After years of “Made in China” supply chains are considering alternatives
Editor’s note: This story is part of a series celebrating the fifth anniversary of Supply Chain Dive. Take a look back at some of the key stories in the supply chain since 2016 in this round-up.
The “Made in China” label is ubiquitous in the United States and is shaped by everything from industrial machinery to flip-flops. But risks – from rising costs to a trade war to a pandemic – have made companies rethink their relationships with suppliers and China.
“We have found that we are putting too much power into a single country,” said Dawn Tiura, CEO of the Sourcing Industry Group.
The change of tone of US-based supply chains is not a mass exodus from China. Instead, it’s an approach that involves diversification.
The risks of single sourcing from China have been brewing for years, but they bubbled even more during the COVID-19 pandemic. At the beginning of 2020, production and supply operations came to a standstill in many parts of China. The impact spread across the Trans-Pacific to US importers unable to source goods.
Risk factors in sourcing from China
Trade Wars and Tariffs: Duties of up to 25% on total landing costs for importers. So far, the tariffs have remained in place during the Biden administration, and many experts see no short-term lifting of the tariffs.
Intellectual property: Intellectual property theft has been a problem for several years and one of the reasons that started the trade war. “Many manufacturers find that their end products have been copied or stolen,” said Tiura.
Rising wages: The outsourcing of manufacturing to China contributed to the growth of the middle class. As the middle class flourished, so did workers’ wages. In 2015, wages in China began to exceed those in Mexico, according to a PwC analysis. Resilinc analysis estimated the average hourly wage in the manufacturing industry to be $ 6.50 in China, compared to $ 4.82 in Mexico. For many companies, increased labor costs added another factor to the basic cost equation.
Forced labor: The US continues to investigate suspected forced labor, including in the Xinjiang region of China.
climate: Coal is a big part of China’s electricity production. The country allows certain manufacturing processes that are banned in the US because they are perceived as harmful to the environment. And supply chains must also consider the environmental cost of shipping by sea or air. It is estimated that the environmental impact is 25 to 50% higher than that of industry in the US. In addition, according to Verisk Maplecroft, the Chinese cities of Guangzhou and Dongguan are hardest hit by sea level rise according to current forecasts.
Delivery times: When importing from China, purchasing managers have to consider manufacturing times plus shipping times, compared to a location in the USA or Latin America, for example.
Transport capacity: Today’s freight landscape is characterized by low capacities and sky-high freight rates for sea and air freight. Ports in China and Southern California are often congested, resulting in even longer lead times for importers.
COVID-19 outbreaks: The virus risk is not unique to China, but outbreaks have closed or restricted operations at key transportation hubs such as the Yantian International Container Terminal and Shanghai Pudong International Airport. “China has a very, very, very strong stance on COVID. So a worker can test positive and close a supply chain for two weeks, ”said Tiura.
Camille Batiste, Senior Vice President of Global Supply Chain and Procurement at Archer Daniels Midland, experienced the disruption firsthand. The company had several major suppliers of a key ingredient for its energy drink customers, but they were based in China.
When the pandemic disrupted China’s production and exports, Batiste and her team had to “sniff around and try to find other suppliers.”
The sourcing team eventually found a suitable ingredient in South America, but it didn’t exactly match the product it used to bring back from China. ADM had to adjust its in-house manufacturing to use the material.
The short-term solution allowed ADM to maintain the flow of product, but it also brought to light the longer-term risks associated with primary suppliers in a region or country.
“It has fundamentally changed our supply chain in our nutrition business,” she said.
Batiste said she will continue to look for other sources for the main ingredient.
“We have to build a supply chain that can also receive material from other locations,” said Batiste. “We just have to always have … multiple sources.”
The alternatives to China-only
As the pandemic spread, no procurement target was immune. Bans would be lifted in one region only to be imposed in another. Supply chain executives got caught up in a whack-a-mole situation that continues to this day. Single sourcing from China wasn’t the only risk; Single sourcing from any region was a risk.
“You need to hedge your bets,” said Dale Rogers, professor of business administration in the Department of Supply Chain Management at Arizona State University, during a Resilinc webinar in July. “They cannot be fully obtained from just one place.”
This insight has led supply chains to diversify their supplier base, with some regions and strategies emerging as dominant.
South East Asia
When the US imposed Section 301 tariffs on imports from China, many companies looked to Vietnam.
The country has high levels of literacy and relatively low labor costs, said Eddy Malesky, director of the Duke Center for International Development, during a Flexport webinar in July.
