How U.S. Manufacturing Companies Are Reassessing China

Aug. 18, 2020
Survey finds business plans are being rewritten, many plan to leave China in the wake of coronavirus.

In June, after a large number of companies in China had resumed operations, East West Associates conducted a survey of more than 150 Western companies with operations in China to see if their strategies for manufacturing, contract manufacturing and sourcing there had changed.

"Our objective was to acquire first-hand, working knowledge of the comprehensive impact of the coronavirus on companies with operations in China - the challenges they are facing, the actions they have taken and how they are planning for the future," said Alex Bryant, president of East West Associates. His firm is a consultancy that helps manufacturers locate or find resources in other geographic markets.

The topline points of East West Associates' survey:

  • 95% of the companies have been confronted with an unprecedented changed economic environment, due to the disruption of both the domestic and global markets.
  • 91% indicated they were facing multiple challenges simultaneously, in particular decreases in demand and disruptions of operations.
  • 92% said they have taken action to restore stability and recover.
  • 77% indicated that they have taken multiple domestic and global actions simultaneously.

In all, 85% of the companies have changed their company business planning due to the pandemic, but they are planning in two very different directions: 39% with an increased focus on improving operations in China and 46% with an increased focus on relocating operations out of China (the other 15% said it's either too early to tell).

Among the 46% planning to move out of China, 50% will move just sourcing operations, 5% will remove manufacturing operations and 45% will relocate both manufacturing & sourcing operations.

This exodus from China will not only change the global manufacturing landscape but also drive further change that will impact global business, said East West Associates - i.e., a reallocation of economic influence that will lead to the development of regional innovation hubs, a redistribution of wealth that will create new markets of growth for business development, etc.

When asked where they are considering to relocate their China-based operations, respondents replied:

  • 74% Asia
  • 53% Mexico
  • 11% Central & Eastern Europe
  • 37% U.S.
  • 21% other

The biggest challenges of resuming operations in China (respondents could choose up to three):

  • 64% said decreased product demand from customers
  • 63% supply chain disruption
  • 62% logistics disruption
  • 52% manufacturing disruption
  • 14% cash/liquidity to maintain operations
  • 9% not all employees or on-site senior executives have returned to china-based operations.

When asked "what actions has your company taken to mitigate the challenges of resuming operations in China", the response breakdown was:

  • 56% said "identify & qualify alternative vendors, purchase finished components and goods from alternative manufacturers, identify & qualify contract manufacturers, shift components and raw materials from other company facilities."
  • 46% said they would "identify & qualify alternative logistic partners, establish expedited freight agreements or renegotiate warehousing and consignment agreements."
  • 24% were offering pricing discounts, renegotiated customer agreements or sales incentives for customers.
  • 22% were bailing (shift production to other company plants, decrease factory production, factory consolidation, discontinue product lines).
  • 15% are looking at alternative payment strategies (pre-payment, extended payment terms, renegotiated vendor terms, etc.)
  • 7% were looking for market research of growth potential (new markets, adjacent verticals, etc.).
  • 5% were hiring new or temporary employees or interim executives, transferring executives from other sites or training employees and leadership.

There are a number of underlying economic challenges facing U.S. companies in China that existed before the coronavirus pandemic and will remain after the COVID-19 pandemic subsides—i.e. tariffs, domestic Chinese competitors, increased labor rates, etc. These challenges have been driving companies to diversify risk and expand their manufacturing operations and supply chains beyond China, primarily into Southeast Asia and Mexico.

When asked, "In addition to the Coronavirus, how would you rank the negative impact of the following factors upon your business?" answers were:

  • 27% U.S./China Tariffs
  • 19% Strong domestic Chinese competition
  • 18% increased Chinese labor rates
  • 18% slowing China economy
  • 18% Transparency, IP loss, etc. in China

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