{"id":2084,"date":"2019-09-03T12:57:50","date_gmt":"2019-09-03T12:57:50","guid":{"rendered":"https:\/\/proqc.com\/blog\/?p=2084"},"modified":"2023-10-31T08:31:23","modified_gmt":"2023-10-31T08:31:23","slug":"us-china-trade-war-and-global-alternatives","status":"publish","type":"post","link":"https:\/\/proqc.com\/blog\/us-china-trade-war-and-global-alternatives\/","title":{"rendered":"US-China Trade War and Global Alternatives"},"content":{"rendered":"

In this series of posts we will first explore the background and latest developments of the ongoing U.S.-China trade war and then provide an overview of some other counties that companies are considering as a new sourcing alternative.<\/em><\/p>\r\n

Written by<\/strong>: Pro QC Quality Assurance Team<\/em><\/p>\r\n

Considered one of the biggest threats to the global economy this year, the ongoing U.S.-China Trade War has caused what can only be described as a mad dash for companies to move their production out of China. But what exactly is going on, and what does it mean for your supply chain solutions?<\/p>\r\n

A very brief review of the politics<\/strong><\/h3>\r\n

Although there is some contention about tensions mounting between the U.S. and China as early as 2016, things ramped up in early 2018 when the U.S. announced a list of 1300+ categories of Chinese imports listed for tariffs. In March 2018, the U.S. government levied import tariffs of 25% on steel and 10% on aluminium. China responded by placing tariffs on imported U.S. goods and agricultural products, with 25% on a list of 106 products, including soybeans, automobiles, and chemicals.<\/p>\r\n

By May 2018, the U.S. asked China to reduce the trade gap between the two nations by US$200 billion in two years. A brief truce ensued, followed by the U.S. Trade Commission recommending a 25% tariff on approximately US$200 billion worth of goods, including textiles, metal products and machinery in early August of that year. The second round of tariffs was released a few days later on the following list of US$16 billion worth of goods.<\/p>\r\n

In early August 2019, the U.S. government announced it will tax all Chinese goods entering America at 10% tariffs, potentially set to increase in stages to 25% \u2013 encompassing items from apparel to smartphones. This will be on top of U.S. tariffs on a total of US$250 billion worth of incoming Chinese goods, while China tariffs have applied to a total of US$110 billion U.S. goods.<\/p>\r\n\r\n

With tensions mounting, the recent escalation saw China devaluing their currency in what they stated was part of trade protectionism measures. The currency passed the unofficial peg of seven Chinese Yuan to one U.S. dollar, making China more competitive for those who wish to purchase Chinese goods with international currencies.<\/p>\r\n

So how does this impact your supply chain solutions?<\/strong><\/h3>\r\n

While tariffs may have increased for goods either going to or from the U.S. or China, global trade markets continue to be active despite the uncertainty of future conditions.<\/p>\r\n

For example, China\u2019s automotive import industry continues to boom, and automotive product inspection is still a large business.<\/p>\r\n

But several industries \u2013 including large numbers of those in the apparel sector \u2013 have been looking to shift their manufacturing from China to other locations in Asia as a precaution to any economic fallout. While those considerations vary for individual businesses, the decision to move production doesn\u2019t necessarily mean things will be easy in a new country: supplier maturity, quality, and logistics are all factors to be taken into account when determining the best spot to be in.<\/p>\r\n

Protecting your brand becomes even more important when you realign your supply chain \u2013 so how do you do that?<\/p>\r\n

When looking at ex-China production countries such as Vietnam, India, Thailand, Indonesia, and even Myanmar, it is imperative to have \u2018quality boots on the ground\u2019 or enlist a reliable quality control or inspection company in Asia, who understands the region. To ensure quality from the commencement of supplier identification through to postproduction monitoring you may require services such as an initial supplier audit, quality inspection, factory audits or\u00a0supplier management or development<\/a>. You also may see quality control companies use terms such as source inspections and third-party inspection services for standard postproduction quality control services.<\/p>\r\n

As we continue to monitor the trade situation, we\u2019ll be highlighting alternative supply countries for those seeking alternatives to China. Follow us for more on the pros and cons of each, and why you shouldn\u2019t eliminate China from your supply chain.<\/p>\r\n

