Coronavirus pandemic supply shocks reinforced for manufacturers the importance of having more flexible, resilient supply chains that aren’t concentrated in China, but diversifying production in other countries is easier said than done.
Companies desire more flexibility and resilience in their supply networks, but there are limits to how much cost, scale and supplier proficiency they’re willing to sacrifice, said Willy Shih, a professor of management practice at the Harvard Business School.
“Many companies are going to have difficulty achieving escape velocity from China” to overcome the gravitational pull of the world’s manufacturing hub, he said in a virtual presentation Friday for FreightWaves LIVE @HOME. “At best they might orbit it around it. There’s going to be no tolerance for higher prices from consumers, especially in this global recession that we’re suffering through. There’s still going to be demands for efficient use of capital and capacity. Scale advantages will persist and this will be important for those industries that have a large footprint in China.”
A quarter of customers recently surveyed by Australian logistics giant Toll Group said they planned to shift some operations out of China in the next three years after experiencing production and shipping disruptions that impacted sales and service. The hunt for new production sources intensified three years ago when the Trump administration began imposing large tariffs on Chinese imports.
Vietnam, Indonesia, Malaysia, Thailand and Mexico are among the countries that are attracting manufacturers from China. Companies rushing to these locations will face constraints because transportation infrastructure is not as well developed as in China and the amount of available labor is less, analysts say.
Some manufacturers may employ a “China+2” strategy and relocate factories to more than one country, especially for products destined for North America, Shih said.
New sourcing patterns will vary by industry.
Labor-intensive soft goods such as garments, shoes and household products will probably still be produced in China, but automakers and electronics companies are already spreading production sites to regional markets to shorten their supply chains and gain more quality control over suppliers, Shih noted.
“Resilience is on everybody’s mind. For a while at least, we will see more risk analysis, in the form of supply chain mapping and categorization of suppliers” to assess the relative impact on cash flow if a business partner has production problems, the professor said.