Is this the end of manufacturing in China as we know it?

To say that China’s in the news a lot these days is an understatement. From trade wars to border skirmishes to semiautonomous regions being put under new a legal regime, it seems that tension between China and the west is always front of mind.

One of the dominant topics in diplomatic and economic circles the last few years has been a potential “decoupling” of the US and Chinese economies. And more than that, it’s already underway, with factories and production capacity migrating out of mainland China into other countries- mostly in Southeast Asia.

So is this a trend that will continue? To an extent, yes. Does it mean that manufacturing in China is over? Most certainly not.

There are two main reasons why people talk about pulling manufacturing from China and moving it to another country. Cost and politics. While politics has added to prices of late via tariffs, we’re going to steer clear of that side of things and keep things focused on the main costs of producing products there vs other countries in \the region.

Is it more expensive to manufacture in China than Vietnam, Cambodia, or Indonesia?

Yes… if you’re only looking at labor costs. That’s what originally drew the majority of manufacturing to China in the first place: cheap labor.

The 2019 manufacturing labor cost per hour in China is $6.50. That’s almost double the labor costs in Vietnam ($3.80). The Philippines comes in at $3.10, and Indonesia is $0.80. (Source)

Well, why isn’t everyone manufacturing in Indonesia? There are two massive benefits to being the world’s manufacturing hub for 30 years: supply chains and experience.

China’s current supply chain is larger and more sophisticated than any other supply chain that has existed on the face of the planet.

Never before has anyone been able to move from raw material to final product at the same speed, scale, or scope. You need to understand that China holds damn near all of the cards when it comes to manufacturing. Everything from mining rare earth minerals, to refining, to production and shipping. The logistics of shipping everything from raw materials to when it arrives in California on a boat is mind-bending… oh and it’s all pretty much run by China.

Let’s say that a medium-sized cellphone accessory business wants to move its manufacturing to Vietnam. Where does Vietnam get their raw materials? China. Where is all of the factory’s equipment and machinery coming from? China. Where are the molds being made? China. It is incredibly difficult to cut China out of the manufacturing equation in 2020.

Pulling out of China isn’t just about setting up new supply chains. It’s about training a workforce. There are now multiple generations of skilled workers in China. The labor market in other SEA countries is nowhere near the size, level of experience, or training as China’s labor force. Sure, you have access to cheaper labor, but it will be far less efficient and scalable.

Yes, there are some low-tech manufacturing opportunities in SEA countries. We are seeing a rise in the quality of textiles, basic metal products, and some plastic components coming out of places like Vietnam and Indonesia. For anything remotely complex, however, you’re still better off back in China.

When large companies decide to move their manufacturing to a country like Vietnam, they are essentially building a new city. From paving new roads, to building power stations, to establishing schools, it’s a huge process that requires buy-in and intricate partnerships with local governments. It is a massive undertaking, and the companies that are driving this process right now (Apple, Samsung, etc.) are setting the stage and will have a big impact on the manufacturing industry in 15-20 years. Training a new labor force, setting up brand new supply chains, and working with local governments is not impossible, but it’s certainly not the easiest way to manufacture in 2020- especially for SMEs.

Will we see a massive shift in manufacturing out of China and into countries like Vietnam, Indonesia, and the Philippines? Eventually; but it will be a gradual process. This kind of change doesn’t happen overnight; it happens over decades of slowly building infrastructure, supply chains, and training the labor force. It has taken decades for China to master manufacturing, and they had a singular focus with multiple regions and population centers aligned, ready to complement each other’s efforts on a macro level. That can’t be replicated across the SEA region- at least not in the same way, and at the same speed, that it was accomplished in China.

Over the next decade, China’s shift from hardware to software, similar to Silicon Valley’s the 1980’s, will continue- and it will continue to be accelerated by political forces.

The initial Silicon Valley boom was initially fueled by building hardware. As money started pouring in, manufacturing was slowly phased out of the area and outsourced to places like China. One day, China will do the same. Not tomorrow, and not next year. For now, it remains the best manufacturing option for the vast majority of products in 2020.

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