So what are your alternatives to China<\/strong><\/h3>\r\n

Choosing a new manufacturing location is never easy, especially if you\u2019re used to working with a particular production unit. However, with the U.S.-China Trade War in full swing, many are being forced to look at other options in order to decrease the loss on margins. It doesn\u2019t have to be all negative though; we\u2019re weighing out the pros and cons of two alternative countries, Vietnam and Taiwan.<\/p>\r\n

Before you start though, we think this tip is helpful: remember to assess whether the new location you\u2019re looking at has known expertise in manufacturing your product. And secondly, conducting a factory audit on a potential new supplier can help make sure you\u2019re taking the right step.<\/p>\r\n

\"\"<\/p>\r\n

Vietnam <\/strong><\/h3>\r\n

Second quarter 2019 figures from the Vietnamese government have indicated the country\u2019s manufacturing figures rose 9.14%, pushing GDP up to 6.71% year on year, as Vietnam indicates it\u2019s been benefitting from the current U.S.-China Trade War climate.<\/p>\r\n

According to the IMF, in 2018 Vietnam\u2019s strong economic growth was led by industrial activity. One of the reasons for this has been the government\u2019s strong support of the private sector, which has helped strengthen the regulatory quality and boost the ease of doing business in the country.<\/p>\r\n

Revamped anti-corruption laws in 2018 have also improved transparency \u2013 with a commitment to link databases on taxation, anti-money laundering, customs, and land transaction, on target for the end of 2019.<\/p>\r\n

If you\u2019re producing apparel, shoes, home-textiles or anything furniture-related, Vietnam\u2019s a good bet.<\/p>\r\n

But beyond this, one of the key advantages of Vietnam is its logistics chain \u2013 with solid infrastructure: roads, airports, and multiple ports of shipping, getting your goods on their way is much easier than ever before.<\/p>\r\n

But this is also one of the challenges to consider \u2013 logistics is still more costly and less integrated in Vietnam than in China.<\/p>\r\n

Further cons in Vietnam are a need to improve the enforcement of contracts and legal interpretation as well as facilitate resolution and bankruptcy proceedings.<\/p>\r\n

Taiwan <\/strong><\/h3>\r\n

The Economist has long hailed Taiwan as being the most technologically advanced computer microchip maker in the world, and with the world\u2019s seventh-largest economy, there\u2019s no need to look at the region\u2019s GDP figures.<\/p>\r\n

A tech-savvy hotspot, Taiwan has built up its reputation as a key player in manufacturing IT goods over the last 20 years. One of the advantages here is a highly skilled labour-force and top-notch R&D centres, which also offer design expertise that is often found lacking in other markets. All these pros inevitably make Taiwan a great option for higher quality \u2013 and largely tech – manufacturing needs.<\/p>\r\n

\"\"<\/p>\r\n

Solid infrastructure and well-established shipping ports and logistics chains back Taiwan\u2019s claims to fame here, but strong IP laws, backed by stable governmental regulation are also important factors in why it is such a hotspot.<\/p>\r\n

This though leads into Taiwan\u2019s biggest challenge: cost. All the stability Taiwan provides also means that you\u2019ll be paying up to 30% more for manufacturing there versus in mainland China.<\/p>\r\n

Remember that supplier identification research or an initial supplier audit can help determine if a location is right for your production needs.<\/p>\r\n

Cambodia<\/strong><\/h3>\r\n

A relatively recent entrant into the outsourced manufacturer game, the Cambodian government has been making a real push for the country to build a name for itself as an apparel manufacturer over the past 7 years or so.<\/p>\r\n

With one of the fastest growing economies in southeast Asia, there\u2019s no doubt that they\u2019ve been successful in garnering business \u2013 Cambodia now accounts for approximately 31% of all apparel manufacturing in the region. A number of major multinational brands manufacture here, contributing to the 16% GDP and 80% of the country\u2019s export earnings.<\/p>\r\n

Taking advantage of a competitive labour force, it is undoubtedly Cambodia\u2019s strategic location which really counts \u2013 functional rail infrastructure surrounds the international port city of Pnomh Penh, where the majority of factories are located. The country is also strategically placed in another sense \u2013 as a member of the ASEAN Free Trade Area, which offers less costly sourcing of materials between the 10 member countries.<\/p>\r\n

