Asia/India
Manufacturing Exodus from China: The Reasons and Alternative Options
China has been the world’s top exporter since 2009. However, things seem to be changing in recent times, and businesses are looking at manufacturers in other South Asian countries like India, Vietnam, Taiwan, etc.
Being the most populous country has helped China build a vast workforce to strengthen its manufacturing sector. Statistics show that 13% of the country’s population (about 182 million) works in manufacturing. However, a series of reasons have led to China becoming a less-preferred destination to manufacture cost-effective products. This is not a sudden development but a gradual shift, accelerated by trade tensions and politics.
Let’s understand more about the exodus of manufacturing from China and the other feasible alternatives for business from around the globe.
Reasons for Manufacturers and Brands to Move Away from China
Data shows that the contribution of income from export goods is reversing in China. The country has targeted a GDP growth of just 5%, the lowest in the last thirty years. There are many reasons for this.
• Role of Covid-19 Pandemic:There’s no denying the disruptions caused by the Covid-19 pandemic. While the entire world has been affected by this, China seems to have suffered a lot more due to severe restrictions. Even after the restrictions had been removed, the country didn’t notice a great increase in manufacturing exports.
For example, Apple’s China One Plus policy led to the manufacturing of Apple iPhones in India and Vietnam. Many countries and brands are not impressed with how China handled the pandemic and its relations with Taiwan. They also don’t appreciate the restrictions imposed on businesses.
• US-China Rivalry:The US and China have a complex trade history. Both countries are in constant competition to outsmart the other. Recently, this has reached a new high, with the US imposing $550 billion worth of tariffs on Chinese products. China retaliated by imposing $185 billion worth of tariffs on US goods. Additionally, there is a 25% tariff on China-specific products, which impacts $34 billion worth of products. Businesses can avoid a percentage of these tariffs and manufacturing costs simply by exporting goods from another country like India, Vietnam, etc.
• Temporary Labour Shortages:In late 2022, China suffered temporary labor shortages after it abandoned its zero-Covid strategy. The officials said there are fewer chances of the country suffering from another mass attack of injection. Many hoped China would be back in action. However, this good news didn’t translate to an increase in the workforce. Tesla’s Shanghai plant has extended its reduced production schedule to continue until next year.
• Weakening Export Demand:The export demand has also suffered a slowdown since the pandemic (2020). Despite the pandemic restrictions being removed, the global markets are tentative and wary of an impending recession. Many countries, including the US, are tackling high inflation. The war between Ukraine and Russia has also weakened the export demand in manufacturing. Businesses are looking elsewhere to set up their manufacturing units for affordable prices.
• Changing Demographics in China:Another reason for the manufacturing exodus in China is the change in demographic conditions. The industry primarily has workers aged between 15 and 64. However, the size of this age group has been decreasing since 2010 and will continue to do so for the next few years. The decrease in the labor pool corresponds with the doubling of wages. As the human force supply further decreases, the wages may increase even more, making it expensive to consider China for mass manufacturing.
• Labor and Export Costs:Statistics show that labor wages in China doubled between 2009 and 2014. Compared to other Southeast Asian countries, China has an expensive manufacturing industry. This increases the costs while reducing profits. Naturally, brands began to move out of the country to find more affordable manufacturers. Moreover, the export duty in China is 25%, and it is 3% for India for injection molding. Businesses find it easier to get exports from countries like India, Taiwan, etc., and increase their profit share.
Top Six Alternative Countries for Manufacturers
Even though China is still the factory of the world, businesses have far greater options to choose their manufacturing partners. The following countries are fast becoming a cost-effective alternative to China.
1. India
The Indian economy has grown exponentially over the last few years. The country is strengthening its manufacturing sector along with other industries. In fact, India has been competing with China for many years and is gaining better momentum. Though the COVID-19 pandemic affected India, the country managed to sustain its industries and even began to find internal sources of raw materials to avoid relying on outside suppliers.
In such instances, choosing India as a manufacturing partner offers many benefits. Firstly, the cost of production is low. As per some sources, the average monthly wage in India is $70, compared to $200 in China.
Secondly, corporate taxes have been reduced in India to promote new investments from global brands. Thirdly, India has a vast market as the second-most populous country. Furthermore, it is a democratic country where businesses have a fair chance of capturing the markets. The semiconductor and injection molding industries are among the fast-growing markets in India. According to Mordor Intelligence, the Indian manufacturing sector is expected to grow by a CAGR of 4% between 2023 and 2028.
2. Thailand
Thailand has become the best choice for auto manufacturing in Southeast Asia. From full-fledged vehicles to automotive spare parts and electronic cars, Thailand has the necessary infrastructure to handle the latest manufacturing demands in the sector. Popular global brands like Sony have their own manufacturing factories in the country.
The electric vehicle market is thriving in Thailand. Even Tesla has entered the market, while Chinese electric car-part manufacturers are quickly relocating from China to Thailand. Automotive businesses with European clients are choosing Thailand to cater to their demands. Geo-political tensions and cost are the major reasons for this development.
3. Bangladesh
Bangladesh is India’s neighboring country with a young population and large land suitable for the manufacturing sector to thrive. The country is becoming a worthy choice for Chinese manufacturers looking to expand into newer markets. Bangladesh has been a good option even before the pandemic and is continuing to be among the top alternatives for export manufacturing. In fact, the Bangladeshi apparel industry is growing and has the maximum FDI from China.
4. Mexico
Mexico is a North American country with a growing manufacturing industry. With the US being a top consumer in the continent, manufacturing in Mexico is proving to be a cost-effective solution for many brands. Many Chinese and international manufacturers with the US as their main client are moving to Mexico. This helps them avoid losing money due to the US-China tensions.
Mexico is building industrial parks and estates like the Hofusan Industrial Park to attract more foreign investors. The country offers low energy prices and other benefits to promote manufacturing investments.
5. Poland
Poland is becoming the hub of European trade. With Ukraine being at war for more than a year, Poland benefitted the most by gaining new investors in the manufacturing and tech industries. The country’s government is pushing for more developments by promoting the use the advanced technology to boost the economy.
The manufacturing sector contributes 22.4% to the country’s GDP. Major players belong to the food & beverage industry, automotive, plastic, rubber, metal, electrical equipment, chemical, etc. Chinese car-part manufacturers wanting to expand to Europe consider Poland an effective choice of investment.
6. Vietnam
Vietnam already has established manufacturers catering to global clients. However, post the pandemic, many Chinese companies have been shifting to Vietnam. While some of these companies work independently, others act as suppliers to the established manufacturers. This has led to an increase in foreign investments in the country.
The solar panel industry is highly active in Vietnam, with Chinese businesses as the major players. In recent times, the country has been attracting ancillary manufacturers like energy storage providers, plastic molding, die-cast manufacturers, etc.
Conclusion
As economists wonder if China will regain its lost prominence, businesses are focused on exploring new markets to make investments and build ties with friendlier countries for affordable manufacturing.
Trumould is a global injection molding company with a strong presence in the US and Indian markets. We offer customized, quick, and premium quality services to our partners from versatile industries. We aim to make manufacturing simple, easy, and cost-effective for startups and large enterprises.
