China Manufacturing:”Elvis Has Left the Building”

China’s trade in goods surplus with the US fell by 7.9 per cent in November alone, per just released US Census Bureau statistics. “US purchases of Chinese goods are now at their lowest point since March 2013.” Since the trade war began, US goods purchases have increased 51.6 percent from Vietnam, 30 percent from Taiwan, 19.7 percent from Thailand 19.7 per cent, 14.6 percent from Indonesia 14.6 per cent, 12.7 percent from Mexico, and 11.3 per cent from Malaysia.

Companies have finally begun to realize that US-China decoupling is real and “they need to rethink things.”  Few believe the Phase One Trade deal will slow down the decoupling and John Evans, “who advises firms on relocating from China, said that even with the announcement of a phase-one deal, he has been getting more calls”: 

“There were still a number of companies sitting on the sidelines, even into the last quarter of last year, thinking there’ll be a grand resolution. But in reality, it’s more of a new normal.”

This so-called new normal has helped drive a long list of big-name companies out of China, with others choosing to keep a presence but scale back operations to continue selling to the domestic market.

But for every Hasbro, Samsung, Sonos, Sharp, GoPro, Sony or Nintendo, there are a host of small suppliers being forced out due to costs, or because they are pressured to follow their major customers

It is not just American firms fleeing China, “but companies from all over the world.”  Allar Peetma, CEO of Estonian manufacturer Gerardo’s Toys, says its “plan is to produce in the EU” using automation that will allow it to keep its costs about the same but improve quality. He notes that “other countries have high [import] taxes for China too, like Brazil and Turkey.” Tsutomu Aoi – a manager in the Hong Kong division of Japanese magnetic toymaker Sumaku – says that the tariffs have led his company to set up in Indonesia. CEO Pascal Comte of French scooter manufacturer says that you can’t do anything about tariffs i the short term but “long term for sure, or medium term, the best option is Vietnam. It takes a while to transfer tooling, and to find operations and manpower.”

The article rightly notes that moving manufacturing from China to other countries is rarely fast or easy:

Rarely, however, is the divorce from China a clean one. Sloven at Capstone moved to a new base in Thailand with the help of a Chinese manufacturing partner that still provides many of the components used in their products. It can be a delicate balance, working with a Thai manufacturing partner to ensure that enough of the finished product is made of local content, to qualify for a low-tariff “Made in Thailand” label.

“We’ve worked out a formula that’s good for both of them so they both can stay in business,” he said. “It’s difficult to get out of China without the help of your Chinese partner.”

The company needs to ship a particular form of glue from China that cannot be sourced in Thailand and will also import packaging from there.

“You would be amazed at the things that you find out. It’s cheaper to produce your packaging in China, put it on a boat, ship it to Thailand than to have a factory in Thailand produce that packaging,” Sloven said “My point is you can’t do this overnight. This is a two year process.