Exit the Dragon: Shifting Manufacturing Out of China
Explore the drive behind shifting manufacturing out of China and understand where companies are relocating production to and why.
By Hugo Britt | November 9, 2023
Intel, Microsoft, Nike, and Dell have all recently signaled their intention to move some of their manufacturing out of China to different shores. These announcements mirror an ongoing shift in the global manufacturing landscape where an increasing number of U.S. companies are turning their backs on Chinese manufacturing. At present, China makes up around 31% of global manufacturing.
Below, we explore what is driving this relocation trend and understand where companies are shifting their production to.
Why are U.S. companies shifting manufacturing out of China?
Trade Tensions and Geopolitical Uncertainty
One of the primary drivers behind the exodus of U.S. companies from China is the ongoing trade tensions between the two nations. These tensions have led to the imposition of tariffs, export restrictions, and other trade barriers, making it more challenging and expensive for U.S. businesses to operate in China. The unpredictable nature of these trade disputes has created an atmosphere of uncertainty, causing many companies to reconsider their reliance on Chinese manufacturing.
Rising Labor and Production Costs
China’s once-advantageous low labor and production costs have been steadily increasing over the years. As China’s middle class continues to grow, so does the demand for higher wages and better working conditions. While this is good news from a humanitarian viewpoint, it has raised labor costs, reducing the cost advantage that initially attracted U.S. companies to China. Furthermore, the rising costs of energy, raw materials, and regulatory compliance have also contributed to the erosion of China’s cost competitiveness.
Supply Chain Resilience and Diversification
The COVID-19 pandemic highlighted the vulnerability of global supply chains, particularly those heavily reliant on a single source or location. Many U.S. companies realized the importance of supply chain diversification and resilience during the pandemic, leading them to seek alternative manufacturing locations. By spreading their operations across multiple countries, businesses can mitigate the risks associated with unexpected disruptions.
Intellectual Property Concerns
U.S. companies have long expressed concerns about the protection of their intellectual property (IP) rights in China. Instances of IP theft, forced technology transfers, and other practices have made businesses wary of sharing their proprietary knowledge with Chinese partners. This has further motivated companies to explore manufacturing alternatives in regions where IP protection is stronger.
U.S. companies are shifting manufacturing out of China due to concerns regarding rising labor and production costs, the importance of supply chain diversification, and geopolitical uncertainty.
Alternative manufacturing hubs
Here’s a brief summary of the alternative manufacturing hubs attracting U.S. investment after China:
Known for its skilled labor force, Vietnam has attracted significant attention from U.S. companies. Nike, for instance, produces a substantial portion of its athletic footwear in the country.
Companies like Intel, Dell, and Flextronics have established manufacturing operations in Malaysia. Intel has multiple assembly and test facilities in the country.
Goodyear and Unilever are examples of companies that have manufacturing operations in Indonesia. Goodyear produces tires for both domestic and export markets, while Unilever has numerous consumer goods production sites in Indonesia.
Several diverse industries see Mexico as an attractive manufacturing hub due to its “nearshore” proximity, comparatively low labor costs, and the UMSCA trade agreement. The U.S. automotive industry is a major player in Mexico, with companies like Ford manufacturing a wide range of vehicles there.
Honeywell, a multinational conglomerate, also has multiple manufacturing sites in Mexico where they produce aerospace systems and safety equipment. General Electric also operates in Mexico, manufacturing appliances and power generation equipment.
The aerospace industry is gaining momentum in Poland, with companies like Pratt & Whitney establishing a manufacturing presence. Global electronics giant Samsung produces consumer electronics and home appliances in Hungary. Eastern Europe is seen as particularly attractive due to its proximity to Western markets (compared with Asia), and investment in the region may be rising due to companies pulling out of Russia.
Of all the countries in this list, India is seen as having the most potential to become a global manufacturing superpower to rival China. Apple has been increasing its manufacturing footprint in India, with partners like Foxconn producing iPhones and other Apple products.
This move is part of Apple’s strategy to tap into the growing Indian consumer market. Boeing also has a substantial presence in India with facilities for manufacturing aircraft components and Indian research and development activities.
It is important to understand that none of these alternatives have the massive clout of China. Vietnam, for example, has a population size that is only around 7% of China’s, and its manufacturing sector is only 2%, meaning that if every company tried to shift production to Vietnam, the country simply wouldn’t have capacity. It will take years for advanced economies to significantly diversify away from China.
In the meantime, companies are considering the strategic benefits of offshoring, nearshoring, reshoring, and “rightshoring.” This article can help explain the nuances between these varying approaches to procurement and their impacts to your bottom line.