.
Jerry Peck is a licensed customs broker and Global Trade Management expert with more than 30 years experience in regulatory compliance and GTM optimization solutions. Contact him at firstname.lastname@example.org, or at 469-235-5229.