Breaking Free from China’s Grip: Moving Your Manufacturing Out of China

Last Updated on July 11, 2023

You may consider moving your manufacturing out of China to another country such as the US, or possibly setting up product assembly in Mexico, if you currently have shelter manufacturing services in China, but are concerned about tariffs imposed by the United States hurting your bottom line, or if you are concerned about China intellectual property theft. 

Why Are Companies Moving Manufacturing out of China?

There are several reasons why companies are moving manufacturing out of China:

1. In recent years, China's labor costs have been rising steadily, making it less cost-effective for companies to manufacture there. In addition to increasing wages, production costs also increase, resulting in a reduction in profit margins.
2. The US-China trade conflict and the levying of tariffs on Chinese products have led to a shift in manufacturing operations away from China. With higher import costs for Chinese goods, companies are contemplating the relocation of their production facilities to other nations.
3. Supply Chain Disruptions: The COVID-19 pandemic highlighted the vulnerabilities of global supply chains, with disruptions in manufacturing and transportation affecting the availability of goods. Companies are now looking to diversify their supply chains and reduce their dependence on a single country like China. A third of supply chain leaders plan to move manufacturing out of China by 2023, according to Gartner research.
4. The COVID-19 pandemic brought into focus the vulnerability of global supply chains, with disruptions in manufacturing and transportation affecting the availability of goods. It is now common for companies to diversify their supply chains and reduce their reliance on a single country, such as China. According to a Gartner study, a third of supply chain leaders intend to move manufacturing out of China by 2023.
5.  In recent years, companies doing business in China have been concerned about intellectual property theft and counterfeiting. It has been the experience of many companies that their products or technologies have been stolen, leading them to relocate to other manufacturing locations with better intellectual property protections.
6. Political and Regulatory Risks: China’s political and regulatory environment can be unpredictable, with sudden policy changes or crackdowns on certain industries. This can create uncertainty and risk for companies doing business in China, prompting them to consider moving manufacturing to more stable and predictable locations.
7. The political and regulatory environment in China can be unpredictable, with sudden policy changes or crackdowns on certain industries. For companies doing business in China, this can create uncertainty and risk, leading them to move manufacturing to a more stable and predictable location.

Why Moving Manufacturing Out of China is Increasing Amidst the US-China Trade War

Many companies are moving manufacturing out of China as a result of the current trade tariffs the United States has imposed against China. The Trump administration set tariffs of 25 percent on 818 categories of goods imported from China worth $50 billion on July 6, 2018.  

Many countries and their respective businesses, including the United States, have shifted manufacturing out of China to new locations, such as Mexico, in response to these tariffs. 

Source: CivilsDaily

Some Chinese manufacturing companies are moving from their home country in an effort to avoid tariffs:

Chinese direct investment in Mexico reached a record high in 2021, as more manufacturers set up shop across the border from the U.S. to circumvent tariffs imposed under the Trump administration.

Companies based in mainland China and Hong Kong invested $606.3 million in Mexico during 2021, up 76% from the year before and the highest figure since tracking began in 1999, the Mexican Secretariat of Economy reports. This made China the ninth-largest investor in Mexico, just behind South Korea.

https://asia.nikkei.com/Economy/Trade-war/Chinese-factories-flock-to-Mexico-crossing-U.S.-border-to-avoid-tariffs

Challenges Arise in Sourcing Materials for Manufacturing by Chinese Companies

Aside from the ongoing US-China trade war, another challenge for manufacturing companies is the difficulty in sourcing materials for their products when operating in China or with Chinese suppliers. The supply chain disruptions caused by the pandemic and the increasing costs of production in China have made it more challenging for companies to maintain their operations in the country. This has led to a growing trend of manufacturing out of China and relocating production facilities to other countries where materials and labor costs are more favorable.

Manufacturing blog Quality Inspection reports that it is difficult to find materials for use in manufacturing in China or by Chinese firms.

“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?”

Rising Salaries for the Labor Force in China

In addition to the challenges in sourcing materials, the rising salaries for the labor force in China have also become a significant issue for manufacturers looking to move their operations out of the country. The Chinese labor market has become more competitive, and workers are demanding higher wages and better working conditions, making it more expensive for manufacturers to maintain their operations in the country.

As a result, many companies are considering relocating their manufacturing out of China to other countries such as Mexico, where labor costs are more affordable. This trend has gained traction in recent years, and many companies are exploring opportunities to diversify their supply chains and reduce their dependence on China.

CNBC reports that "made in China" is no longer so cheap as labor costs have risen rapidly in the country's extensive 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 Moving Manufacturing out of China

When contemplating moving manufacturing operations out of China to either the US or Mexico, location becomes a crucial factor. The cost of production and the proximity to supply chains are critical considerations. For many companies relocating from China, finding the best location closer to their target market is a top priority. Hence, proximity becomes a critical factor to ensure supply chain efficiency and cost-effectiveness.