However, while it is substantially less costly to do business in Cambodia, one of the real issues the nation has faced is a relative lack of regulation when it comes to wages and working conditions for labour in the industry. Regular conduction of factory audits and supplier audits are crucial here.<\/p>\r\n

India<\/strong><\/h3>\r\n

With a relatively well-established manufacturing industry, India is one of Asia\u2019s manufacturing juggernauts, following China. Through the government\u2019s continued push through the \u2018Make In India\u2019 campaign, India has seen an uptick in tax benefits with reform in foreign direct investment regulations, along with an uptick in modern, high-quality factories as well as ongoing improvements in the logistics space.<\/p>\r\n

\"\"<\/p>\r\n

While 31% of India\u2019s manufacturing exports come from the textile industry, the country is known as a haven for sourcing a large plethora of products \u2013 everything from apparel to wooden products and hard goods to sporting goods to jewellery and high-quality medical supplies are being manufactured here. Quality inspection is a well-oiled mechanism in India, with consistency as one of the higher-quality producers among its peers in the region.<\/p>\r\n

Although production here is a lot less costly than in China, India compares in the fact that Intellectual Property protection and enforcement is weak. The government is overhauling some of the regulations here, but it could be a little longer before any sort of clarity on what exactly will change.<\/p>\r\n

Another current disadvantage of India is a somewhat tenuous infrastructural system \u2013 the water and electricity supply can be patchy \u2013 and the domestic logistics chain is not so stable, with shipments from the north often taking a couple of weeks to reach the south of the country due to poor roads.<\/p>\r\n

Bangladesh <\/strong><\/h3>\r\n

Better known for its apparel manufacturing, Bangladesh has also in recent years billed itself as a hardware destination. Proximity to China has been one of the biggest advantages for the tiny nation, which receives its raw materials from there.<\/p>\r\n

Although a largely rural nation, with the agricultural sector providing employment for at least 41% of Bangladesh\u2019s population, according to the IMF. Further figures indicate the industrial and manufacturing sector employs roughly 20.8% of the population, with the services sector (including technology outsourcing), employing around 38% of the population. This puts Bangladesh squarely in an advantageous spot for a variety of outsourcing needs.<\/p>\r\n

While the world\u2019s lowest cost labour in Bangladesh forms the backbone of a manufacturing industry that is able to churn out the largest number of goods at acceptable quality at the lowest possible cost, this is one of the downsides of diving into the country without a bit of extra research.<\/p>\r\n

Post the Rana-Plaza incident, which in 2013 saw the collapse of an eight-storey commercial garment manufacturing building, housing several apparel manufacturers, the spotlight certainly turned toward exporters conducting better supplier inspection.<\/p>\r\n

With ongoing scrutiny, regular factory audit and supplier audit services are imperative when looking at Bangladesh as an alternative sourcing destination to China.<\/p>\r\n

Indonesia<\/strong><\/h3>\r\n

KPMG\u2019s ASEAN Business Guide 2018 country focus reports Indonesia as a nation with not only consistent economic performance (5.3% in 2018, and similar figures estimated for 2019), but also as having strong governance and transparency to support future growth.<\/p>\r\n

Two-thirds of Indonesia\u2019s GDP come from manufacturing, construction, wholesale and retail trade, information and communication, financial and insurance activity, agriculture, forestry and fisheries, according to the KPMG report.<\/p>\r\n

The advantages here are of a country that offers several tax incentives and benefits to those looking at Indonesia as a sourcing and manufacturing destination. Free-trade zones and free port areas contribute to zero import duties or other taxes on the import of raw materials and other goods.\u00a0<\/p>\r\n

However, despite the positives, two factors offset challenges for Indonesia in general: labour productivity and highly developed manufacturing infrastructure. Ongoing site inspection is a necessity to ensure that your chosen supplier is the right one for you in meeting your production needs and times.<\/p>\r\n

Malaysia <\/strong><\/h3>\r\n

A well-developed infrastructure and productive workforce characterize Malaysia as a sourcing and supply alternative to China. Seven international ports are key to the country\u2019s ability to price down in shipping to the world.<\/p>\r\n

Tax-wise, although domestically manufactured products and imported goods are both taxed at a rate between 5% and 10%, there are no import duties on raw materials, machinery and parts in Malaysia.<\/p>\r\n

