In today’s trade environment, there’s a lot of talk about producing goods outside of China. But will shifting production help or hurt your business?
Nathan Resnick, CEO and Founder of Sourcify, and Tal Kohn, Freight Marketing Pricing Analyst at Freightos, teamed up to give you the information you need in the first webinar of our Three Weeks of Peak Series.
Read on to decide if sourcing outside of China is right for you or check out the full webinar video below.
Need a freight quote outside (or inside) of China?
Pros and Cons of Working Outside of China
One of the major advantages to working outside of China is that production costs can be dramatically lower. For example, in China, labor costs have risen over the past 15- 20 years, whereas in countries like Vietnam, India, and Bangladesh, the cost of labor has remained low. Another advantage is if you choose the right country for your product, it can decrease lead time and increase quality. A third advantage is that producing in other developing countries can help U.S. brands avoid Chinese tariffs.
However, there are also drawbacks to working outside of China.
The main challenge is that the raw material sources outside of China are not as broad as in China. Another is that infrastructure outside of China often lags, which means lead times can become a challenge and production delays can be more common.
Saving on Production Costs
The following graph shows factory salaries in China and outside of China:
As you can see, wages are much higher in China. It’s important to note that this graph shows average estimates, with real salaries dependent on the location of the specific factory. For example, closer to bigger cities like Guangdong or Shenzhen, labor rates will be much higher, whereas in more remote areas, labor rates are going to go down. Take these rates into account when planning your production costs.
Another important piece to saving on production is analyzing your actual component costs. Typically a contract manufacturer will give you all-in costs, but asking for a breakdown will help you understand where you can save.
Here’s an example: let’s say you’re producing a watch. You want to understand: what’s the cost of the watch hands, the watch strap, and the watch movement– that is, the unit costs behind each component? But also understand the labor rates: how long does it actually take to assemble a watch? What does that translate into from a labor cost standpoint?
Knowing these details can help you plan strategically.
Which Country Outside of China Should I Choose for Production?
Every country has its own specialties. Check this map to see which country is best for producing your products:
One note on shipping from the Phillippines: in the Philippines, there is a growing sector of free economic zones, which were set up by the government to boost labor and employment rates. So although raw material sources in the Philippines are limited, you can choose to have your factory in the Philippines, import materials from other parts of Asia, manufacture in a free economic zone, and then export it for free from the Philippines as well.
Key Questions to Ask When Considering Sourcing Outside of China
Where do the raw resources come from?
You’ll want to choose a country that is able to source your product.
What are the capacity limitations?
For very large companies, note that many large factories fill their yearly capacity quickly, so these get booked well in advance.
For most e-commerce companies, primarily working with small and medium-sized factories that are looking to grow, you’ll have the most success by getting on the same page with your supplier about sales forecasting. Factories outside of China are growing very fast, but they don’t have the experience of a factory in China that has been manufacturing for 20 years, so clear communication and goal-setting are key.
How does exporting from this country actually work?
Exporting products from the Philippines or Vietnam can be different from exporting from China. Talk to your customs broker about duty rates, which are calculated based on the country of origin.
One note of caution: some Chinese factories are selling new facilities in Vietnam or Malaysia or the Philippines, but many times these facilities outside of China might not provide enough value-add to the goods. They may simply be repackaging products that were already made in China. For your product to actually change country of origin, there needs to be a significant value-add to the product in that country of origin.
What are the product regulations?
It’s important to know your product’s regulations, especially when there might be FDA requirements.
For example, one product that people often overlook is sunglasses. To import sunglasses to the U.S., factories need to be FDA approved because sunglasses are technically a medical device. So as you expand to new product lines and work with new factories, make sure that they have the right certificates so your products won’t get stuck at customs.
Avoiding Supply Chain Issues
When you’re considering shifting supply chains and moving production, make sure to avoid supply chain problems that can arise. Here are some steps you can take:
- Work with a local sourcing team such as Sourcify to make sure you have price visibility and get multiple price quotes
- Use multiple factories so that if something goes wrong with your factory you don’t have to scramble to maintain your inventory
- Consult a customs officer or broker to understand what duties you’ll owe when importing your products.
- Understand your costs across your entire supply chain. Unit costs, freight rates, duty costs– these are all important pieces to understanding how much it will cost you to actually get your product landed to your customer.
- Map out your shipping options to make sure you’re getting the best freight prices and transit times
Origin Ports, Transit Times, and Pricing Outside of China
If you choose to source from Southeast Asian countries outside of China, there are a few major ports to familiarize yourself with.
Major Ports for Export in Southeast Asia
There are two major hubs in Pakistan: Lahore in the north and Karachi in the south. Karachi is actually the one that borders the ocean, so anything produced in north will ultimately be sent to Karachi for international export.
Vietnam is long, narrow, and spread out. In the north near Hanoi, the capital, is Haiphong, in the center is Da Nang, and in the south by Ho Chi Minh, there are a number of different terminals, Vung Tau being one of the more primary ones.
In the north, the primary seaport is Keelung. Taichung is in the middle, and Kaohsiung is in the south.
In the north there are the ports of Manila and Subic Bay, slightly to the west of it.
In the middle is Cebu and in the south is the Port of General Santos.
In the north-central part of India, New Delhi is a major port, with Kolkata in the northeast.
In the southeast is the port of Chennai, with Mumbai/Nhava Shiva in the southwest, and Mundra in the west.
Shipping from Outside China: Transit Times
Here’s what you can expect from the transit times compared with what you might experience when shipping from China. This information is for LCL ocean shipments:
This chart shows how many days it takes to get to Los Angeles, Houston, and New York. The countries near China, such as Vietnam, Taiwan, and the Philippines, have similar transit times to China. With Taiwan, since it’s a little bit further to the east, you may gain a day, whereas Pakistan and India have longer times not only because they are further away, but also because oftentimes there’s transloading or stops along the way towards the United States that increase transit time.
India is different from the other countries because whereas from other countries, goods typically move east over the Pacific Ocean to the west coast of the United States, India, because of its geographic location and different production sites, can send freight both eastbound coming from the east of India, and westbound to reach the east coast of the U.S.
That means that whereas for every other country, transit times increase as you move from west to east U.S., India has the longest transit time to Houston and shorter times to both Los Angeles and New York.
Shipping from Outside China: Pricing
Here is the kind of pricing that you might expect for a 1.5 CBM, 300-kilogram shipment with port-to-port costs:
Once again, going from west to the east mostly increases prices, except for India where shipping to Houston is on average the most expensive.