Manufacturing in Asia is on the move. China Daily wrote in a recent article about the phenomenon one trade official dubbed the “great industrial transfer,” whereby sections of Asian manufacturing are moving away from China toward nearby Southeast Asian countries. Indeed, increasing labor costs in China, which have seen increases in the range of 15 to 20 percent annually in recent years, is compelling many companies here in the United States to seek lower costs in neighboring Southeast Asia, according to 5 Horizons Group, a St. Louis and China-based product design and supply chain firm with satellite operations throughout Southeast Asia and India.
Why Companies Are Shifting Some Manufacturing Away From China
“China’s position as the lowest cost option has been replaced by other countries in a number of labor-intensive product industries where pricing is sensitive and where labor and overhead costs are larger components of the product price,” says Jon Allen, co-founder and managing partner of 5 Horizons Group. “There are opportunities in many Southeast-Asian countries where labor has become increasingly skilled and high-quality manufacturers have relocated part or all of their operations to these countries.”
Allen adds that this combination of lower costs and arrival of better quality manufacturers has been the predominant reason that many of the largest brands have relocated parts of their manufacturing to Southeast Asia, a trend that is likely to continue.
Challenges in Emerging Southeast Asian Markets
Despite the opportunity for lower costs, however, Southeast Asian countries have their limitations.
Allen notes that despite increasing costs in China, at this point other countries are still no match for the depth and breadth of China’s manufacturing landscape and infrastructure, which still provides for more efficient production for many products that require more complex supply chains. “The economic conditions required for an entire network of finished goods and components suppliers to move wholesale out of China are probably still a ways off for a number of the products we produce.” The result, he says, is a mixed bag, which means more opportunities but also more decisions that require careful consideration when developing a global sourcing strategy.
Importance of Having a Physical Presence in Southeast Asia
5 Horizons Group positions its expat-led teams close to its manufacturing partners throughout Asia. “These on-the-ground leaders bring our organization’s creativity to the source, allowing us to understand the capabilities of our suppliers and to enable them to be best-in-class,” according to Kevin Lehrer, who co-founded 5 Horizons Group with Allen five years ago.
“Having a strong physical presence is critical, not only to our ability to quickly identify and solve issues, but also to maintaining good supplier relationships,” Lehrer says. “We believe the physical proximity of our leadership is key to demonstrating our long-term commitments to our suppliers and developing mutual trust over time.”
Lehrer says that having 5 Horizons’ Asia teams fully immersed in its Asia partners’ businesses allows the company to bridge the requirements and operational strategies of every business they partner with, from retailers to factories.
How Can a Company Ensure Quality from Start to Finish When Manufacturing Abroad?
The most important aspect of ensuring quality throughout the entire process of product development, according to Lehrer, is to focus extensively on up-stream collaboration from the earliest stages of design and development.
“By doing this, we are able to mitigate the majority of down-stream quality issues,” Lehrer says. “Our teams on both sides of the world are constantly communicating needs, concerns and possible vulnerabilities.”
And by working closely with designers who understand the manufacturing capabilities of suppliers in Asia, Lehrer says the company is able to better streamline the process of actually producing a product. “At 5 Horizons, we have strived to create an eco-system of quality that considers both ends of the supply chain simultaneously and that engineers quality into our products and supply chains even before we open the first tool,” says Allen.
The intent is to ultimately help clients and factories maximize their return on the partnership — a kind of bridge building between Eastern and Western companies.