“China Plus One” Strategy: Post COVID View
It’s Not Coming Back to the US With labor turnover and labor rates in China increasing relatively quickly, some in the US think that maybe some production might be coming back. Don’t count on it. While contract manufacturing labor turnover in China is high – from our factory audits of sites in China we commonly see 66% annually for DL and 33% for IDL, turnover of key management positions in the organization such as process and test managers is far lower. Direct labor rates are increasing, but that doesn’t mean that automation in the US would now be cost-effective. Fact is, behind that seemingly “cost competitive” automation is still relatively expensive machine maintenance tech’s, software tech’s, planning, procurement and other organization overhead. Almost no OEM customers of EMS companies now in China – our clients or others we know of, are seriously considering the US as their “Plus One” solution.
It’s More Likely Other Low-Cost Geographies “China Plus One” is diversifying a supply chain to include China as the primary source, plus another supplementary country. So, what makes for a good manufacturing geography?
Rather than the US, other nearby Asian countries and Mexico are more favored options.
Country Options for China Plus One (examples) Mexico: + Cannot compete with China for certain high-tech products but for others can be an attractive option, particularly if end-markets are North America and Europe. Vietnam: + Proximity to China is attractive. Allows for efficient transportation of people and products between locations. Indonesia: + Large population. India: + Large market with significant purchasing power. USA: + High volume of quality talent.
It’s New Products, Not Those Currently in Production Setting-up redundant production of the same products in multiple countries is frequently undesirable due to cost impact (e.g., lower economies of scale, need for duplicative tooling and test equipment), quality consistency risk and for other reasons. Therefore, the EMS customer interest in evaluating a “China Plus One” strategy involves mostly its new products. This leaves it a footprint in China for finished product market access, low-cost tooling design and fabrication, and for other benefits.
In evaluating countries for “China Plus One” consideration an important factor is their proven ability to recover from catastrophe. It appears that China has done well in this regard. China is a geographically large country and a disaster in one area does not necessarily impact the entire country. While China was particularly affected by COVID, their large manufacturing power, ecosystem and strong workforce have allowed for efficient recovery. For this reason, similar labor cost alone is not enough if the potential “China Plus One” country has not shown ability to recover from disasters quickly.
China is known as the “World’s Factory” and not easily replaceable. Everything is there – a full manufacturing ecosystem. If there is a new product assembly process or test problem, resources are nearby for fast, often 24-hour solutions. China is no longer lowest in DL rates but factory labor there is highly efficient. China is a huge country and regional market. It seems to have done a good job recovering from COVID due to their significant ecosystem that could soon “reboot” moreover, tariffs have not had as significant impact as expected. While supply-chain diversification is conceptually attractive, maintaining a manageable strategy remains most important. Potential exists for valuable “Plus One” companies, but on the whole, shouldn’t be forced.
Robert Freid
For more information on our services visit: cmcseattle.com
@ 2020 Contract Manufacturing Consultants │ All Rights Reserved |