IS SOURCING / MANUFACTURING IN CHINA STILL AN ECONOMICALLY VIABLE OPTION?

Manufacturing costs as well as labour and CAPEX/OPEX costs have steadily increased in most of China’s Special Economic Zones over the past few years. This has, in turn, created a rethinking of the manufacturing strategies for foreign enterprises some of whom have relocated their operations back to their home countries or to other perceived competitive regions such as Eastern Europe and South-East Asian countries.

However, the range and scope of the physical infrastructure and logistical networks available within most of the developed areas in China are still unparalleled amongst the emerging countries leading to a competitive advantage for local supply chains. The quality and reliability of products from China are constantly improving while the local Chinese manufacturers look to automation and to the basic concepts of Industry 4.0 to respond to the ever-increasing demand for more efficient and sophisticated manufacturing systems. Chinese industries have also increased their R&D investments exponentially over the past decade in order to develop products and systems leading to technological competitive advantages over other global brands. Such shifts in policy and strategy adopted by many Chinese suppliers have further decreased the perceived risk factors in outsourcing away from the home markets.

While manufacturing and outsourcing in China may still be a viable option for enterprises under the "China+1 policy" , the risks of uniquely depending on only China were made evident during the COVID-19 epidemic when entire supply chains were completely disrupted by the rigorous restrictions suddenly imposed. More recent events such as the election of Donald Trump as the next US President and the upcoming imposition of new, harsh tariffs on China's imports will be a decisive factor on any supply chain plans.

There are also some potential risks in limiting outsourcing and manufacturing in China: 

• Legalities (local regulatory environment policy); outsourcing and manufacturing master agreements (implementation and compliance).
• Ethical considerations (unacceptable working conditions, compliance of by-products disposal, lack of supply chain social responsibility and commitment).
• Poor or lack of quality mostly due to the use of sub standard raw materials or manufacturing short-cuts on the supplier’s production lines.
• Delays in delivery as a result of supplier’s under capacity or customers’ order back log. Also, goods border inspections at the China/Hong Kong border, the most employed point of transit for goods exported overseas from China, may be time-consuming and at times very discretionary and could result in goods being detained for long periods of time.
• Poor or inadequate packaging due to cost saving activities by the supplier or strict regulations on packaging material in force at the destination country.
• Tariff and non tariff barriers where protectionist measure are seen as the only way to gain or retain a competitive advantage. A typical example of such barriers is the recent attempt by the Trump administration to levy high import duties on the imports of steel and aluminum from China as they were seen as to be sold at lower than cost prices.
• Synchronisation of the production and delivery of goods in China as outsourced components. Parts and sub-system will have to timely fit in a final assembly and testing process at the country of destination. Internal production orders, their frequency and lot quantity as well transit times must reflect the requirement of the new overall production paradigm.

A risk mitigation and management strategy should a fundamental part of any supply chain strategy. Especially in today's highly volatile business climate and geo-political instability. Risk mitigation strategy cannot be underestimated or taken lightly as it offers an essential tool for a successful  outsourcing strategy that delivers constant cost savings over time.