Manufacturers shift supply chains from China to Southeast Asia amid challenges

The initiative led by the United States to gradually reduce trade ties with China, combined with increasing costs and a growing recognition of the importance of diversifying production, is prompting manufacturers to seek alternative locations.

However, the complex task of shifting entire supply chains away from the world's second-largest economy poses significant challenges. Governments and business leaders must accelerate these efforts, as delays could leave them vulnerable during critical times, according to an article by Bloomberg.

At the recent Computex trade show in Taipei, exhibitors across various sectors—from power tools and auto electronics to servers and laptops—shared similar stories. They are relocating operations out of China to Southeast Asia, driven largely by major international clients. Thailand, Vietnam, and Taiwan are focal points for these new investments. Yet, they caution that while initial phases of migration, especially final product assembly which is labour-intensive and uses simple equipment, are progressing swiftly and affordably, subsequent stages will prove more daunting.

Moving beyond final assembly involves semi-completed manufacturing like product casings and housings, which also shows promise in terms of speed and cost-effectiveness. Mexico has emerged as the largest source of imports to the US, while countries such as India, Vietnam, and Thailand are gaining ground against their Chinese counterparts.

However, the real challenge lies in the earlier stages of production, where specialized and expensive equipment operated by skilled technicians is essential. Processes like plastic and metal moulding heavily rely on well-established networks of nearby suppliers. Over the past two decades, China has developed significant expertise and capacity in crucial industrial chemicals, essential for various sectors including textiles, plastics, and agriculture. It dominates global production with over 40% share in chemicals and holds substantial capabilities in titanium oxide, a key ingredient in paints and coatings.

This concentration of chemical production in China creates a cluster effect, essential for efficiency and speed in related industries such as plastics and metals used in electronics, automobiles, and machinery. Despite expanding operations in Southeast Asia, manufacturers at Computex noted that their chemical, plastics, and metals suppliers in China are not rushing to relocate, imposing natural limits on how much of the supply chain can realistically be moved elsewhere.

Current global economic conditions pose additional challenges to migration efforts. Recent downturns in the materials sector, where China plays a leading role, have left suppliers of intermediate chemicals financially constrained, limiting their capacity to invest in new overseas facilities. Moreover, improvements in supply chain logistics and transportation have reduced the immediate urgency for relocating entire manufacturing processes away from China.

Effective migration requires substantial incentives and client willingness to accept higher costs. Alternately, geopolitical crises like war could force abrupt changes, though waiting until such a point would likely be too late. Therefore, while comprehensive supply chain migration is costly and complex, undertaking these efforts during peaceful times offers better prospects than waiting for crises to precipitate action.