Foreign investors see Vietnam as relatively stable politically and property rights are more secure, Malesky said. Electronics and automotive components are growth industries in Vietnam.
“This could be Vietnam’s moment,” said Malesky.
Vietnam balloons trade
Imports from Vietnam to the USA in billions of dollars
Vietnam is also advancing in a way that is attractive to businesses, said Tom Gould, Vice President of Global Customs at Flexport, in the same webinar. This means that suppliers in Vietnam, not buyers, are responsible for sourcing, manufacturing, quality assurance, environmental and labor issues.
“Vietnam could tell its customers, ‘They want a product; I will deliver the product to you’ as opposed to ‘They want a product; tell me how to build it and I will do it for you,'” said Gould.
Companies have also looked for suppliers in Bangladesh, Thailand, Indonesia and Malaysia.
But human rights concerns remain across Southeast Asia. Many countries in the region also have no developed transport infrastructure or ports, which only increases lead times and risks.
Asia dominates procurement in the USA
Top Sourcing Regions for US Buyers
Reshoring / nearshoring
The same risk factors that led to supply chain diversification also led them to consider reshoring to the US. The proximity enables shorter transit times, lower emissions and the possibility of promoting a “Made in USA” label. Import duties are no longer a problem. The total cost of ownership is often lower.
A study by Thomas, interviewed by respondents in March, found that 83% of manufacturers are likely, very likely, or extremely likely to go ashore, up from 54% in March 2020. But restoration of manufacturing sites in the US could be off After decades of sustaining, Asia and Latin America are proving to be challenging.
“It is extremely difficult to reverse the 30-year-old trend of outsourcing and offshoring production in emerging markets,” said a chemical manufacturer in the Thomas survey. “We no longer have the talent, know-how, or capital resources to effectively manufacture critical components of critical products and assemblies.”
Nearshoring to Mexico is more common in the US and Canada due to the high labor costs and can offer significant cost advantages compared to China.
However, experts are quick to point out that sourcing up close is not synonymous with resilience.
“When I’m in North America and my only suppliers are in North America, there is a problem here,” said Batiste. “We’re in trouble.”
Mexico retains its place as the No. 1 trading partner with the United States, but procurement executives are starting to target other nations in Central and South America as well.
Nike makes several products in Asia, but some items require shorter lead times, Rogers said. Nike has adjusted its procurement so that NFL-related products are imported from Central America, put on a ship and brought to the port of Miami with short transit times.
Tiura has Nicaragua in its sights. The country has a strong job market and a good level of education, although political turmoil discourages many buyers, she said.
Sourcing from Latin America also offers additional transport options. Cross-border rail can transport goods from Mexico to the USA The Pan American Highway runs from Alaska to the tip of South America, with only the Darien Gap interrupting the route.
However, the infrastructure in many parts of Central and South America is limited.
“There’s a road. It’s not a great road,” said Rogers, referring to the Pan American Highway. But with enough investment to build the transportation infrastructure, Rogers said the highway could rival China’s Belt and Road.
Do the roads lead back to China?
Diversification doesn’t stop at level 1. Some members of the Sourcing Industry Group thought they diversified by adding a supplier in Vietnam only to find that the supplier was buying materials and components from the same place as the supplier in China, Tiura said.
“In the end, almost every road led to China,” said Tiura.
In today’s world, it is hard to imagine a supply chain being completely detached from China, regardless of whether the connection is in Tier 1 or Tier 4.
According to the United States Fashion Industry Association’s Fashion Industry Benchmarking Study 2021, China is the most popular sourcing destination for US fashion companies. Machines, toys and plastics are often sourced from China. Pharmaceutical supply chains are heavily reliant on overseas production.
Trade between the United States and China flourished
Imports from China to the USA in billions of dollars
The country has an abundance of production centers, innumerable raw materials, a robust workforce and a strong port infrastructure. Global companies have established supplier relationships that deleting it could be harmful.
Plus, the country has a huge population and consumer base, and companies want to do business with the country, according to Tiura. China’s e-commerce sales were $ 2.4 trillion last year, dwarfing US online sales of $ 792 billion in 2020.
Those deep roots are why China is likely to always be a staple food.
“You can’t replicate the size of the Chinese manufacturing base,” said Rogers.
But it does not remove the need for redundancy as a resilience measure.
“Who knows where the next earthquake, the hurricane, the pandemic or the political uprising is coming,” said Rogers. “You need to think about it and have ways to keep the product flowing even when these disruptions occur.”
This story was first published in our weekly newsletter Supply Chain Dive: Procurement. Sign up here.