A US-led effort to gradually disconnect trade ties with China, rising costs and a broader understanding of the need to diversify production is driving manufacturers to invest in alternative locations. However, migrating entire supply chains away from the world’s second-largest economy is extremely challenging, which is why governments and executives need to pick up the pace, or they might find themselves caught short in a time of need.
At the recent Computex Taipei trade show, exhibitors ranging from power-tool suppliers and auto-electronics vendors to server and laptop makers told me almost identical stories.
They are moving operations out of China and into Southeast Asia, largely at the behest of major foreign clients. Thailand, Vietnam and Taiwan are the focus of new investments. However, they also warn that once the initial migration phases are complete, subsequent decoupling would be much harder.
Illustration: Yusha
Assembly of final products is the easiest, because it is labor intensive and the equipment used is simple. Then comes semi-completed manufacturing, such as product housings and casings. Such transfer is quick and cheap, and well underway.
Mexico is now the largest source of imports to the US, while factories in India, Vietnam and Thailand are taking share from Chinese counterparts.
If we look only at final assembly, it is easy to conclude that full supply chain migration is achievable.
However, most of the hard work and value-add happens many steps before final production, using specialized, expensive equipment operated by well-trained technicians.
Plastic and metal molding is one example. This phase relies heavily on networks of suppliers close at hand.
Over the past two decades, China has built up considerable capacity and expertise in the crucial and hidden ingredient of all industries: chemicals. Hundreds of factories dotted around the country specialize in semi-processed compounds known as intermediates.
China accounts for more than 40 percent of global chemical production, one estimate showed. It has a 55 percent share of acetic acid capacity, a relatively banal substance that is the core component of vinegar, but also used to make glue, textiles, dyes, rubber and plastics, and agricultural products.
The country also holds about 45 percent of the world’s titanium oxide manufacturing capabilities, an ingredient in paints, paper and various coatings.
Because this concentration of chemical factories creates a cluster effect, makers of related products such as plastics and metals that go into toys, packaging, electronics, automobiles and machines risk losing speed and efficiency if they start moving too much of their operations abroad.
Taiwanese and foreign exhibitors at Computex said that while they are already expanding in Southeast Asia, their own suppliers — chemicals, plastics and metals makers — are not in much of a hurry. That creates a natural limit to how much of a supply chain can be exfiltrated from China, even if sweeteners such as free land, tax breaks and cheap utilities are on offer.
The global economic environment works against migration, standing in contrast to the increasingly tense geopolitical situation that adds urgency to decoupling.
First, a recent downturn in the materials sector, where China is a leader, means suppliers of intermediate chemicals are not in the financial position to dedicate new capital expenditure to foreign plants.
In addition, recent easing of supply chain constraints and higher availability of transport capacity softens the urgency to move all parts of the manufacturing equation to alternative hubs.
There is no need to spend millions of dollars on a new plant if there are plenty of ships on hand to move half-finished goods in bulk across the South China Sea to assembly sites in Southeast Asia.
It would take massive incentives and a willingness from clients to accept higher prices before more manufacturers can afford to make the move away from the hubs they built in China over the past few decades. The alternative catalyst, an unthinkable shock like war or political upheaval, would also provide the impetus. However, by the time that happens, it would be too late.
Complete, end-to-end migration of supply chains is difficult and expensive. However, if it is to be undertaken, the move is best done now, in a time of peace and tranquility, than during a period of urgency.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.
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