How Will You Know When to Exit China?
December 10, 2013 - SCMR Editorial
A few years ago, we were fretting over how quickly we could move production to China in order to stay competitive in the marketplace. I helped many companies move production or start sourcing in China, in the early 2000s. Over the past few years, I helped the same companies address quality and contractual problems with their Chinese suppliers. But the business environment has changed and now we should be considering bringing some of that production back.
Reshoring is important for rebuilding the US economy and has become appropriate for making products here that will be sold here. Some products have customers only in the US or Western Europe, so why not produce here? This is not a roll-back to the 1960s when manufacturing was King in the US. It is about moving forward to rebalance your global supply chains.
Reshoring is a very popular idea (we have over 1100 “likes” on our Reshoring page on Facebook). The problem is, how will you know what products and when to bring back production from China? It’s not as simple as exiting China and not looking back.
There are many variables to consider in determining the costs and feasibility of reshoring some of your production. Take Apple for example; while they have returned some assembly of products to Silicon Valley, they have done so through their contract manufacturer, Foxconn. They have not reopened their 1980s production sites in Cupertino. But the preponderance of Apple’s manufacturing remains in China, the largest future target market for Apple’s products. It is also where Apple’s supply base is located.
GE, on the other hand, innovated and automated the production of tankless water heaters, a product that is sold primarily in the US. GE was able to reopen a manufacturing site in Kentucky where this new product is made for sale domestically. But it wasn’t easy. Manufacturing these tankless heaters required extensive product innovation and factory automation.
Perhaps in our rush to take advantage of low cost manufacturing in China, we overlooked some of the costs. And perhaps there were hidden costs such as travel, quality and rising freight costs that now need to be considered. To make a true, new evaluation of production costs in China vs. in the US, all costs must be considered. In addition to costs, you must consider the following:
- Innovation – what product innovation is needed for the US market?
- Automation – can you automate to reduce labor costs through new technologies such as 3D printing, and robots?
- Localization – could basic products be manufactured in China and then have final assembly for the US market accomplished here?
- Supply base – is your supply base all in China? If so, what work needs to be done to reestablish your supply base in the US?
- Incentives - what tax and other incentives are being offered by local, state and federal governments?
- Skills - what skills will be needed for US production and where will you get those skilled workers?
To determine when to leave China, you have to do some heavy analysis. We are finding that most companies can bring back 15-20% of their production and be competitive in the US market. The rest of production should probably be left in China for now.
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