If you’re considering shifting your manufacturing operations from China to Southeast Asia, join the club. It’s been the talk of the town for years, and recent global events have spurred the conversation even more.
This is not a simple game of musical chairs. You can’t just pick up your operations in China, move them to Vietnam or Thailand, and expect things to go smoothly. If you believe it’s that simple, I have a bridge to sell you.
There are undeniable benefits. It’s best to remove your rose-tinted glasses and take a close look at what shifting production from China to Southeast Asia implies.
Why Are We Even Talking About This?
Why are so many manufacturers looking to leave China? It’s not because they suddenly developed a strong urge for Southeast Asian cuisine.
The reasons are as diverse as they are persuasive. Take your pick:
- Rising Chinese labour costs: The PRC pledged to increase the size of their workforce’s pay packets and China is no longer a low-cost labour country. Labour costs are still less than 50% of the USA or Germany, but up to 30% more than Thailand.
- Trade concerns with the United States, Trump’s section 301 tariffs on some Chinese country of Origin goods.
- The drive to diversify supply lines. And don’t forget the COVID-19 epidemic, which revealed the dangers of putting all your eggs in one production basket
- Geopolitical reasons. It’s getting messy out there with Taiwan.
- Complicated bureaucracy and government interference. While bureaucracy exists in the whole of Asia, China remains a complicated place to do business.
That being said, Southeast Asia isn’t a mystical industrial utopia. It has its own set of obstacles and eccentricities. So, before you start packing your Chinese operations, let’s have a look at them.
The Lay of the Land
Southeast Asia is not a monolith. We’re talking about a varied area with nations at various levels of development, each with unique strengths and limitations.
Vietnam? It has been the poster child for this manufacturing transition, thanks to a young workforce and gradually improving infrastructure. It’s also next door to China with land borders to the north, so that makes things easier. Thailand? It benefits from a more mature industrial industry, particularly in automotive. Indonesia? Large domestic market, yet can be difficult to navigate due to regulations. Philippines? Strong in electronics, but watch out for infrastructural delays.
The point is, Southeast Asia cannot be treated as China 2.0. Each nation is unique, and you must conduct research to determine which (if any) is best suited for your activities.
The Good, the Bad, and the Ugly
Let us start with the positive news. Southeast Asia has several enticing benefits for manufacturers. Lower labour costs (for the time being), strategic positioning, a young workforce, and growing infrastructure all point to great possibilities.
But now for a reality check. Many Southeast Asian countries’ infrastructure still lags behind China’s. Skilled labour might be difficult to come by. Supply chains are not as developed or interconnected.
And here’s another truth: relocating industrial operations is a huge endeavour. It’s disruptive, costly, and riddled with hazards. Anyone who claims differently is either crazy or attempting to sell you something.
So, You Still Want to Make the Move?
Congratulations if you’ve made it this far and are still thinking about making the move. You’re either bold or insane, perhaps both. Those kinds of individuals often reap the rewards. Since you’ve committed, let’s discuss strategy.
Do Your Damned Homework
I cannot emphasise this enough: research, research, research. And I’m not talking about a quick Google search and a look at some consultant reports.
You will need boots on the ground. Visit feasible locations. Talk to other manufacturers who have made the transition. Engage with local authorities, suppliers, and logistical providers. Get a feel for the employment market.
And for the love of everything that is holy, do not base your selection just on personnel expenses. Sure, salaries in Cambodia may be lower than in China, but how about productivity? What are the skill levels? What are the infrastructure costs?
The devil is in the details.
Start Small, Think Big
I highly recommend that you don’t try to shift all of your business at once. Begin with a trial project. Consider moving manufacturing of a particular product line or component.
This technique allows you to test the waters, work out the problems, and create relationships without risking everything. It also provides an escape route if things go wrong.
However, although you are starting small, remember to plan for big. Consider your long-term strategy. How does this relocation fit into your broader company vision? Are you looking at Southeast Asia as an export hub, or are you also considering local markets?
Build Your Team
Moving manufacturing processes is not a one-person show. You’ll need a strong squad to pull this off.
This includes personnel who understand the local business climate, can traverse the regulatory framework, and can bridge the cultural divide between your current operations and the new site.
Don’t just drop in a lot of foreigners and expect magic to happen. You need local talent who understand the terrain. They will be your secret weapon for navigating the local business landscape.
Get a Grip On Your Supply Chain
What is the most difficult aspect of migrating from China to Southeast Asia? Supply chains. China has a developed, integrated supply chain that is difficult to overcome. What about Southeast Asia? Well, it depends.
At first, you may need to import components from China or other nations. This translates to lengthier lead times, more complex logistics, and potentially greater prices.
So, make supply chain management your primary focus. Build partnerships with local suppliers wherever possible. Consider bringing essential vendors with you when you relocate. For heaven’s sake, invest in strong supply chain management solutions.
Don’t Underestimate the Cultural Factor
This is where many manufacturers falter. They are so focused on the logistics of the transfer that they lose sight of the human factor.
Southeast Asian business culture is distinct from Chinese business culture, which in turn differs from Western business culture. Disregarding these distinctions is a recipe for disaster.
Invest in cross-cultural training for your employees. Learn about local business manners. Most importantly, be patient. It takes time to form relationships in this area of the world.
Keep One Eye on the Future
The manufacturing environment in Southeast Asia is changing quickly. Today’s low-cost site might become tomorrow’s costly nightmare.
So, when you’re setting up shop, keep an eye on the horizon. What is the government’s long-term economic strategy? How is the educational system evolving? What infrastructure upgrades are in the works?
Do not forget about automation and Industry 4.0. Moving to a lower-cost locale does not excuse you from staying up to date on technical improvements.
The Bottom Line
Moving manufacturing from China to Southeast Asia is not an easy task. It’s complex, difficult, and won’t fix all of your issues immediately. It does, however, come with some evident benefits.
However, if you go in with your eyes open, do your research, and approach it intelligently, it might be a game changer for your company. Southeast Asia has compelling potential, including a rising consumer market, strategic position, and improving corporate conditions.
Just remember that there is no one-size-fits-all approach. What works for one manufacturer might be disastrous for another. You must choose what makes sense for your unique business, goods, and long-term plan.
Why rush into it? This is not a decision to be taken flippantly. Take your time, conduct your due diligence, and ensure that you are prepared for the obstacles that lie ahead.
If you have any questions, please contact me at Noah@shepherd-partnership.com.
References:
Logistics Management, 2023. China is no longer a low-cost country. https://www.logisticsmgmt.com/article/global_labor_rates_china_is_no_longer_a_low_cost_country
Association for Manufacturing Technology, 2024. Onshoring.