Still Made in China Wordcloud

US-Tariffs: To Move Out of China or Not? How Do I Minimize the Impact of Staying in China?

US-Tariffs seem to be on the rise from China, so the natural next step would be to hop on out of China, to another surrounding country… right? Let’s take a deeper dive into this option and propose some solutions to minimize the impact of the new US-Tariffs.

If you don’t know if your product has been affected by the tariffs yet, here’s the list.

Alternatively, if you have your HS Code and just want a second opinion as to whether it’s subject to the tariff increases, use the Noviland US-Tariff Checking Tool.

Alternatives to China

It may seem like a natural next step to move your production out of China due to these new tariffs, and yes – there are several other countries that manufacture in Asia.

Alternative manufacturing countries to China:

  • Vietnam
  • India
  • Thailand
  • Taiwan
  • Malaysia

These seem to be some of the most discussed countries by SMBs on forums and Facebook Groups. They are fantastic countries to manufacture in… but there are many misconceptions about how easy the move is.

What’s wrong with moving to these countries?

Companies that started making the move 1-2 years ago aren’t having much of an issue, however if you’re making the move now there are a few things you need to know about these countries.

Here are some of the issues I’m going to dive into:

  • Supply Chain
  • Infrastructure
  • Standards & Quality

Let’s start with Supply Chain

Upstream supply chain pertains to the factories acquisition of things like raw materials, parts, packaging, etc. from their suppliers.

Chinese factories have been considering making the move to their neighbors like Vietnam since the Trade War started in 2018, however the upstream supply chain is one aspect that deterred a lot of them.

Simply put, there aren’t enough materials to make your end-products to go around.

Jie Xiang, VP of Asia Procurement at Noviland, recently visited Vietnam and got to speak to many industry leaders as well as some of the top raw materials suppliers.

“The packaging factories and raw material suppliers for plywood don’t know what to do with such an increase in demand. They told me they weren’t ready for it and for factories popping up in Vietnam, they’ll have to increase their prices because of the demand spike and have to turn a lot away.” Xiang said.

This is just one bottleneck in making the move to countries like Vietnam. Considering their lack of resources, companies purchasing from Vietnam are going to have to expect longer lead times and factories there are going to have to conform to higher raw material prices.

Infrastructure of these Developing Nations

Although a lot of these countries are part of the Belt and Road Initiative (BRI), they are nowhere close to having the infrastructure built to take on the demand shift from China.

Manufacturing worker training, development of factories & their processes, and transportation infrastructure are just a few of the necessary infrastructures that need to be in place in order for a country to be successful in manufacturing.

Fred Burke, managing partner of law firm Baker McKenzie’s Vietnam office  has taken a notice to these issues.

“The Vietnamese workers were really not trained up to the level that the Chinese are, and that starts with the construction of your factory, or the road to get there.” Burke said to the South China Morning Post.

Several factories in Noviland’s network have reported attempting to make the move to Vietnam in the past year to keep production running, but have been running into the roadblock of rising costs for both land and labor.

Some reporting land prices have doubled, even tripled, since they started their plans in early 2018.

Pair that with jammed ports and the inability to simply travel to the factories due to poor transportation infrastructures and you’ll find yourself with the biggest over-promise/under-deliver situation you can get.

One of Noviland’s partnered factories in the furniture industry that was able to make the move successfully starting a year ago, reported having to book their spot on a ship 2-3 weeks in advance whereas their average time in China is roughly 2-4 days.

The infrastructure is expected to develop with the help of the BRI, however that is expected to have results well into the 2020’s.

Standards and Quality outside of China

Through a combination of not-ready infrastructure and supply chain, you can only imagine the drop off in quality of products.

Causes

  • Demand of raw materials driving up prices
  • Lack of quality workers due to larger factories taking up the skilled laborers
  • Shortage in managerial labor
  • Factory shifting production to high-demand products with less experience
  • Real estate pricing so high causing factories to minimize operational expenses to be competitive

These are just some of the reasons that quality levels will decline with the shift of manufacturing out of China.

There is an influx of workers coming from more remote parts of the country with the new given opportunities, however that comes at a cost because hiring labor from more remote areas means the factories are getting less professional workers.

Big Companies Moving out of China

Yes, it’s true – large companies are looking to shift some of their manufacturing out of China. With some of the more notable ones being Apple and Sony.

This shift is not a short-term solution to their problems. This will take years to develop because of many of the things that were mentioned above – with it all coming down to the quality levels they need to maintain.

Keep in mind that all factories taking on new business will of course give priority to the larger, more traditional companies, before they start taking on eCommerce Sellers. Wholesalers, Retailers, Manufacturers, etc. will have the upper-hand on the SMBs attempting to move out of China.

Although they plan on diversifying their suppliers, the option of simply pulling out of China immediately is simply not an option.

One of Amazon’s largest competitors, Walmart, doesn’t expect any slowdown in consumer spending and fully expects costs to be passed along to consumers. Walmart CFO, Brett Biggs, said in an interview that he had not seen signs of consumers spending less.

Minimizing the Impact of Tariffs

Here are a few alternatives to minimizing the impact of the tariffs while staying in China:

Step 1

Analyze your margins if you ate the cost completely and run a break-even analysis.

Step 2

Determine:

  • What margin do I absolutely need?
  • How much do I need to pass along to the consumer?

Step 3

Based on how much you need to pass along to the consumer:

  • Does it still make sense to sell this product?
  • Ask yourself what you can do to raise the value of your product to justify the increase (see suggestions below)
  • Are there other processes you can optimize to minimize your COGS?

How to Minimize (& Maximize) Your Spend

You can use a service like Noviland in a few ways:

  • Finding alternative factories that may have better pricing and/or product quality
  • Finding a factory for complementary products you can bundle with your current product to add more value
  • Locating a pre-vetted factory willing to have lower MOQs than the average factory
  • Purchasing a higher quality custom packaging for your product through the Noviland network
  • Creating product bundles from a variety of factories in the Noviland network
  • Easily finding pre-vetted factories for the products not impacted by the tariffs
  • Consult with Noviland to see what their factories can do for your long-term pricing strategy

Other ways to minimize spending is by:

  • Running Amazon PPC with one of the most trusted Amazon PPC companies AsteroidX to help you improve your ROI via Amazon PPC. If you use this link to sign up, you’ll also get $400 off your second month of service!
  • Optimizing your ads to be able to spend less while attracting a larger audience. Check out OptMyAds.com or amzpathfinder.com for help with this
  • Shipping all products and packaging separately to save on container space and have them assemble/store them with 3PLguys.com
  • Optimizing your listing so you beat the competition, even with a higher price. Consult with AwesomeDynamic.com, Nozani.com, or Marknology.com to find out how to do this.

 


Francois Jaffres is the COO of Noviland.com, a rapidly growing sourcing & purchasing solution making sourcing from overseas factories simpler. He has worked with over 500 businesses to source from China, has a background in Industrial Engineering, and is very active in the Amazon Facebook Groups. He currently splits time between Campbell, CA and Pittsburgh, PA.

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