You’re Invited To: Bring New Trading Partners to the Party
More U.S. companies are asking a Plus One guest to join China sourcing strategies, inviting suppliers beyond the border of the world’s primary outsourcing powerhouse to the dance.
If you think China looks less attractive these days as a place to source or manufacture, you’re not alone. Increasing numbers of U.S. companies have sought alternatives to China in recent years, planning either to leave that country altogether or to diversify their sourcing.
For instance, 88% of respondents to a 2022 Capterra survey of supply chain professionals at small and mid-sized companies say they plan to switch at least some of their sourcing to suppliers closer to the United States, while 45% say they plan to switch all of their suppliers.
Some firms open factories or strike deals with vendors in the United States, Mexico, or elsewhere near home. Others seek alternatives to China in South or Southeast Asia. And some, like one client of Washington, D.C.-based FTI Consulting, plan to source from different regions to support different markets.
“The company is looking at India, Vietnam, and other places to support the EMEA [Europe, Middle East, and Africa] market,” says Ron Scalzo, senior managing director with FTI’s Corporate Finance and Restructuring section. “They are also looking at Mexico, or possibly onshoring in the United States, to support the U.S. market.”
Outsourcing to countries other than China is nothing new; Mexican maquiladoras have served U.S. brand owners since the 1960s. But for companies that rely on China’s prodigious manufacturing ecosystem, several recent factors are prompting a fresh look at other parts of the world.
Tariffs, COVID, and Conflict
One factor is the trade war that revved up in 2018, when the United States imposed hefty new tariffs on Chinese imports. One document, known as List 3, named about $200 billion worth of goods from China that would incur additional tariffs.
“When that list came out, business contacts started asking me to look for alternative manufacturing sources for them,” says Erik Brigham, who at the time ran an export business in Thailand. Observing a demand for Thai suppliers, Brigham launched a new enterprise to fill the need, Bangkok-based Thailand Sourcing.
Then came the pandemic and China’s Zero COVID policy.
“The pandemic introduced risk into supply chains like we’ve never seen before,” says Rosemary Coates, a supply chain consultant and executive director and chair of the Reshoring Institute, a nonprofit that helps U.S. firms start manufacturing in the United States.
“Companies couldn’t get product out of China,” Coates says. “They had real difficulties with the factories opening and closing. That’s still happening today.”
Along with production delays in recent years, port congestion and high shipping rates have also made some companies rethink long supply chains rooted in China. Consider the U.S. fashion industry.
“When there was port congestion coming out of China, some U.S. buyers responded to the long lead times by buying and storing larger quantities,” says Raine Mahdi, founder and CEO of Zipfox, an online sourcing marketplace with an initial focus on Mexico. “But that means more cash tied up for longer.”
With much shorter lead times on orders from Mexico, clothing brands can buy in smaller increments.
Other factors turning U.S. companies away from China include ongoing geopolitical tensions, concern about intellectual property, and—for some —the desire to label their products Made in the USA.
“There has always been a subset of consumers who might want to buy American,” says Scalzo. “That subset is growing.”
Breaking Up is Hard to Do
Whatever its reasons for moving away, a U.S. company entrenched in China might face a tough transition. First, cutting old ties can be tricky. “For example, if you have shipped a mold or tool to China to assist with production, you’re never getting that back,” Coates says.
Also, departure can turn a supplier into a competitor. After you’ve taught a manufacturer where to source materials and how to make your product according to your standards, when you leave, that knowledge stays behind. “They’re going to continue to manufacture your product and label it differently,” she warns.
For a company that owns a factory in China, multi-year employment contracts can also complicate an exit. “You have to pay out to the end of that contract,” Coates says. In a plant with thousands of workers, that’s a big expense.
The search for non-Chinese suppliers or contract manufacturers can also prove challenging.
“When you enter China, there’s a massive city that has 2,000 factories, of which 100 will meet with you,” says Kevin McGaffey, founder of Bangkok-based MOTOA Group, a sourcing company that specializes in finding alternatives to China. “You have time for 10. Five or six will say ‘yes,’ and four will be competitive.
“Try that same thing in Gujarat, India, Haiphong, Vietnam, or Samut Prakan, Thailand, and you will have a very different experience,” he adds.
Even when you locate a capable supplier, you won’t find the same supportive infrastructure that China provides.
“It’s not just where your plant is, but where your raw materials and components are coming from,” Scalzo says. Those sources tend to be in China or other parts of Asia. “How do you begin to shift the entire supply chain going upstream?” he asks.
A firm that moves out of China must also learn to navigate a new business culture.
For instance, in Latin America, personal relationships are crucial.
“You can’t just e-mail or text a supplier and say, ‘Can you make this product?’” explains Amy Wees, founder of Amazing at Home, an Austin-based consultancy for e-commerce merchants and co-founder of the EvoLatam Expo, an annual trade show in Mexico that introduces e-commerce brand owners to Latin American suppliers.
“You need to go in person and build those relationships to get things done,” she says.
Also, suppliers in Mexico aren’t always well-versed in the nuts and bolts of contract manufacturing. “It’s not that Mexico doesn’t have those capabilities,” Wees says. “It just requires more of a partnership and conversation.”
Companies migrating from China to another Asian country could get a shock when it comes time to negotiate a business deal. “I’ve visited 80-plus executive teams and owners, and they’ll say, ‘I don’t understand why this is difficult and why these terms aren’t what I want,” says McGaffey.
Chinese suppliers can rely on their government to finance production, but their counterparts in other countries look to their buyers for that money, he adds.
Brigham agrees that buyers will need to get used to different purchasing terms.
