Are You Leaving China Now?
So many of our clients are affected by the section 301 tariffs imposed by the Trump Administration on China. As of June 10, add Mexico to that list. Manufacturers are experiencing significant increases in costs due to 10-25% duty on imported parts and finished products. They are asking me if now is the time to leave China for other low-cost manufacturing locations. I always give the typical management consulting answer: “it depends,” because it does.
The first question I ask is why do you want to leave China? Is it simply because of the tariffs that are likely to be only temporary – at most for the next two years? Have you found, verified, and tested a new factory in another low-cost country such as Vietnam, Indonesia, Thailand? Are you trying to run from IP theft, because if you are, there are no guarantees in other countries that it won’t happen again. Have you considered the market growth rates for potential customers in China?
There is a lot to consider if you have an established manufacturer or supplier in China and decide to leave.
Productivity Rates and Capacity
You might find that labor costs are 20-30% cheaper in Vietnam or Indonesia, but are you also tracking quality issues and productivity rates at the factories there? The learning curve for establishing new production may be longer than you would expect, especially if you are used to China’s manufacturing might and capability. Other countries aren’t nearly as sophisticated. In a recent comparison of athletic footwear manufacturing in China vs. Vietnam, the company found that labor rates in Vietnam were 30% cheaper, but productivity was nearly 20% less and quality was a very significant issue with much higher rework rates than in China.
With many companies now attempting to find alternative manufacturing countries, some places in Vietnam and Thailand are overwhelmed with requests and refusing to take orders from new customers. Keep in mind that infrastructure in most countries, such as roads, warehousing, airports, and harbors isn’t anywhere close to what China has built over the past 25 years. Remember too, that if you move to a new country, your supply chain will also need to move. Rebuilding your sources and supply chains in a new country could take months or years.
IP Theft in Other Countries
If you are looking to run away from IP theft problems in China, beware of what you are running toward. IP theft isn’t an isolated problem just in China. Many countries throughout the world have weak IP laws that won’t protect you. Counterfeit products come from countries throughout Asia, the Middle East, and more recently Africa. And if you haven’t registered your own Trademark in China, take note. Many Chinese companies will register your trademark and then use it after you leave the country, and there really isn’t much you can do about it.
The manufacturing IP, tools, and molds you leave behind will likely be used to continue the manufacturing of your products when you leave. It’s going to be very difficult, if not impossible, to retrieve your tools and molds from a Chinese manufacturing site, even if you think they rightfully belong to you. Don’t think that just because you have shut down production of your product, that the Chinese factory is simply going to “forget” how to make your product. The will probably continue to produce it and sell it in domestic and international markets.
Labor Contracts and Permits to Leave
You may also be required to file for a permit from the Chinese government to close your manufacturing operations. This could take a number of months and also require you to pay out all of your Chinese employees’ contracts before you go. This is likely to be much more costly and lengthier than you had predicted. Sure, you could turn off the lights, lock the doors, get on a plane and simply abandon your Chinese operations. But don’t expect to ever come back to China. You are likely to not be granted a visa or you might be detained when trying to visit China in the future.
Your Chinese manufacturer or supplier may be angry that you are leaving and try to retaliate. They might slow production or the fulfillment of orders, or simply refuse to ship at all, especially if there is a balance due on your account.
I worked as an Expert Witness on one case where a contract manufacturer of toys shipped several container loads for the holiday season to a wholesaler in the U.S. When the U.S. importer announced they were reshoring manufacturing to America in January, the manufacturer refused to release the containers from the Port of Long Beach.
Before You Jump
Before you leave China, be sure you have identified all of the risks of a new location as well as those of leaving your current manufacturing site. Better yet, consider opening a second factory in a new location, without closing the old one, aka: “China Plus One.” Be sure to get advice from a global supply chain consultant or a law firm with offices in the U.S., China and your new location.