Leaving China: The Right Way, the Wrong Way, and the Max Power Way

In 2020, it was common wisdom that the time had come to move away from sourcing in China. Then the idea of China +1 caught on, where companies planned to supplement their sourcing needs with goods and materials from elsewhere in Asia (or closer to home) in addition to keeping China as a primary source.

Now, it feels as if we’ve resigned ourselves to the idea that China will be the primary location that many companies around the globe look to for sourcing partners. What are their advantages that make it so hard to diversify?

This week’s episode of Art of Supply is the monthly interview, and I sat back down with Jeffrey Goldstein, Founder and President of Onward Global. He is based in China, which allows him to offer us an honest, firsthand look at how sourcing in China has changed over the last few years… and how it has remained the same.

To read his observations on doing business in China post-COVID, read Even with +1, China is still #1 on Art of Procurement.

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Not a Job for Max Power

If you watch The Simpsons, you may be familiar with “The Max Power Way.” According to Homer Simpson, there are three ways to do something: the right way, the wrong way, and the Max Power way - which is the wrong way but faster!

Among companies looking to move away from sourcing in China, too many tried to follow the Max Power Way, although probably without being aware of it.

As Jeffrey pointed out, “I think the first thing companies need to realize is that it is not a 6 to 12 month project to relocate a supply chain or to develop a new supply chain in another country. It took us 30 years to fully understand China and optimize our operations and our supply chains here, so replicating that elsewhere, even if it's an English speaking country, just is not realistic.”?

Successfully diversifying from China, let alone leaving altogether, requires more than a determination to do so. Companies will also have to make a significant and sustained investment of time and resources. Realistically speaking, leaving China is a 3 to 5 year project, and so someone in the organization needs to be given a clear executive mandate to focus on the effort.?

That person “needs to know that they'll be supported,” Jeffrey said. “To go at it halfheartedly or to say, ‘let's hope for the best’ just is not enough.”

Will You Be My +1?

If companies are determined to diversify their sourcing out of China, there are a few locations they are likely to look first. Each has potential advantages and disadvantages.?

Vietnam

According to Jeffrey, becoming a member of the World Trade Organization in 2007 gave this country a head start. “A lot of the Japanese, Korean, and Taiwanese companies started investing there at that time, giving them a good boost ahead of Cambodia and Bangladesh in terms of their foreign direct investment in supply chain development.”?

Over the last few years they have expanded from apparel and footwear into electronic component assembly. This decision has led them away from low cost, labor intensive production methods and towards higher end production that leverages automation for efficiency.?

Cambodia

According to Cambodia’s Ministry of Industry, Science, Technology, and Innovation, the country saw an 83 percent increase in manufacturing output in 2022 alone.

“They're making big investments in furniture, lighting, electrical equipment, and things of that sort. But people have to realize Cambodia is a very small country. So while it can certainly be a China +1 option, it is certainly not going to be a replacement.”

It is not just Western companies that are trying to diversify from China, Chinese companies are doing the same - in some cases to retain business that would otherwise move to non Chinese-owned suppliers. That investment has given the country the opportunity to grow, and they haven’t wasted it.

India

Unlike Vietnam and Cambodia, who have long been focused on exports, most of India’s production capacity has addressed domestic consumption. Today’s business incentives have given them a reason to make the transition, but the associated service and product quality don’t always meet sourcing expectations.

“India is very interesting and they have a lot of big differentiators over other countries, not only because they have a huge population, but because they've had a large manufacturing base for a long time,” Jeffrey observed. “Because of their large domestic market, there's a certain level of expertise there. They’re one of the only countries in Asia with such a diverse and developed material supply chain.”

Swimming with the Sharks

I’m sure I’m not the only person who has noticed while watching Shark Tank that it doesn’t matter how small a business is - the Sharks want to know where you manufacture and produce your goods. Many small and mid-sized businesses have discovered that they need to source in China in order to be profitable.

“It can be really challenging because a lot of the time headquarters have very limited knowledge as to where and how their products are being made,” Jeffrey explained. “This can create large ethical and quality risks. This applies anywhere around the world, not just China: when a supplier knows they're working with a smaller company that maybe doesn't have the resources to come over to Asia to hold them accountable, or they're working with a smaller company that doesn't have a full-time supply chain person who knows what they're talking about, a lot of the time that supplier feels a little bit more confident about taking advantage.”

Accountability isn’t just about leverage, it is also about businesses having the transparency they need to feel confident that a supplier will provide them with what they have agreed upon. Without this visibility, proactively minimizing risk and maximizing opportunity are equally difficult. The work required to set a company up for success when sourcing globally all comes down to how they select and manage their suppliers.?

“The one thing I will remind anyone that's listening here is that good quality, good customer service, good costing, good lead times, all that starts with good sourcing,” Jeffrey pointed out. “It's worth investing the time and the capital upfront to identify multiple resources, to vet multiple resources, to try out multiple resources before proceeding with that one supplier that you consider a partner.”?

Given today’s risk averse corporate environment, this advice may provide the best response procurement can give when they receive feedback that strategic sourcing takes too long.?

Procurement’s counterparts in the business may naturally get impatient, but the time is going to good use. There will always be surprises after selecting a supplier, but the more preparation is done upfront, especially around critical long distance relationships, the better. It is a mistake to short circuit that part of the process. Procurement can always strive to become more efficient, but rushing pre-qualification can only lead problems later on.

Countdown to November 5, 2024

Whenever I get to speak to someone who has an interesting perspective on business, global business especially, I like to ask what they are keeping an eye on. For Jeffrey, it all comes down to November 5th, 2024.

While most people are politely (or dutifully) doing their best to avoid mingling partisan politics with work, we can’t avoid the fact that presidential elections have far reaching consequences.?

“The Trump administration disrupted China-US relations and started this supply chain decoupling movement, and the Biden administration, for the most part, has continued to invest in that decoupling movement, although in a more behind-the-doors manner,” Jeffrey said. “But I think whether you're the COO of a U.S. brand, a Chinese factory owner, or the Indian government, everyone is waiting for November 5th, 2024 to see how American trade policy is going to change. If it does, what challenges or what opportunities is that going to create?”

I’ll admit his answer wasn’t what I was expecting, but I think Jeffrey is spot on.?

Supply chain professionals have to find a way to divorce politics from policy so we can be ready for November 6th. Now is the time to start researching, educating ourselves, and scenario planning. Now is the time to identify alternate scenarios and parallel strategies.

From where we stand today, the only thing we can be more sure of than a 2020 rematch come November, is that China will still be in a dominant position as a global sourcing destination.

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