Macro Moves

Companies want to move production out of China, Is it possible?

Created on 14 Apr 2020

Wraps up in 4 Min

Read by 3.9k people

Updated on 31 Aug 2020

The investor in minimizing the odds. Unfortunately, a lot of companies manufacturing or importing from China are forced to learn it the hard way.  The Chinese economy will take a minimum of two quarters to get back on track after facing a deadly hit by COVID-19. The multinationals whose production units are set mostly in China are to pay for it. Hence, companies are left with no alternative than to spread their wings to defend any such happenings in the future. 

Someone’s loss is absolutely another’s gain. As China struggles to uphold its place in the global market, the rest of the countries are bracing to grab the opportunities. But a few countries like India, Vietnam, Africa, Bangladesh and the ASEAN countries are already on the radar as a substitute for China. 

It all started…

It is an obvious fact that COVID-19 pushed the companies to look for possible avenues to kick start new production units. But most of the companies started contemplating on it as soon as a disturbance between two great economies raised its head. Earlier this year, the USA and China found themselves in the middle of a trade war. As a result of which the companies faced a tariff of about 25% on $200 billion worth of Chinese goods. And China, on the other hand, imposing about 5-10% tariff on the import of US-based goods. This situation gave rise to a train of problems offering the expansion of production units as the only solution. Further, the demand for higher wages and increasing costs happen to be another reason. All this made big sharks like Nintendo, Apple and Dell lookout for commencing manufacturing stations outside of China. 

When COVID-19 closed economic activities in China, it was a wake-up call to the rest of the corporate world.  As most of their production houses were in China, as soon as there was a lockdown or a problem in the country everything that was produced in that soil faced the consequences. And the rest whose production is based on those parts or semi-finished goods had to wait for their arrival. Along with that companies had to confront a shortage of inventories.  Japan has also favored this step. It added 220 billion yen towards this cause. It claims that this amount will be used to assist companies who are going to relocate out of China. This decision doesn’t just rule the minds of foreign multinationals but Chinese-origin firms like Nikkei and TCL are planning to execute it. 

Who is next in the race? 

Say you placed all your eggs in a single basket. When the basket is shaken and the eggs are broken, your apparent decision will be to spread your eggs in multiple baskets. But what are the other baskets which the corporates are eyeing at?  As the search for another possible location started so did the race to attract those companies. India will have to compete with Bangladesh, Vietnam and the rest of the ASEAN countries in this race. Wistron, one of Apple’s manufacturing partners, is all set to start production in India. A lot of iPhone makers and smartphone makers are also ready to catch a suitable location in India. Pegatron made its way to Vietnam. And a lot of US apparel importers are now shifting their focus to Bangladesh which is the second-largest clothes producer. Bangladesh is prompted to be the next textile hub. HP and Dell are planning to move about 30% of their production towards Southeast Asian countries. About 200 companies are intending to reshape their production and manufacturing sector. This move is a crucial step in reducing over-reliance on China.  

Apart from this, the ASEAN countries, India and Bangladesh have a friendly trade agreement with China which is another benefit. These countries are also located geographically closer making it another added advantage.  But India is for sure to have an upper hand. Huge labor force, strong domestic markets are among the many reasons that will attract the companies. Vietnam and other countries have only 1/9th of the population in China. However, Bangladesh and other countries have a cheap labor force when compared to India. Also, the labor market in India lacks proper training which is mastered by Vietnamese. The diverse culture and price centric nature of the Indian masses can also be a major obstacle. There are also several and taxing and legal obstacles. The companies had to acquire nearly 34 permits to start construction. That is why companies like HP mostly utilize leased spaces. 

On the other hand, though the ASEAN countries are constantly developing there is a lack of coordination and cooperation among themselves. The AEC (Asian Economic Community) which was formed in 2015 comes up with big plans but only to fail in the most important part, execution. The Asian Single Window (ASW)and Non-barrier tariffs are a few examples. If the ASW is implemented then the goods need not wait at the shore for 10 days. They will also allow easy movement of goods among the ASEAN regions.  When companies are ready with the capital it is up to the Government to support it. The various nations should make sure that the process for establishing industries or units are less stringent. They should come up with tie-ups, collaborations and Free Trade Agreements (FTA) to ease up the process. The countries should focus on developing good regional value chains. India is already taking initiatives to set up friendly ties with ASEAN. The countries should start cooperating in bringing out the best of each other to attract the migrating companies. 

This is the smallest step taken along the road directing towards a long journey. The Southeast Asian and other nations will have to work out possible plans and schemes to turn the wind in their favor or it will be just another missed opportunity. 

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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