For nearly two decades, China has been the global hub of manufacturing. Western businesses moved into the Asian nation as it offered cheap labor. But in the past few years, manufacturers have begun moving their operations out of China because of rising costs. And the current trade war with the U.S. has only accelerated this exodus.
Trade war and manufacturing
According to a report by the Boston Consulting Group, China’s production cost was 6 percent lower than that of Mexico. A decade later, the production cost of Mexico went cheaper by 4 percent. Right now, the cost of manufacturing in China is only 5 percent lower than that of the U.S. And when America slapped on additional import tariffs, the writing was on the wall for many manufacturers — time to move out.
“I’ve been going back and forth to China for years, and it is getting more expensive. With all these tariffs coming, why not run some of your production runs elsewhere? Companies are saying that the scare of these tariffs has decreased the incentives to manufacture in China,” Nathan Resnick, CEO of Sourcify, said to Forbes.
The Communist Party is reportedly trying to retain manufacturers by projecting the mainland as a cheaper production center than coastal areas. However, manufacturing costs in the mainland will still end up on the higher side over the long-term from rising wages and tariffs.
Japanese companies seem to be taking a lead in the exodus. Sixty percent of Japanese businesses have shifted or are in the process of shifting their operations out of China. The remaining 40 percent are looking into withdrawing their funds.
The Trump administration is also planning to withdraw from a postal treaty that it claims is giving an unfair advantage to Chinese businesses. Such a move will raise shipping costs for manufacturers in China.
New manufacturing hubs
Global businesses see Southeast Asian countries as the ideal alternative centers of manufacturing. GoerTek, Apple’s Airpod production unit in China, is shifting to Vietnam. “Due to macro-economic factors — such as external market fluctuations and China-U.S. trade disputes — the company’s operation and management has become more difficult,” company Chairman Jiang Bin said in a report quoted by ABC News.
SK Hynix is moving some of the production of its DRAM modules to South Korea. Toshiba is looking to make Thailand or Japan its new production center for plastic molding machines. Mitsubishi will shift its machine tool manufacturing to Nagoya in Japan. Asia’s biggest shipping and logistics company, Kerry Logistics Network Ltd., will move production lines from China to countries like Vietnam, Myanmar, Laos, and Malaysia.
The U.S.-China trade war is seen as an incredible business opportunity by governments in Southeast Asia. “In Taiwan, the government is actively encouraging companies to move production out of China, pledging last month to speed up its existing ‘Southbound Policy’ to reduce economic reliance on China by encouraging companies to move supply chains to Southeast Asia,” according to The Globe And Mail.
If the trade war between Washington and Beijing remains unresolved, it is inevitable that a large number of manufacturing businesses that cater to the American market will move out. The only thing left to be seen is how long China can hold out before it finally succumbs to following the laws.