For many years, China has maintained a pre-eminent position as a leading manufacturing country.
However, with the onset of the current pandemic coupled with rising US/China trade tensions, many companies are actively evaluating their options to move their Chinese operations to new locations. Many governments worldwide are also making a push for seizing this business, India’s “Make in India” campaign being one example.
As they move their manufacturing from China, companies are considering countries such as India, Vietnam and Indonesia, which have large production capabilities. However, India, Indonesia and Vietnam have some risks of their own, including the fact that their ports do not have the same volume handling capacity as China’s.
Companies are also leaving China due to China’s poor environmental record. China is the world’s largest contributor to carbon emissions (around 28% in total) even though the government has recently introduced and amended environmental protection laws. China has even banned importing waste and plans to go beyond this by increasing the standards on impurity levels. Non-compliance can cause businesses large administrative penalties, including administrative detention, imprisonment and even criminal penalties. Certain violations might even result in suspension of business. The arbitrary nature of the Chinese court system, however, makes this legislation, which would otherwise be a welcome change, create additional future risk for companies operating from China.
Ports are a critical component to manufacturing success, since once the goods are made, they need to be delivered to customers. Did you know that Shanghai tops the top 50 World Container Ports list while Tanjung Priok, Jakarta, Indonesia is 22nd, Ho Chi Minh City port, Vietnam is ranked 26 and JNPT (Jawaharlal Nehru Port in Navi Mumbai) in India is ranked 28? Even if Indonesia does not have ports as advanced as those of China, it still has better port handling capacity than most Asian countries. The government of Indonesia has also reduced handling costs at ports, which was once a concern and further plans to reduce the logistics costs. Vietnam has a great deal of port capacity, with 44 main ports and 470-500 million tons’ annual capacity. However, Vietnam is lacking big ship infrastructure since 80% of its cargo moves through smaller ports and regional gateways. India has a significant capacity for handling around 1451 million tons’ annually (which is expected to grow to 2500 million tons by 2025); it also has 12 major ports handling 60 % of its total cargo traffic.
In terms of manufacturing costs, China is now only about 4% cheaper on average compared to the US, according to The Diplomat and Seller Labs. This is because average manufacturing wage rates in China have increased greatly in the last couple of years. As a result, many companies such as those manufacturing shoes, apparel, electronics, etc. are moving from China to countries such as Thailand, Malaysia, Vietnam, Taiwan or India where blue collar wage rates are lower based on information provided by The Diplomat and The Business Standard.
Well-known companies such as Microsoft, Samsung and Google are also looking to shift their manufacturing bases to Vietnam and Thailand since the Coronavirus crisis according to reports from CNBC and The Economic Times while Apple plans to shift 20% of its production from China to India, says ET Now. Reuters has reported that HP and Dell are also planning to shift 30% of their notebook production in China to other Southeast Asian countries. The Corona Virus has been a catalyst for more companies to leave China and, as a result, many Asian countries are receiving the benefit. India is developing land almost double the area of Luxembourg for companies wishing to shift their manufacturing base, according to The Economic Times. An article in Business Today said that even Japan has offered a JPY 220 billion package to Japanese companies shifting production back to Japan and another JPY 23.5 billion package to Japanese companies seeking to move their manufacturing base out of China!
Another issue relevant to the shift from Chinese manufacturing is intellectual property (IP) protection which is very poor in China for foreign companies. The European Intellectual Property Office (EUIPO) has listed only China as a “priority 1” country with the most unfavourable IP protection laws. The system is grouped into 3 categories with category 1 being at the bottom. The law is loaded against the foreign investor in this regard as, if a foreign company steals IP from a Chinese company, the Legal Representative can suffer, in the worst-case scenario, the death penalty. According to a recent European commission report, “the scale and persistence of unsolved problems in the Chinese system for IP protection and enforcement has caused irreparable harm to European businesses”.
Another impediment to doing business in China is the risk of a forced technology transfer in order to access domestic markets, obtain investments or achieve regulatory approvals. For example, the EUIPO estimates there was a loss of 3.6 per cent of sales, equivalent to EUR 9.6 billion annually between 2012 and 2016 as a result of counterfeit drugs arising from this source.
As we move into the 21st Century, manufacturing is transforming from labor intensive to energy-intensive work, which changes cost dynamics. Companies are shifting from person-hours to kilowatt hours as humans are replaced with robots which drive utility costs up but reduce employment costs and risks. Robot factories at home can reduce transport costs and serve the local market more efficiently. Investing in smart factories and technologies can increase the “speed to market”.
For example, a global auto parts manufacturer implemented robots into their factories for various functions such as inspection, to reduce unplanned downtime and increase accuracy. The company was thus able to eliminate manual inspections, according to Deloitte. Having efficient units run with the help of robots and smart technology in the home country itself will save time as well as logistics costs.
Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.
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