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. But 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 may find themselves caught short in a time of need.
At the recent Computex trade show in Taipei, exhibitors ranging from power-tool suppliers and auto-electronics vendors to server and laptop makers, told me almost identical stories. They’re 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. But they also warn that once the initial migration phases are complete, subsequent decoupling will be much harder.
Assembly of final products is the easiest because it’s 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’s easy to conclude that full supply chain migration is achievable.
But 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% of global chemical production, according to one estimate. It has a 55% share of acetic acid capacity, a relatively banal substance that’s the core component of vinegar, but also used to make glue, textiles, dyes, rubber and plastics, and agricultural products. The country also holds around 45% of the world’s titanium oxide manufacturing capabilities, an ingredient in paints, paper and various coatings.
