Free Shipping on orders over US$39.99

How China Plus One Diversifies Supply Chain Risk – EPS News

Trade wars, tariffs and geopolitical concerns have spurred global electronics manufacturers to reassess their strategies regarding China. But rather than abandon the nation entirely, China Plus One is taking hold as a way to diversify supply chain risks.
“Trade dynamics with China have changed,” said Vipul Kumar, manager, procurement and supply chain intelligence for business consultant Aranca. “At first it was ‘we have cheap labor in China so why don’t we [manufacture or] buy there.’ That’s why the U.S. has put tariffs on imported goods. We’ve also seen quality problems. More recently, we’ve seen the duties increase as well as the labor rates.”
supply chain, diversity, Chinasupply chain, diversity, ChinaChina’s practices regarding IP and market access have long concerned electronics manufacturers. Covid-19 has only added to business skepticism. Still, “one executive told me we have to keep business separate from emotion,” said Kumar. “Businesses still like what China is offering. The main driver has been wage rates.”
Government and social pressures are also driving diversification, particularly the push toward reshoring/onshoring. The European Commission plans to introduce a “European Chips Act” to provide a European strategy to boost leading-edge semiconductor manufacturing. The semiconductor shortage has heightened the United States’ attention on high tech, which has passed a bill that includes $52 billion to fund semiconductor research, design and manufacturing initiatives.
Companies focused on corporate social responsibility (CSR) find China’s human rights and environmental policies problematic. “China’s lack of transparency can be used as a weapon for companies looking to diversify out of China,” said Alex Saric, chief marketing officer for Ivalua, which recently released a report on CSR. “China Plus One is an alternative, but that is harder for electronics because there is such a concentration there. It’s also not clear if there’s a viable alternative.”
In electronics, diversification doesn’t necessarily align with lower costs. The Covid-19 pandemic increased companies’ awareness of upstream risks such as materials shortages or smaller partners going out of business. Many companies were caught short-handed when finished goods – such as semiconductors – weren’t being built because materials or substrates were unavailable. Businesses are currently willing to pay bit more for guaranteed supplies. The Institute for Supply Management reports price hikes are successfully being passed on to customers.
Mexico and Vietnam in the spotlight
Mexico and Vietnam are the main targets for electronics diversification. There are fewer import duties in Mexico, said Kumar, but the shift to Mexico is still in the exploratory stage.  “The cost of manufacturing in Mexico is relatively high,” he said.  “However, the main reason for a shift there is ‘diversification in supply base’ and not cost.”
Foxconn has some factories in Mexico and is looking to increase its presence there, Kumar said. Pegatron is planning to invest in Mexico at some level.
Mexico’s supply chain is not scaled for cost synergies, he added. But companies that are planning to diversify their supply chain are taking a portion of their sourcing spend out of China to Mexico.
Vipul Kumar, Aranca
“As an example, electronics companies in Mexico, such as Inventec, ZKW and Mphasis, are keen on increasing their production lines for sub-components such as servers, lighting systems and cognitive services supporting Latin America and U.S. customers, respectively.”
For U.S.-based manufacturers, proximity increasingly matters. Transpacific shipments have been plagued by disruptions and price hikes throughout 2021. The Long Beach and Los Angeles seaports are currently experiencing record backlogs. Half a million shipping containers are sitting off the coast of Los Angeles, according to one estimate.
Vietnam has also emerged as a favored alternative for the electronics and automotive industries, Aranca reports. This is due to several factors: the country’s robust economic growth (+6.8 year-over-year (YoY) in 2019) driven by increasing foreign direct investment; an increase in imports (+10.5 percent) and exports (+7.3 percent); multiple free trade agreements; a rise in industrial production; low raw material costs and high availability of raw materials and suppliers.
Intel, LG Electronics and Google are among companies that have moved some production to Vietnam. Intel builds platform controller hubs there; LG and Google are manufacturing smartphones.
But China is still a powerhouse in electronics. “No one is going 100 percent out of China because it doesn’t make business sense,” said Kumar. “Even with higher labor costs, a great deal of assembly will remain there. Semiconductor manufacturing is highly automated, but a lot of assembly and packaging are not. Also, you still need people to manage automation and control systems. China’s labor cost advantage still holds.”
By some estimates, China also accounts for 70 percent of critical raw materials used in manufacturing. “Companies may geographically diversify but a lot of raw materials come from China,” Kumar said.
Companies are applying financial metrics to supply chain diversity, such as the revenue impact of losing a supplier or the time it takes a supplier’s factory to recover from disruption. “Different industries have different tolerances for risk,” said Saric. “The supply chain is moving toward diversification, but electronics are still heavily concentrated in China.”
Barb Jorgensen is editor-in-chief for supply chain publication EPSNews and has covered electronics manufacturing, procurement and business for more than 25 years. Barb spent most of her career with Electronic Business magazine and EBN; freelanced; and then founded online publication EPSNews with two industry veterans—Bolaji Ojo and Gina Roos. EPSNews was acquired by AspenCore in 2017.
Your email address will not be published. Required fields are marked *

Post comment

document.getElementById( “ak_js_1” ).setAttribute( “value”, ( new Date() ).getTime() );
This site uses Akismet to reduce spam. Learn how your comment data is processed.

Copyright © 2021 by AspenCore, Inc. All Rights Reserved.


rafi rajib
We will be happy to hear your thoughts

Leave a reply

Reset Password
Compare items
  • Total (0)
Shopping cart