News #103 - Global manufacturing is repositioning — but it’s complicated

The shifting dynamics of global manufacturing and supply chain strategies are reshaping the logistics landscape, creating unprecedented challenges for businesses, policymakers, and logistics professionals. The "China Plus One" strategy, which encourages companies to diversify their manufacturing footprint beyond China, has gained traction due to rising labor costs, trade uncertainties, and geopolitical tensions.

However, as highlighted by Dimerco Express Group executives and industry experts, the execution of this strategy is far from straightforward. Companies pursuing diversification face numerous hurdles, including infrastructure limitations, workforce shortages, regulatory complexities, and freight market volatility.

Drivers Behind the Transition

While multinational manufacturers have explored alternatives to China for years, trade disputes and tariff policies have accelerated this transition. According to Kathy Liu, Global Sales and Marketing Director at Dimerco, labor-intensive industries like textiles and footwear were the first to move to countries such as Vietnam and Thailand. More recently, high-value sectors, including electronics and semiconductors, have begun shifting production to new markets.

This transition represents more than a cost-saving measure; it marks a structural shift in global supply chains, requiring long-term planning and investment. The U.S.-China trade war has played a significant role, with tariffs threatening to increase duties on Chinese imports by up to 60%. While some manufacturers relocated production to tariff-friendly countries such as Vietnam, India, and Malaysia, trade compliance expert Karen Kenney cautioned that these locations are becoming vulnerable to reciprocal tariffs, making their long-term advantages uncertain.

Kenney explained that U.S. Customs and Border Protection (CBP) has intensified its scrutiny of transshipment practices to ensure manufacturers cannot reroute Chinese-made components through third countries to avoid tariffs.

"CBP knows where product components originate. They’ve invested in AI and have access to extensive data. Even if companies lack full visibility into their product supply chains, CBP does, and they will eventually identify discrepancies," Kenney emphasized.

Challenges in Emerging Manufacturing Hubs

Relocating manufacturing operations is far more complex than establishing new facilities. China’s extensive supply chain ecosystem—spanning ports, highways, and logistics hubs—has been developed over decades and cannot be easily replicated elsewhere.

Infrastructure gaps in alternative manufacturing destinations often result in higher transportation costs, longer lead times, and logistical bottlenecks. For example, Southeast Asia's limited deep-water ports restrict larger cargo vessels, requiring costly transshipment through hubs like Singapore.

Moreover, workforce development in new markets presents significant challenges. Unlike China, where governments collaborate with manufacturers to establish training programs for local workers, many alternative destinations lack this level of coordination.

"In China, large factories often have agreements with local governments to create training schools, ensuring a skilled workforce is ready to join the factory immediately after completing their training. This arrangement is rarely seen in Southeast Asian countries," Liu noted.

Companies relocating to Vietnam or India must also navigate cultural differences, language barriers, and varying labor laws, all of which can impact productivity. In some cases, businesses that moved operations to countries like Mexico have struggled with labor shortages and cultural differences, prompting a return to China.

"I have one client who shifted 60% of their production to Mexico but had to move back to China due to labor challenges," Kenney explained. "These challenges include a lack of skilled labor and cultural differences in work expectations. In some regions, there's a ‘do whatever it takes’ mentality, while in others, workers strictly adhere to their defined roles and schedules."

The Role of Logistics Providers

Given these complexities, companies increasingly rely on experienced logistics providers to manage diversification strategies. Providers with deep regional expertise offer customized solutions, such as multimodal transportation strategies combining cross-border trucking with airfreight to overcome capacity constraints.

For example, businesses in Thailand and Vietnam leverage Singapore's advanced airport infrastructure to expedite goods movement, while others utilize China’s superior cargo capacity for efficient routing. Logistics providers also assist with factory relocations, managing customs complexities associated with transporting machinery and production equipment across borders.

"Many manufacturers underestimate the bureaucratic and compliance challenges of relocation," Liu pointed out. "Customs procedures vary significantly between countries, and mishandling these processes can lead to costly delays."

A Hybrid Approach to Diversification

While the China Plus One strategy offers opportunities for supply chain resilience, many businesses are adopting a cautious, hybrid approach. By maintaining some operations in China while gradually expanding into new markets, companies can mitigate risks without overcommitting to a single region.

This approach reflects uncertainties around future tariff policies and the unpredictable nature of global trade relations. Geopolitical pressures also add complexity, particularly as countries like China continue to invest in Southeast Asia’s logistics infrastructure. These investments raise questions about long-term supply chain independence and foreign influence in critical infrastructure projects.

Kenney highlighted the U.S. government’s concerns over China’s role in global infrastructure investments, citing the Panama Canal as an example.

Strategic Takeaways

The China Plus One strategy remains a compelling risk management approach, but its implementation is fraught with challenges. Businesses must navigate infrastructure gaps, workforce constraints, and regulatory hurdles while addressing geopolitical uncertainties.

As Liu noted, "The original idea of China Plus One is to diversify production lines and mitigate risks. It has become an increasingly valuable strategy amid the U.S.-China trade war."

Kenney concluded, "Diversifying supply chains is essential, but companies should proceed cautiously, avoid overcommitting to any single market, and plan meticulously."

Source: https://www.freightwaves.com/news/global-manufacturing-is-repositioning-but-its-complicated

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