“If you’ve been getting net 90 days out of China for 20 years and then you move to Thailand, don’t be surprised if they want 30/70 FOB [30% deposit/70% due upon transfer of the bill of lading],” Brigham says. “They want skin in the game. Even if they don’t need the money, to them it’s an important part of building trust.”
Steps for Success
If you’re looking for alternatives to China, one important early step is to establish which criteria you’ll use to choose the new country and new suppliers.
“The criteria is a little different for everybody,” Scalzo says. “The basics are available labor, access to raw materials and components, and infrastructure.”
Along with what’s available now, keep in mind how the infrastructure is likely to improve in the coming years. Take Mexico, for example.
“The infrastructure for trans-border Mexico to U.S. support is not nearly what it needs to be,” says Scalzo. But we’re likely to see new investment, particularly in rail facilities, to support more cross-border trade, he says.
For companies trying to decide whether to reshore to the United States, the key might lie in how much labor their processes involve.
“If the process involves sewing, high labor content, and high-touch labor, then look for a low-cost country if you’re going to move out of China,” Coates advises. “If you are highly automated, or plan to be, the economics shift significantly.” Then it’s possible to make the case for domestic production.
Some further advice from the experts on sourcing from a country other than China:
Do the homework. “Go through the same steps you would when vetting any new supplier: Get quotes from a few different people, ask for samples, start with a prototype or small order first, test the relationship, work out the kinks,” says Mahdi.
Meet in person. Before Wees started leading sourcing trips to Mexico, she once asked a supplier there to give her a quote for a product she wanted for her own e-commerce business. “Their quote was higher than I sell that product for at retail,” she says.
Then Wees made a visit. Face-to-face discussions revealed that many Mexican suppliers thought Americans wanted to buy their existing products at wholesale rates. Once Wees explained that she was a brand owner, developing her own products and looking for a contract manufacturing relationship, she received more palatable quotes.
Consider the total cost. The cost per unit to produce an item in Mexico is generally higher than in China. “However, once you take into consideration that you’re not paying tariffs, in many cases you will realize a savings,” Wees says.
Be flexible. When approaching a potential supplier, don’t get hung up on the way you operate in China. “You have to manage your expectations and realize that it’s like a first date with a person from a different culture whom you’ve never met,” McGaffey says.
Don’t delay. While Mexico has enough production capacity today, that could change. “Some factories are already saying they can’t take any new business because they’re inundated with orders,” says Mahdi.
Now is the time to start making connections. “Make the decision to at least start testing manufacturers in Latin America and start establishing relationships, even if at a small scale, keeping somebody in your pocket as a backup supplier,” he advises.
The same goes for other parts of the world. “If you are able to get a quote from Thailand specifically, and you’re working with someone you trust, take it very seriously,” Brigham says. “And think about what it would mean in the long term to have a diverse supply chain for this specific product, even if it costs a little more up front.”
If, for your purposes, you think of China as a sinking Titanic, and countries such as Vietnam and India as potential lifeboats, make sure to secure your place while capacity remains. “If it’s Southeast Asia you want to go to, it’s filling up fast,” Brigham says.
Tomorrow’s Regional Trade Growth Leaders
World Regions 2021-2026:
Predicted Export Volume Growth Rates
Trade growth is spread across a wider variety of countries, according to DHL’s Trade Growth Atlas 2022. China accounted for 25% of trade growth in recent years and is predicted to continue to have the largest growth, but its share is likely to fall by half, to 13%.
Vietnam, India, and the Philippines stand out in terms of both speed and scale of projected trade growth through 2026. All three have potential to benefit from efforts to diversify China-centric strategies. While emerging economies increased their shares of world trade from 24% to 40% between 2000 and 2012, with half the increase driven by China alone, these shares have barely changed over the past decade.
Emerging economies continue to race forward on measures of connectivity, innovation, and leading companies. They are becoming more important exporters of sophisticated manufactured products, and increasingly compete not only on low costs, but also on innovation and quality.
New Tools For Sourcing From Latin America
Raine Mahdi founded the Zipfox online sourcing marketplace to give buyers an alternative to platforms such as China-based Alibaba and Global Sources. Those platforms pose risks, Mahdi says, because they sign on as many suppliers as possible. That leaves buyers to search through a field of listings with no clue about which vendors offer good value.
“If you’re looking for T-shirts or phone cases, do you need 500 options?” Mahdi asks. “Or would you rather have 25 high-quality options, maybe with different sizes and different minimum order quantities?”
Zipfox launched in 2022 as a place to find Mexican suppliers, which Mahdi says his company vets carefully before letting them join the platform. Eventually, Zipfox aims to become a global marketplace, with plans to expand into Central and South America in early 2023. “We’ve put feelers out in Egypt, South Africa, and India, just to test the markets,” he adds.
In the long run, Zipfox will probably even add Chinese suppliers. “But now is not the time,” Mahdi says.
For buyers—especially e-commerce brand owners—who want to make in-person contacts in Mexico and beyond, the EvoLatam Expo offers a chance to check out suppliers in many different categories.
“Most of us don’t just sell things made of wood, or just household goods,” says Amy Wees, an online merchant, e-commerce consultant, and co-founder of EvoLatam. “We’re used to going to trade shows like the Canton Fair in China, ASD in Las Vegas, or Global Sources in Hong Kong.”
When Wees and her business partner started to lead sourcing trips to Mexico, they found trade shows for single categories, such as ceramics. “But there was nothing that would help an e-commerce brand owner source from multiple categories at once,” she says.
They founded EvoLatam to fill that need. “If we were going to evolve e-commerce into sourcing in Latin America, this was an absolute requirement,” Wees says.