Another large benefit here is Malaysia\u2019s reputation for its natural resources \u2013 it is one of the world\u2019s largest producers of tin, rubber, and palm oil, while petroleum is also one of its biggest exports. The benefits here are clear in terms of lower electricity rates as well as heralding its role as an electronics manufacturing destination.<\/p>\r\n

The challenges here are heavy bureaucracy \u2013 foreign involvement in the sector is restricted and requires expert on-ground assistance in navigating the paperwork required. Halal certification is also required across a range of products necessary for various industries, as well as services, and is something that must be monitored and ensure careful following when looking to source supplies from the country.<\/p>\r\n

Offset by high quality technology and a strong knowledge-based, Malaysia is a destination to consider for production of medical and health products, as the stringent regulatory atmosphere offers the opportunity for superior end products.<\/p>\r\n

Myanmar <\/strong><\/h3>\r\n

Formerly known as Burma, Myanmar began to open up to the world – after decades of isolationist measures \u2013 around 2015. Quickly garnering a reputation as a fast-fashion producer, Myanmar\u2019s top exports are petroleum gas, dried legumes, apparel, rice and refined copper.<\/p>\r\n

The country is also well known for its wood products and jade and gem processing. More recently, electronic good and vehicle assembly units have been set up in Myanmar as well.<\/p>\r\n

Corporate tax exemptions and special economic zones have made manufacturing in Myanmar much easier than ever before, along with its status as an ASEAN Free-Trade Agreement signatory.<\/p>\r\n

However, here it is imperative to maintain regular scrutiny of factory production units \u2013 often the same factory will be producing disparate goods (everything from wooden products to men\u2019s apparel to women\u2019s lingerie) at the same time.<\/p>\r\n

Another challenge faced here is the lack of regular maintenance and updating of manufacturing equipment.\u00a0<\/p>\r\n

Without third party inspection services to keep a close eye on units, Myanmar is one of the more difficult countries to enter as a sourcing destination.<\/p>\r\n

Philippines<\/strong><\/h3>\r\n

Manufacturing is anticipated by Deloitte to be one of the key industries that will drive growth of the nation over the next 20 years \u2013 based on the nation\u2019s continued strong economic growth pattern.<\/p>\r\n

With governmental policies increasingly opening up foreign direct investment channels, capital injections have driven up investments in the manufacturing sector \u2013 yielding higher quality factory facilities and better trained labour.<\/p>\r\n

The Philippines is a diverse manufacturing location with expertise in everything from electronic components and semiconductors to processed food, furniture, homewares and fashion. Another plus is that 70% of the population is English-speaking, opening up the channels of communication.\u00a0<\/p>\r\n

However, one important challenge to consider with the Philippines is a high-level of bureaucracy. A current lack of transparency does not protect investors \u2013 the nation scores low here on the World Bank and IFC indices, ranking 128 in the world.<\/p>\r\n

Additionally, despite being relatively inexpensive to move products across borders, the country remains slow in processing and transport. This may be accounted for by a large calendar of public holidays (approximately 18 days annually) as well as a number of days which see shutdowns due to tropical cyclones each year.<\/p>\r\n

Thailand <\/strong><\/h3>\r\n

With a thriving domestic market and a stable economy, Thailand is worth over 437.81 billion USD economically.<\/p>\r\n

It\u2019s the place to go if you\u2019re looking to manufacture computer components, autos and auto parts, and for food processing. The country has been working on transforming their manufacturing base to high-tech production, already bringing in Chinese investors to help enact this plan.<\/p>\r\n

\"\"<\/p>\r\n

With excellent infrastructure and ease of doing business, Thailand is well placed after China as a sourcing and manufacturing location. An additional advantage is an educated workforce. \u00a0<\/p>\r\n

It is however important to bear in mind that as far as foreign direct investment goes, the government does favour Thai nationals. Along with this is the need to keep a finger on the pulse of the country\u2019s politics \u2013 there have been several shifts in political power over the last decade, which has yielded disruptions to the supply chain.<\/p>\r\n

Talk to us about how to best serve your full-spectrum supply chain needs.<\/p>\r\n

Learn more about Pro QC’s quality assurance, engineering and consulting services at https:\/\/proqc.com<\/a>.<\/p>\r\n","protected":false},"excerpt":{"rendered":"

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