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Global manufacturing leaders are rethinking current supply chains. As trans-oceanic shipping backs up and supply shortages rise in Asia, reliance on China is making less and less business sense. However, while other locations seem promising alternatives, supply chain relocation is no simple feat.
Manufacturing dependence on Chinese supply chains now goes back decades. Many companies have substantial assets tied up in China. Relocating this equipment, intellectual property, supplier network, and production capacity is a very complex and challenging issue. Nevertheless, many companies are embracing the challenges, and relocating to Mexico and other offshore destinations.
Manufacturing in China has been lucrative since the 90s. And so much so, that US and global producers have committed nearly all of their eggs to this basket. Now, however, over-reliance on Chinese suppliers is proving to be their downfall.
While things have been changing for several years, the past two years have sent a clear signal that the time to reconsider the supplier mix is here. Currently, shipments from China are severely backlogged. Containers are in short supply, and the ports simply cannot handle the volume of trade with China. Unfortunately, this is no temporary glitch. The US in particular has come to realize we’re in the midst of a full-fledged supply-chain crisis.
But other factors are driving the need for supply chain diversification away from China. The Asian country is also the world’s largest carbon emitter, burning through coal at entirely unsustainable rates. In spite of access to huge energy reserves, China’s economic machine is sputtering as a result of persistent power shortages that make it increasingly difficult to depend on them for consistent results.
Other shortages have been plaguing China, too, contributing to an effective breakdown as the leading supply chain destination. The country’s labor shortage appears to be a long-term problem, since the working-age population peaked in 2011. As their working class dwindles, the labor problem is exacerbated by COVID-19 restrictions, which make it more difficult for migrant workers and workers without the proper papers to find employment.
Ports are also locked down frequently for mass testing and the fear of outbreaks. Recently, the Port of Ningbo was shut down over a single case – shutting down the world’s 3rd busiest port in the middle of a supply chain crisis.
We have written before on the many reasons companies are choosing to move to Mexico. The Latin American country offers many advantages over China. In brief, some of these include:
Supply chain relocation may be an easy decision for some, especially in light of Mexico’s advantages. But effectively accomplishing this can be very challenging. Mexico, however, comes with its own set of complexities.
China and Mexico are very different countries, and this is especially noticeable in their economic and manufacturing systems. US manufacturers accustomed to a certain way of doing business in China cannot expect to simply move these systems to Mexico and carry on as before. Certain challenges must be met and complexities sorted through for success in supply chain relocation to Mexico.
For example, China typically provides turn-key solutions for finished goods. Vertical integration is the standard model there, and contract manufacturing is usually quite simple for foreign companies. As a result, most US companies that use Chinese manufacturing no longer have the engineering and design expertise to handle product design and step-by-step operations.
But in Mexico, the focus is on intermediate goods. Success in Mexican manufacturing typically involves a high level of cooperation and co-creation. This means providing plans and specifications and help in the design phase.
Chinese companies believe they own the proprietary drawings, schematics, materials specifications, and even the tooling for a finished product. Therefore, relocating a specific product to another country will require inputs that the US company may not have access to.
Likewise, Chinese rules for capital transfer can be quite challenging. Many who choose to relocate out of China find it next to impossible to take their equipment with them. Outsourcing may mean the need to acquire new machines and equipment – or partnering with another company making the same or similar product to share the burden.
In regards to raw materials, China’s scale of volume is much higher than in Mexico. As such, raw materials sourced elsewhere may not be as competitively prices. Additionally, there must be a focus on value engineering to reduce the costs of over engineering.
A key way to reduce the impact of these challenges is partnering with another manufacturer making the same product to share the cost of contract manufacturing. Or take advantage of embedded supplier networks and shared economies of scale by entering Mexico under a shelter service. But understand that overcoming decades of reliance on China will not come easily or quickly. There will be challenges to overcome, requiring creative ways of re-thinking the manufacturing process.