The Trump Administration's higher tariffs on U.S. imports from China have accelerated a trend that began several years ago: U.S. companies are shifting some sourcing from China to other, typically lower-cost countries in Southeast and South Asia, as well as sub-Saharan Africa, Eastern Europe, and the Western Hemisphere. But the consequences and costs of relocating can potentially outweigh any savings from avoiding the tariffs, cautioned panelists at the recent 18th Annual Northeast Cargo Symposium hosted by the Coalition of New England Companies for Trade (CONECT) in Providence, R.I. Any importer contemplating such a move should be realistic about the pros and cons of leaving China, they said.
Manufacturers often rely on local suppliers for an array of materials, parts, and components, so relocating production may require finding new suppliers that meet quality standards and can take on more business on a specified timetable. But those suppliers may not always be available when and where you want them, said Jack Daniels, president and CEO of EastBridge Strategic Sourcing, a consulting firm that helps U.S. companies manage overseas sourcing and production. He told of one company that moved production of one of its products from China to Myanmar. "The tariffs disappeared," he said, but for several reasons some specialized parts still had to be sourced in China, which added time and complexity. Additionally, there were no direct ship calls from Myanmar to the company's U.S. destination, so the product had to ship via Singapore, which also added time and cost.
Daniels said that so far, only a few of his clients, many of which are in the electronics industry, have moved any production out of China. That's partly because these contract manufacturers depend on multiple suppliers of numerous small parts, and it's "too painful to move all of that at this point," he said. About 85% of the world's printed circuit boards are made in China now, and it will be "years and years before the entire ecosystem of manufacturers and suppliers can shift out of China—if it ever does," he added.
Some other types of products are starting to leave China, though. Ocean carriers are responding to increased demand for service from Vietnam and other Southeast Asian countries and have started to offer more direct calls and transshipments in the region, said Sri Laxmana, vice president, global ocean services for third-party logistics (3PL) provider C.H. Robinson. Ocean shipping, however, is a "very asset-heavy industry," so carriers must be certain there will be sufficient inbound and outbound volume to justify the additional costs and transit time, he said. They must get commitments from ports, container terminals, and local labor, yet in developing economies, transportation and logistics infrastructure and services may not be adequate or reliable enough to handle the additional demand. That can lead to delays and capacity shortages, he said.
Careful research needed
One company that's adjusting its sourcing strategy in response to tariffs is Manchester, Conn.-based Bob's Discount Furniture. Last fall, Bob's moved about 25% to 30% of its business from China to factories in Vietnam, some of which are owned by its existing Chinese suppliers. The company also has been increasing its sourcing from India and Indonesia, said Amy Elmore, director of international logistics.
Elmore outlined some of the steps she and her team have taken to keep the cost and service impact associated with sourcing shifts under control. They included:
- Negotiating new product pricing to mitigate the cost of additional tariffs.
- Having "people on the ground" to onboard new vendors and make sure everything from raw materials to logistics goes smoothly.
- Assessing logistics infrastructure and services in terms of capacity, availability, and reliability.
- Accurately quantifying how much volume would be produced in the new locations. This was helpful when negotiating pricing and service with ocean carriers and consolidators, Elmore said.
- Adjusting internal lead times to account for the more frequent delays in loading containers at new ports and the longer transit times to U.S destinations.
Elmore said that anyone who is thinking about relocating production should consider taking similar steps. In addition, she recommended that importers think about the end-to-end supply chain, and not just the international segment. It's important to know, she said, "if you have to change your routing, will it impact your domestic costs, distribution, and transit times?"
