Why moving supply chains from China to ASEAN isn't that easy

30 September 2020 Consultancy.asia 5 min. read

The supply chain industry is busy finding ways to move components out of a high-risk Chinese market, but this is easier said than done.

In recent months, studies and gurus across the world have called for organisations to rethink their supply chain mix, aiming to better cope with the ‘new normal’ emerging from Covid-19. One key recommendation that has surfaced repeatedly is that supply chain reliance on China should be minimised.

The immediate wake of the crisis has made the case for these claims. A pertinent example here is Foxconn – a contract-based electronic manufacturer with production plants in China. Disruptions to Foxconn’s supply chain when the crisis first began had a tangible impact on the supply chain of its buyers, which include tech giants Apple, Intel and Sony. This topped off an already uncertain climate as tensions between Beijing and Washington escalated last year.

The upshot is that experts are urging companies to optimise their supply chains and reduce reliance on China. Solutions on offer include manufacturing closer to home or making sure the final product is less dependent on China lead times. As a result, businesses from countries in Asia and across the world have been reevaluating their supply chains to potentially move away from China.

Moving supply chains away from China is not that easy

Meanwhile, other Asian markets such as India, Vietnam and Indonesia are gearing up to catch the rebound from this phenomenon. Upping their manufacturing capabilities and cutting labour costs, these markets are prepared to offer an enticing alternative to China as a key link in global supply chains.

That being said, moving the supply chain away from China is not that easy. In fact, according to René Buck and Sui Leng Khoo from Buck Consultants International, it is unlikely that companies can easily abandon operating in China altogether. The best they can do is shift bits and pieces to other markets.

The big question then for companies migrating partially out of China is: Where to go next? Most of the companies that have shifted production capacity out of China have set their eyes on the ASEAN region; The ASEAN or Association of Southeast Asian Nations is composed of Indonesia, the Philippines, Vietnam, Thailand, Myanmar, Malaysia, Cambodia, Laos, Singapore and Brunei.

Of the 250 respondents surveyed by the American Chamber in China: 25% are heading to Southeast Asia, while 11% are going to Mexico, 8% to Indian subcontinent, 6% to the US, 4% to East Asia and 4% to Europe.

Seems simple enough, but even relocating to ASEAN throws up complications. Despite targeted efforts from markets in the region, It will likely take a few years before the ASEAN region can catch-up with China. Buck and Leng Khoo put forward three competitive advantages that continue to give China supply chain supremity.

Availability of skilled labour

ASEAN’s population taken as a whole amounts to 647 million people, which still pales in comparison with 1.3 billion in China. One advantage for ASEAN is the cost of labour. Once the hallmark of low labour costs, China has grown into an expensive labour market in recent years, particularly when compared to other ASEAN markets. Minimum wages in the Philippines and Vietnam have fallen down to one-third the minimum wage in Guangdong, China. This is for blue collar jobs. Even in the higher skill white collar segment, the mid-tech workforce in Thailand or Malaysia, for instance, is far cheaper than what is available in China.

Where ASEAN markets lose out to China is in the quality department. The ASEAN labor pool lacks the experience and diversification of China’s contemporary workforce. As the Operations Director of Omnidex Group, supplier for industrial equipment manufacturer McLanahan explains: “China has a 15-year head start – whatever you want, someone’s doing it”.

Unlike in China, companies in the rest of ASEAN still have to train their workforce, particularly for work in the tech space.

Access to an extensive network of suppliers

At this point, ASEAN still lacks the presence of specialised supply chains that comply with global safety requirements. Add to this the lack of access to capital-intensive machineries – all of which lies in China’s proud possession. An example is Canon’s network of 175 suppliers in Vietnam, only 20 of which are actually Vietnamese companies. Most are from China, Japan and Taiwan.

Another example is Electrical tools company ECM Industries. The company relocated to Vietnam but found it challenging to source multimeters – instruments to measure voltage. So intense was the shortage that they had to develop a cross-border supply chain between China and Vietnam from scratch.

Highly developed logistics infrastructure

With the exception of Singapore and Malaysia, the other eight member countries of ASEAN still lag behind China when it comes to the quality and capacity of seaport infrastructure – key to business growth opportunities. Vietnam is already feeling the logistics pressure, as its ports struggle to cater to the needs of the wave of companies migrating from China.

According to Buck, all these factors combine to delay or minimises the supply chain restructuring drive away from China. “Challenges still loom for companies that are planning to move to Southeast Asia from China. In view of this, most companies relocated only some – and not all – of their operations in China into Southeast Asia,” he explained.