One of the main conclusions of many companies is as follows: ‘diversifying our supply chain outside of China is a must in order to reduce risk’.

There are two main reasons for this.

First, the USA has been leading the charge against Beijing, and any change in the White House will not stop the current trend to “decouple” from China. The general public, the Congress, and the Senate all seem to agree that China is a “strategic competitor” and needs to be opposed.

Second, some disasters can strike one country, and spreading manufacturing sites means a lower probability of being unable to supply products to the market.

We have been asking ourselves about this a lot lately, since our manufacturing arm Agilian is in South China, and many of our clients are based in the USA, Canada, and Australia.

In this article, I compare three alternatives to China. I cover only countries I have been to, and I mix some personal impressions and observations with third party data. There may be gross over-generalizations, and that is probably unavoidable when data are summarized this way.

Ho Chi Minh City in VIETNAM (total 96 million people)

Pros

• The obvious “next place” in many people’s minds. Industrial parks are opening regularly, with many new factories.
• More and more components are made there, which will make it easier to manufacture a variety of products over time.
• The currency is nearly pegged to the USD (stability).
• The population is not small, with extra labor coming from Cambodia (in normal times, with no pandemic).
• Sending Chinese engineers and managers to transfer processes and to work with locals (some of whom can speak Chinese) is relatively easy.
• Shipping China-made parts there is relatively quick and easy.

Cons

• Very hot labor market (especially for good office/management staff) because so many companies have been moving production there. Labor cost is expected to rise fast, as Vietnam as a whole is roughly as large as 1 Chinese province, which also means it won’t be able to absorb all the relocations.
• It is clearly a developing country that is overall more backward than China. It ranks No. 96 in Transparency International ranking, which is not good.
• They have a communist regime and might be Washington DC’s next target if they veer too close to China on certain issues; moreover, they are one of the main parties involved in the South China Sea tensions (and that comes with serious geopolitical risk).
• The country ranks No. 70 in the world for ‘ease of doing business’ in general, which is worse than Malaysia and even than India.
• They are currently closed to the outside, even though they managed the pandemic well.

Kuala Lumpur area in MALAYSIA (total 32 million people)

Pros

• Government gives out a lot of incentives (very low taxes for 5 years, etc.) to manufacturers that relocate there.
• Ease of doing business: No. 12 in the world (but No. 126 on the criterion “starting a business”). That’s really good.
• Travelling there during the pandemic is currently possible for Thai nationals and expats living there.
• Better education system and more high-tech industries than Vietnam, but higher costs too.
• Relatively good quality of life for expats.
• Many Chinese speakers, some of whom have worked in China for decades, make communication and production transfers easier.

Cons

• Higher labor costs.
• A good understanding of the local dynamics is needed to avoid certain mistakes (what ethnic groups to hire from, for example).
• The country is not known for an eager and hard-working workforce in general. When I was there last year, I heard people complain about general “complacency” more than once.
• Can you purchase many of the materials & components needed for your product manufacturing locally? That’s probably an issue for most projects.
• Corruption is present, but not particularly high (No. 51 in Transparency International ranking).

Bangkok area in THAILAND (total 70 million people)

Pros

• Relatively good human resources for management and technical jobs. And it is an attractive place for expat managers & engineers.
• Ease of doing business: No. 21 in the world.
• Travelling there during the pandemic seems to be possible.
• Investment incentives (tax exemptions etc., depending on the type of activity) are available, and some industrial estates (not far from Bangkok) allow for simpler administrative processes.
• Relatively close to China, but no direct border. And not in the South China Sea, where trouble is brewing.

Cons

• Corruption is not absent (No. 101 in the Transparency International ranking: the worst of the 4 countries featured here).
• Currency is not stable in front of the USD (0.027 in 2015, 0.033 in 2019).
• Some political instability, with student demonstrations as I am writing this.
• Lack of many components on site.

Chennai in INDIA (total 1.4 billion people)

Pros

• Large local manufacturing base (automative and electronic products). That should help foster the appearance of more local part factories.
• Wide job market with some well-trained people.
• A relatively large domestic market that, if the current trends continue, will try to avoid buying made-in-China products.
• It is said to be the safest city in India. That doesn’t necessarily translate to a great quality of life, but it is an important factor.
• Relatively low labor rate (partly compensated by lower productivity, many people will say… but that’s only if you don’t have good process engineers to set up good work stations).

Cons

• There are nearly 70,000 new cases of COVID 19 a day these days. But it seems possible to fly there.
• Corruption is not huge (No. 80 in the Transparency International ranking: exactly the same as China).
• Ease of doing business: No. 63 in the world. And Chennai is near the bottom of the list when one compares the major Indian cities.
• Currency is not very stable in front of the USD.
• It’s further away from North America (but closer to EU countries).

Conclusion

To conclude, I’d like you to keep one thing in mind. If you already have production in China, what is the set that will bring your risk exposure down the most? Is it China + Vietnam? Two neighbouring countries that are similar in more than one way?

In contrast, China + India seems like a good risk mitigation combination, since India is part of the nascent ‘anti-China block’. Except if they go to war against each other, naturally, but that seems unlikely.

Many events of the past 3 years have taken us by surprise, and there is much uncertainty about what will happen over the next 5-10 years. That uncertainty actually makes supply chain diversification more important.

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Where do you stand on supply chain diversification? Has your business already made strides to move into SE Asia or India? How has it been going? Please share your experiences by leaving a comment.

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