If you are currently manufacturing your products in China, but find the tariffs imposed by the United States are hurting your bottom line, you may consider moving your production out of China to another country like the US or even possibly Mexico.
Moving production from one location to another is always challenging, even more so when moving from across the Pacific. There are many details that need to be adhered to, and not following or paying attention to these details could be costly down the road. The following article details information you may need to know when moving out of China, and what some of the best manufacturing options for your company may be, like manufacturing in Mexico.
Why are companies moving out of China?
For many companies, the primary reason is the current trade tariffs being levied against China by the United States. On July 6, 2018, in a separate move aimed at China, the Trump administration set a tariff of 25 percent on 818 categories of goods imported from China worth $50 billion.
In response to these tariffs, many countries and their respective businesses, not just in the United States, choose to relocate their manufacturing operations from China to a new location, such as Mexico. Even firms in China, in an attempt to avoid the 25% tax, are moving from their home country.
Why Sourcing for Your Materials is Important
According to the manufacturing blog Quality Inspection, finding materials for use in manufacturing in China or by Chinese firms is proving difficult:
“I used to believe that Chinese manufacturers were great at sourcing their own materials/components. And yet… After reviewing the way they manage their procurement, I have seen more mismanagement than maybe in any other function (production, quality, etc.). There is a strong focus on getting a deal with the lowest price, rather than securing the lowest ‘total cost of ownership’. This has several implications that are highly detrimental to quality. It is a well-known fact that people who screen and select suppliers often get a commission ‘under the table’. A Chinese component supplier routinely asks “what is your commission, so that I know what price to offer?”
Affordable Labor in Your New Location
Salaries for the labor force in China is also becoming a major issue for manufacturers looking to produce their goods at the best rate possible. According to CNBC, turns out that “made in China” is not so cheap anymore as labor costs have risen rapidly in the country’s vast manufacturing sector.
“Chinese factory workers are now getting paid more than ever: Average hourly wages hit $3.60 last year, spiking 64 percent from 2011, according to market research firm Euromonitor. That’s more than five times hourly manufacturing wages in India, and is more on par with countries such as Portugal and South Africa. As China’s economy expanded at breakneck speed, so has pay for employees. But the wage increase has translated to higher costs for companies with assembly lines in China. Some firms are now taking their business elsewhere, which also means China could start losing jobs to other developing countries.”
What You Need to Know About Leaving China
The most important consideration for moving your business out of China to either the US or Mexico, would be location. The cost of your production for you operations and the location for your supply chains will become very important. As one of the main considerations for many companies moving out of China is proximity, finding the best location closer to your market will need to be a priority.
According to the China Law Blog, the location decision should be made well in advance of leaving China, and scrutinized to ensure the new location will be right for your business.
“Finding a new supplier or location to operate a factory is a significant business decision and it should be treated as such. Some of our clients are interested in finding new suppliers and some want to start up an entire new factories themselves. We need to clearly distinguish between the two. In sourcing, for example, the range of what can and will be done is huge, from a simple purchase of a fungible commodity product all the way to purchasing high tech electronics where the factory is expected to provide substantial engineering input. Some of our clients are highly focused on costs, while others are highly focused on quality. Figuring all this out for each client is usually complicated and time consuming and the resulting project is quite different depending on the client’s goals and the result of the analysis.”
It is also important to closely examine the BOM of your operation before leaving China to ensure you are able to get all the materials you need for production outside of China. This is crucial if you want to avoid paying the tariff tax on your materials, as certain components of a finished product, raw materials originate or processing of the materials takes place or comes from China, you will most likely still incur the tariff fee.
According to the Sourcing Journal: “To avoid this, companies need to take a holistic look at their sourcing strategy with all relevant factors considered. Often this means examining the product’s Bill of Materials (BOM), which gives a complete and hierarchical listing of any raw materials, sub-assemblies, components, or ingredients and the quantities and costs used in the product. Companies must then check the materials they use against tariff specifications to ensure the costs they’re trying to avoid by sourcing from China are actually avoided. In some cases, shifting production from China could actually yield a net increase in costs.”
You must have ALL of your product made outside of China to avoid paying the tariff
A common misconception is that because you have manufactured most of your product in a country other than China, with only a few components still made there, you can avoid the tariff. This is incorrect: If you have parts made and then shipped somewhere else for manufacturing, you will still have to pay a tariff. In fact, doing this might not only keep your products subject to the tariffs on Chinese products, trying to pass a finished product as manufactured in another country with Chinese components is illegal and the company making the manufacturing can be subject to stiff financial penalties and even jail time. According to the China Law Blog:
“…shipping a Made in China product to Taiwan or Vietnam or Thailand or really anywhere else in the world before shipping it to the United States will somehow render that product to no longer be considered to have been made in China for US tariff purposes. If this is all you do we can guarantee your product will still be made in China and you will almost certainly be hit with the full force of the tariffs and with a lot more. And yet, all the time we hear from our own clients and we see on the internet that this fact is not widely understood. The fact that many Chinese factories encourage this sort of illicit transshipping by insisting that it is either “perfectly legal” or “will never be detected” obviously does not help.”
Alternative to China Manufacturing: Mexico
If you are one of the companies that are looking for a viable alternative to manufacturing in China, you may want to consider changing your company’s base manufacturing to Mexico.
The new USMCA trade agreement between Mexico, Canada and the United States that is ready to be ratified by the end of this year will provide lower tariff rates and reduced duty rates between the three nations, which in turn will allow manufacturing goods imported between them easier and cost effective. Some other benefits and points to consider:
- There are no tariffs for products made in Mexico and imported into the United States that meet USMCA rules of origin requirements.
- Manufacturing goods in Mexico also means lower shipping time for goods to get into the United States, as well as lower average cost of shipping.
- For companies that are getting established, starting operations in Mexico is almost half the time it takes to begin manufacturing operations in China.
- Mexico, like China, has a highly-skilled and productive labor pool to scale up your operations as needed.
We believe that moving your manufacturing to Mexico is the obvious, and most cost-effective choice for manufacturing companies who may be concerned about the ongoing risks of operating overseas manufacturing. Contact NovaLink today for a free consultation on how you can change your manufacturing base from China to Mexico easily and seamlessly.