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COVID supply chain disruptions reinforce ‘China+1’ strategy

Vietnam considered prime destination for production, Toll Group survey says

Toll Group is a global logistics provider based in Australia. It says more customers are planning to move some production out of China. (Photo: Toll Group)

A new survey of manufacturing and retail customers by third-party logistics provider Toll Group is reinforcing the narrative that the coronavirus pandemic is accelerating moves to diversify product sourcing away from China.

A quarter of customers are now planning to transition some of their operations out of China in the next three years, the global logistics powerhouse said. Melbourne, Australia-based Toll is the 17th largest 3PL in the world by gross revenue, according to Armstrong & Associates.

The pandemic has hardened feelings that concentrating business in China is risky after government-mandated lockdowns at the virus’ origin froze manufacturing and international shipping for weeks, leaving customers without access to critical goods. Nearly two-thirds of businesses have experienced problems with their supplier base as a result of COVID-19, according to the Toll Group survey.

More than half of the 341 businesses surveyed in Australia, Asia, Europe and the U.S. said they have had problems with their production and distribution activities, forcing them to consider alternate arrangements as they plan their operations post COVID.

Rising operating costs in China, such as labor and transportation, initially led companies several years ago to look for other countries where they could efficiently produce goods. The Trump administration’s broad and erratic tariffs on China raised prices for U.S. consumers and provided additional motivation for companies, some of which absorbed the increases themselves to help protect customers, to pursue a “China+1” production strategy. 

More than half of businesses surveyed source and manufacture their products in China, with a further 43% sourcing only from China. 

A third of participants said they were considering Vietnam, which has been extremely successful at containing any coronavirus outbreaks, as an alternative market for conducting export trade, with India, Malaysia and Indonesia also being considered. More broadly, 38% said they are considering alternative regions such as South Africa, Europe and other parts of Asia as part of the shift from a “just-in-time” to “just-in-case” model.

Other findings include:

• Businesses in the retail (25%) and health care (55%) sectors are looking to regionalize their supply chains.

• 23% of industrial manufacturers and 29% of technology customers are looking to source more products from local suppliers.

• Half of all participants said that diversifying their supplier base and increasing inventory of critical products is a key priority.

Toll Group Managing Director Thomas Knudsen said the impact of COVID on companies’ operations has varied according to business size.

“Although the impact of COVID has been far-reaching, our Asian-based customers have told us that they have felt the impacts more acutely than most. Countrywide lockdowns, manufacturing delays, limited international flights, international travel bans and remote working conditions have all combined to create extremely difficult operating environments for businesses small to large,” Knudsen said.

“Vietnam should reemerge quickly in the post-pandemic period given its effective response to the virus. Unlike neighboring countries, its stringent lockdown measures contained COVID quickly, making it a safe place for international firms to do business,” he said.

Toll said some customers will gradually shift their operations to new locations in coming months, while smaller, more nimble businesses have already begun the process of changing their supply chain nodes.

Last summer, industrial real estate giant CBRE published a report showing that the coronavirus and higher tariffs had pushed more companies to shift more production to Southeast Asia, while the updated U.S.-Mexico-Canada trade deal made it more attractive for many to manufacture in Mexico.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.


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Eric Kulisch

Eric is the Supply Chain and Air Cargo Editor at FreightWaves. An award-winning business journalist with extensive experience covering the logistics sector, Eric spent nearly two years as the Washington, D.C., correspondent for Automotive News, where he focused on regulatory and policy issues surrounding autonomous vehicles, mobility, fuel economy and safety. He has won two regional Gold Medals and a Silver Medal from the American Society of Business Publication Editors for government and trade coverage, and news analysis. He was voted best for feature writing and commentary in the Trade/Newsletter category by the D.C. Chapter of the Society of Professional Journalists. In December 2022, he was voted runner up for Air Cargo Journalist by the Seahorse Freight Association. As associate editor at American Shipper Magazine for more than a decade, he wrote about trade, freight transportation and supply chains. Eric is based in Portland, Oregon. He can be reached for comments and tips at [email protected]