The China Law Blog advises making location decisions well ahead of departure from China and thoroughly evaluating them to confirm that the new location is suitable for the 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.

Examine the BOM of Your Manufacturing Operation Before Leaving China

Before moving manufacturing operations out of China, it is crucial to scrutinize the Bill of Materials (BOM) to ensure the availability of all required materials for production outside of China. BOM lists all components and raw materials required to build a product. It is vital to avoid paying tariff taxes on materials, which can occur if any part of the finished product or raw material originates or undergoes processing in China.

In such cases, tariff fees are still applicable. Hence, it is essential to review the BOM carefully to identify any materials that may result in tariff costs and explore alternative sourcing options to minimize expenses when manufacturing out of China. 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.

The Common Mistake of Not Having All Products Made Outside of China to Avoid Tariffs

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:

Many believe that by manufacturing the majority of their product outside of China and only producing a few components in China, they can avoid paying tariffs. However, this is a common misconception. Even if parts are produced in China and then shipped elsewhere for manufacturing, tariffs are still applicable.

Additionally, attempting to pass off a finished product as manufactured in another country with Chinese components is not only illegal but can also lead to severe financial penalties and even imprisonment. As per 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.”

Exploring Manufacturing Alternatives: Why Mexico Could Be a Viable Option to China

If you are one of the companies that are looking for a viable alternative to move manufacturing out of China, you may want to consider changing your company’s base manufacturing to Mexico.

The new U.S. – Mexico – Canada Agreement (USMCA) trade agreement between Mexico, Canada and the United States that was ratified in July 2020 provides 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:

The U.S. – Mexico – Canada Agreement (USMCA) trade agreement, ratified in July 2020, between Mexico, Canada, and the United States, offers lower tariff and reduced duty rates, making it easier and more cost-effective to import manufactured goods between the three nations. In addition, there are other benefits and considerations to keep in mind:

• In accordance with the USMCA rules of origin, there are no tariffs on products made in many of the growing manufacturing industries in Mexico and imported into the United States.
• In addition to reducing the shipping time for goods to reach the United States, manufacturing goods in Mexico also lowers the average cost of shipping goods to the United States.
• Getting started in Mexico is almost half the time it takes to start manufacturing operations in China for companies that are just getting started.
• It is important to note that Mexico, like China, has a highly skilled and productive labor pool, which can be used to scale up your operations as required.

In conclusion, moving your manufacturing out of China and into a country like Mexico can offer several advantages. These include lower labor costs, proximity to the US market, a skilled workforce, and the benefits of the USMCA trade agreement. Additionally, with the ongoing US-China trade war and the challenges of sourcing materials from China, many companies are looking for alternatives to Chinese manufacturing. As such, Mexico has emerged as an attractive option for companies looking to move their manufacturing operations out of China. By considering the key factors such as location, supply chain, and production costs, businesses can make informed decisions that will help them thrive in today's global economy.

FAQs on Moving Your Manufacturing Out of China

Q1: Why are companies considering manufacturing outside of China?
A1: Companies are considering manufacturing outside of China due to several factors. These include rising labor costs in China, geopolitical uncertainties, trade tensions, intellectual property concerns, and the need for diversification of supply chains. Exploring alternative manufacturing destinations allows companies to mitigate risks and find cost-effective solutions.

Q2: What are the benefits of manufacturing outside of China?
A2: Manufacturing outside of China offers various benefits. These include reduced labor costs, access to new markets, proximity to regional supply chains, diversification of risks, avoidance of tariffs and trade barriers, and the opportunity to tap into skilled workforces and technological expertise in other countries.

Q3: Which countries are popular choices for companies looking to shift manufacturing away from China?
A3: Several countries have emerged as popular choices for companies looking to shift manufacturing away from China. These include Mexico, Vietnam, Thailand, India, Malaysia, and Indonesia. Each country offers unique advantages such as favorable trade agreements, cost competitiveness, skilled labor, infrastructure, and proximity to major markets.

Q4: What challenges or considerations should companies be aware of when transitioning manufacturing away from China?
A4: Companies should be aware of various challenges and considerations when transitioning manufacturing away from China. These include understanding local regulations and compliance requirements, assessing infrastructure capabilities, managing supply chain logistics, evaluating the availability of skilled labor, protecting intellectual property rights, and conducting thorough due diligence to ensure a smooth transition.

Q5: How can nearshoring to Mexico be a viable option for companies shifting manufacturing away from China?
A5: Nearshoring to Mexico can be a viable option for companies shifting manufacturing away from China due to several reasons. Mexico offers proximity to the United States, a skilled workforce, favorable trade agreements like the United States-Mexico-Canada Agreement (USMCA), and a mature manufacturing ecosystem. Nearshoring to Mexico allows companies to maintain proximity to their primary market while benefiting from reduced transportation costs, faster response times, and easier collaboration.