For years, offshoring to China, for operations, supply chain, or otherwise, was routine, seen by businesses as a means to cut costs and increase profits.
However, foreign businesses operating in China, or whose supply chains involve China, are experiencing increased costs, whether in the form of regulatory compliance costs, increased dues and tariffs on imports from China, or increased costs of goods in China itself, all of which have eroded profit margins for some businesses. Recent supply chain shortages and delays, even after the COVID-19 pandemic, have undermined normally efficient and timely processes, and further cut into profits. The changing state of diplomatic affairs between the United States and China alone gives rise to uncertainty for businesses.
Imports from China have been declining steadily since last year and, in 2023, the U.S., once China’s largest export market, became only its third largest, behind the Association of Southeast Asian Nations and the E.U. China’s share of U.S. imports in the furniture, textile, and machine industries is at its lowest level since 2015. This decline in imports is partly attributable to the recent acceleration of supply chain reshoring, or domestication, among U.S. businesses, and rising imports from other countries, including Malaysia, Vietnam, India and Mexico.
Indeed, businesses big and small, from Adidas, Apple, Nike, and Samsung on down, have been reevaluating their operations and supply chains involving China, and are either pivoting from China completely, via a clean break, or partially, adopting what is called the “China plus” strategy. They have found that adopting a “China plus” strategy, for example by engaging additional manufacturers or suppliers in other countries, prevents reliance on any one source, providing a buffer against supply chain shortages and delays, or unexpected changes in cost or regulation. In any case, businesses that are considering shifting their operations and supply chains, or at least parts of them, elsewhere should do so responsibly.
As with any relationship, the parties and countries with which businesses are newly associating ought to be appropriately vetted, to ensure that what they have to offer works practically and in accordance with law. Businesses should consider:
- Industry
For some industries, if sufficient alternatives in other countries are available, it may make sense to clean break from China; for others, where alternatives are sparser, it may make sense to adopt a “China plus” strategy. For example, some businesses in the electric vehicle, lithium battery, semiconductor, and rare earth industries have found success completely reshoring their operations, manufacturing, and production, because of increased domestic investment in those areas. Businesses in the solar panel industry have found success completely outsourcing to countries like Bangladesh, Cambodia, Malaysia, the Philippines, and Thailand. The furniture and textile industries have found success paring back in China while expanding parallel operations and supply chains in different locales familiar with the processing components from China, such as Mexico and Vietnam.
2. Resources
The capital at a business’ disposal is always a consideration; a “China plus” strategy, in integrating more players, is likely to add costs in some aspects, but may save costs that would be associated with a clean break. Additionally, a business will need to have adequate human resources at its disposal, not the least of which is personnel competent and experienced in managing complexities across different jurisdictions and involving various parties, and in handling increased responsibilities in inventory and transit.
3. Logistics
Logistics will need to be considered as well. With the “China plus” strategy, adding more sources, as opposed to replacing sources in China in their entirety, may involve more handlers and transit throughout a business’ process. This requires that businesses consider their internal procedures and their obligations to their customers, and whether the time required by adding more sources aligns with the same. Will cultural issues and holidays (formal and informal) present any issue regarding timely manufacture and delivery?
