The Asian manufacturing arena is shifting from China to Southeast Asia

China has been a significant Asian manufacturing hub for decades. Despite such a position,  the country now faces several challenges that led to the rise of reshoring companies. The obstacles range from the pandemic’s adverse effects and rising labor costs to an aging population. These circumstances have forced many companies to seek alternative manufacturing locations, and Southeast Asia is quickly becoming a viable option.

The said region offers several advantages over China, making them attractive as Asian manufacturing sites. Some countries in Southeast Asia such as Indonesia, Thailand, Vietnam, and the Philippines, offer lower labor costs, a young and growing population of skilled workers, and access to free trade agreements. Hence, it’s no wonder many companies are now looking to Southeast Asia as an alternative to China for their manufacturing needs.

Reshoring companies and their reasons

Labor costs in China have increased in recent months due to the Chinese government’s implementation of policies that raise the wages of its citizens and reduce the cost of living. As a result, it became difficult for companies to remain profitable in China. 

The ease of doing business in Southeast Asia is a significant factor in the reshoring trend. Countries such as Vietnam and Thailand have made it less exhaustive for reshoring companies to set up operations by offering tax incentives and other benefits. It has been a major factor for multinational companies looking for a new base for their offshoring operations.

Another factor driving companies to reshore from China to Southeast Asia is their desire to be closer to their markets. Having a production base closer to their target consumers can lead to greater efficiency and cost savings. 

For example, the manufacturing plant of Olympus in Shenzen (OSZ) is one of China’s losses. The move is part of the brand’s broader strategy to reduce costs. By moving its production from China to Vietnam, the company hopes to lessen labor costs and take advantage of the country’s lower taxes and operating costs.

We have decided to discontinue operations of OSZ and concentrate this production at Olympus Vietnam. This will enhance our production efficiency and profitability, enhancing the global competitiveness of our digital camera business.”

Olympus stated.

Trade conflict and the Asian manufacturing industry 

The escalating tension between the United States (US) and China has caused companies to re-evaluate their supply chains, leading to a shift in production from China to other parts of Southeast Asia. US companies reshoring examples are Hasbro, Inc., Brooks Sports, Inc., and Ever Win International Co.

“We’re seeing great opportunities in Vietnam, India, and other territories like Mexico. We’re doing even more in the US. We brought Play-Doh back to the US last year,”

Hasbro CEO Brian Goldner said in a  2019 interview.

The US-China trade war has made it difficult for global companies to do business in China. As tariffs and other trade barriers have been imposed, the cost of doing business in China has risen significantly. Such has led many companies to look for alternatives to China as a production base, in this case, one of which is the Southeast Asian region.

Southeast Asia market benefits from reshoring companies

In March, China eased up pandemic-related restrictions for all kinds of travelers, regardless if they’re visiting China for leisure or business.  However, the pandemic’s toll on China where COVID-19 has become rampant, has curbed distinct supply-related operations.

Supply chains were disrupted due to China’s increased compliance and regulatory requirements. Primarily, border closures, lockdowns, as well as labor shortages increased freight costs and slowed production. 

As a result, the Southeast Asia market has seen a surge in companies looking to reshore their operations. These initiatives create jobs and stimulate economic growth. 

Businesses have been able to hire workers from the Southeast Asian manufacturing market to fill positions. They were offered competitive wages and a path to upward mobility. Also, the growing investment in the region led to an uptick in infrastructure development and technological modernization.

Reshoring manufacturing facilities of global companies can promote regional integration. It encourages companies and workers to move back and forth between countries in the region. Such foster greater collaboration and understanding between countries as well as within the Southeast Asia supply chain.

Also, reshoring enables experience transfer and boosts a person’s employability within the market. Moreover, knowledge transfer occurs when an employee learns new skills in one country. Then, utilizes those when moving back to their country of origin. 

Global companies may grapple with certain challenges

Businesses must consider the availability of skilled labor. Unfortunately,  many countries in Southeast Asia lack the necessary educational infrastructure to develop a highly-skilled workforce. Such can make it difficult for reshoring companies to recruit personnel to operate their Southeast Asia supply chain facilities.

The lack of skilled labor and education makes importing highly crucial. However, the economic climate now does not favor imports as countries face economic pressure of balancing local inflation, raising living standards, and suppressing the increased cost of living. People may not welcome foreign talent.

Aside from the economic climate, politics should also be considered. Southeast Asia news showed unstable political environments and the lack of a strong legal system could make it difficult for companies to protect their intellectual property and enforce contracts.

Additionally, cultural challenges may also be a reason that can affect the Asian manufacturing landscape. These can include language barriers, differences in business practices and cultural norms, and a lack of understanding of local customs and regulations.

Understanding the risks and challenges involved is imperative. Doing so will aid businesses in making informed decisions about the best way to manage their supply chains and remain competitive in the global market.

Impact of factories leaving China

China has been the manufacturing spot of many large factories churning out less expensive goods to meet global demand. But due to China’s various escalating deferring conditions, global companies have started to look elsewhere to ensure production.

The loss of China from the departure of factories has had a ripple effect across the global economy. In the short term, it has caused disruptions to the global supply chain, with companies scrambling to find alternative production sources.

Countries with developing economies are now hosting reshoring factories, and the influx of jobs has provided a much-needed boost. In Vietnam, for example, the manufacturing sector accounted 24.62% of its 2021 GDP, primarily driven by the relocation of factories from China.

The long-term impact of factories leaving China is still uncertain. New Asian manufacturing jobs in other countries, such as India and Vietnam, could possibly replace some of the jobs lost in China.

There’s a possibility though, that the global economy may suffer from a lack of competition and innovation. It’s because most factories leaving China are deemed the backbone of the industry. 

The shift of the Asian manufacturing arena from China to Southeast Asia is indicative of a larger trend that is occurring in the global economy. As Southeast Asian countries continue to invest in infrastructure and improve their labor laws and policies, the region will become an increasingly attractive destination for manufacturers.