Manufacturers move away from China in light of supply issues, cost increases

Reshoring to emerging Asian markets and the Americas offers a competitive advantage.

The coronavirus pandemic reshaped the attitude of the average consumer. Government-mandated lockdowns and fear of infection forced shoppers to embrace online shopping at previously unforeseen levels. This rocked the supply chain at a time when manufacturing was slowed and part shortages raged, creating a perfect storm for retailers and logistics companies alike.

COVID brought e-commerce 10 years forward too quickly, and the supply chain industry wasn’t ready for it.

Today, a post-pandemic world continues to embrace e-commerce, shifting a trend into undeviating consumer behavior.

According to the U.S. Census Bureau, e-commerce purchases accounted for 14.7% of total fourth-quarter 2022 retail sales, increasing by 6.5% year-over-year since 2021.

As Americans’ penchant for online shopping has grown, so has their desire to receive their purchases at an all-time high pace. Consumers expect one-day or two-day shipping on most goods, and they generally expect a complimentary service.

The American consumer is expected to have anything delivered, whenever they want it.

For years, large corporations have housed their manufacturing facilities in China in order to take advantage of lower labor costs. As the American consumer becomes more demanding — and the labor landscape shifts in China — this approach is becoming less cost-effective and more of a liability.

Global trade disruptions and congestion at every point of the supply chain cycle challenged retailers to meet consumer expectations. For China exports, specifically, continued 2023 COVID restrictions, trade war headwinds, and rising infrastructure and labor costs have amplified the pain points of Chinese-U.S. imports and exports. As a result, companies with major Chinese manufacturing operations have explored the benefits of reshoring.

Every CFO is thinking about it because, if they can’t get their products to market, they are basically out of business.

Relocating within Asia
A shift in diversification across emerging markets in Asia—versus a sole focus on China—is proving to leverage both lower labor and infrastructure costs while also providing protection against recent headwinds.

Vietnam offers a competitive market, as the country upholds many of the same benefits that originally drove companies to China — including lower production costs — without the intense COVID restrictions and political unrest. Additionally, Vietnam has a young and rapidly-growing workforce, with a median age of just 32 years old, making it an attractive option for companies looking for skilled workers. According to a survey by the American Chamber of Commerce in Vietnam, over 80% of companies operating in Vietnam plan to expand their operations in the country in the coming years. The cost of doing business in Vietnam is also relatively low compared to other countries in the region, with a low corporate tax rate of 20% and various incentives for foreign investors.

Development experience suggests that investing 7 percent of GDP in infrastructure is the right order of magnitude for high and sustained growth. Over the last twelve years, the government of Vietnam was able to sustain infrastructure investment at 10 percent of GDP.

In the fiscal year 2021-2022, Vietnam’s exports increased year-over-year by 19%, reaching $326.54 billion. Imports into Vietnam increased 26% to $305.84 billion.

Source: American Shipper

Eyes and investments are additionally pointed toward India; an economy focused on accelerated, sustainable growth. According to a report by the Ministry of Statistics and Programme Implementation, the cost of labor is comparatively advantageous, and industrial production in India is nearly 40% lower than in the United States, and around 25% lower than in China. These cost advantages are further amplified by the Indian government’s “Make in India” initiative, which aims to make India a global manufacturing hub and provides various incentives for companies to invest in the country. The government has also suggested an investment of $750 billion to strengthen railway infrastructure and envisioned the Maritime India Vision 2030 which estimates massive investments in world-class infrastructure development at Indian ports.

During the fiscal year 2021-2022, merchandise exports from India surged 43%, reaching a new high at $417.81 billion. Imports increased 55% year-over-year, reaching $610.22 billion.

The balance of trade is favorable, and both India and Vietnam’s focus on our industry is quickly paying dividends for the supply chain ecosystem.

Returning to the Americas
Looking beyond Asia and closer to home, U.S. companies are simultaneously keen on shifting operations back to the Americas.

Can you really take the risk of not having your product reach America? If there is another widespread supply chain problem and all your facilities are across the globe, that could happen. People are rethinking it.

Greater proximity cuts down on shipping delays, port holdups and damaged shipments, making it easier for companies to meet growing consumer demand for short delivery timelines. This ultimately means increased profits, at least somewhat easing the burden of higher labor and manufacturing costs.

People left America because of labor costs. Now, with increased labor costs in China, the advantage is not what it used to be.” Additionally, robotics has cut down on the need for labor.

A report by the Boston Consulting Group (BCG) estimated that the increased use of robots could lead to a 16% reduction in overall production costs for US-based manufacturers. Additionally, the use of robots can help address the labor shortage issues faced by many US manufacturers, as robots can perform repetitive and dangerous tasks that are difficult to automate with human labor.

For companies that depend on robotics for a large portion of their manufacturing processes, moving facilities to the U.S. allows companies to be closer to their customers without being bogged down by higher labor costs. The Lego Group, for example, announced its first U.S.-based factory last year.

Additionally, nearshoring to Mexico provides a multitude of proximity benefits as well as lower labor and infrastructure costs. According to data from the World Bank, the average monthly wage in Mexico’s manufacturing sector was around $589 in 2020. Additionally, Mexico has a large and growing skilled workforce, with a total labor force of around 54 million people.

If a company has to have a cheaper labor component, Mexico is the option. There are a lot of companies moving to Mexico because the Mexico-U.S. supply chain is very efficient.

Mexico’s interest is demonstrated by initiatives such as the Infrastructure Investment Program for Northern Mexico (PNI), launched by the Mexican government in 2019. The PNI promotes infrastructure development in various sectors, including transportation, energy, water, and telecommunications, across the states of Baja California, Baja California Sur, Chihuahua, Coahuila, Durango, Nuevo Leon, Sinaloa, Sonora, and Tamaulipas.

While the benefits are clear, the complexities and costs of reshoring are burdensome. It enables a customer-first approach to navigate new approaches with expertise and transparency at every step of the supply chain.

NEOLink cooperated with our order processing system. He did not replace it or force solutions. Logfret did it better than other companies on the market – it adapted its system to ours. Logfret didn’t come to us saying, “We have this solution, and you either use it or we won’t cooperate.

Procurement Director

Pumps Manufacturer

We made a huge improvement in global visibility with a global platform—anyone can log into NEOLink and look at a shipment anytime, anywhere in the world. We wanted a freight forwarder with a good technology platform, which could handle the complexities of our business and we found NEOLink!

A global leader in performance materials and specialty chemicals

My suppliers have less or zero experience with international logistics. Thus, not able to create proper documentation which leads to tremendous delay. Thanks to Logfret who provide training to all suppliers and work with us to build up a consolidation hub to reduce transportation costs significantly.

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