Made in China is not so simple anymore

For the first time since 2009, Japan’s top export market is not China. Part of the reason is certainly political tension in the increasingly hot north Asia area, but also important is diversification by Japanese manufacturers away from China as a production location. Like many other businesses, Japanese companies have long used Chinese manufacturing sites as a source of low-cost production for re-export to end-customer markets like the US and Europe.

According to a report in Canada’s Globe and Mail newspaper, however: “Japanese manufacturers have been stepping up investments in Southeast Asia, hoping to hedge risks from Japan’s extensive operations in mainland China and to tap the faster growth in emerging Asian markets.”

Coming on the heels of my column last week, in which I argued that China is ready to buy millions of industrial robots, this news completes the picture of where manufacturing footprints are headed for all of us. For its domestic market, Chinese manufacturing is ramping up enormous scale. This includes not only Chinese companies like Haier and Geely but also foreigners from Hewlett-Packard to Lego, all of whom have or are planning major capacity expansions. For export, China also remains dominant, but for the first time it appears that global businesses are truly worried about putting all their eggs in one basket.

Low-cost country production is not the Holy Grail

Rising wages in China are old news. Risk is also widely recognised as a serious problem for foreign companies looking to manufacture in China. “Reshoring”, even if it doesn’t mean millions of new jobs in the US or Europe, does make sense and favours countries like Mexico and Poland. And yet our latest research study indicates that more new manufacturing capacity is set to come on-stream in China than anywhere else in the world. Is this a paradox?

No. It’s the new reality of manufacturing. China still has a cost advantage in most cases, and it also has capabilities that are hard, if not impossible, to match. But above all else it has a market that any growth-orientated business wants to be part of. Manufacturing location decisions used to be all about cost. Suddenly it has become a lot more complicated, requiring not just good due diligence and spreadsheets calculating lowest total landed cost, but instead sophisticated scenario modelling of potentially hundreds of interrelated variables, including (critically) how many customers can be readily reached from the factory.

There is no “next China”

Mexico, as the chart above shows, is attracting a lot of attention from planners looking for future production locations. So too are Brazil and India. In part, these options appeal because they offer attractive labour costs, but none have all the benefits of China. Ron Tarter, Senior Vice President of Operations for Flextronics, for instance, has raved about China’s extraordinary ability to scale and unparalleled can-do attitude to work.

Mexico looks like a clear winner, especially for businesses serving the US market, while India and Brazil offer big domestic markets themselves. None, however, appears capable of meeting global capacity requirements alone in the way China has for some industries during the past decade.

With Chinese manufacturing increasingly turning its energy inwards, planners have been forced to look elsewhere. Most are finding that a diversified portfolio of production assets is not only necessary to produce the needed volumes, but also that local market competition favours those who can react quickly to customers’ special needs. Many also want closer ties between manufacturing and engineering. And risks, whether natural or man-made, are better managed by spreading bets around the world.

The future of manufacturing is beginning to take shape and it no longer includes any one country doing all the work. Skills and capital are working their way into every corner of the world, just as consumer expectations are forcing businesses to adapt. Manufacturing will always need to balance scale and flexibility, but increasingly this will happen with an ever shifting portfolio of production assets in every region of the planet.