Two weeks ago, U.S. Vice President Kamala Harris visited Singapore and Vietnam, signaling a renewed focus by the United States on foreign relations, as well as support for U.S. businesses operating in the Asia-Pacific region. Vice President Harris’s trip followed a meeting between U.S. Secretary of State Antony Blinken and foreign ministers of the Association of Southeast Asian Nations (ASEAN) earlier in August, and a visit by U.S. Defense Secretary Lloyd Austin to Singapore, Vietnam and the Philippines in July.
Over 5,000 U.S. companies maintain a presence in Singapore, supporting 215,000 American jobs (plus exponentially more Singaporean jobs). Over the past 25 years, U.S.-Vietnam bilateral trade has grown from $451 million (1995) to over $90 billion (2020).
In Singapore, Vice President Harris and Prime Minister Lee Hsien Loong announced strengthened trade ties, including the US-Singapore Partnership for Growth and Innovation, which will strengthen bilateral and regional collaboration on trade and investment, beginning with four pillars: the digital economy, energy and environmental technologies, advanced manufacturing, and healthcare. Vice President Harris noted, “Supply chains, without any question, are critical to ensuring that businesses can source the materials they need, get products to market, and enable people to buy these products. So working together with partners like Singapore on strengthening supply chains is critical …”
Regular readers of this blog will know that a “decoupling” of the United States and China has been underway since the first year of President Donald Trump’s administration, and that the pace of departures has increased steadily. Although some companies cannot shift or have no interest in shifting their manufacturing away from China, other firms with concerns about tariffs, human rights, intellectual property theft or political risk have moved, or are moving operations to other countries.
We have written about Mexico as a manufacturing base for companies importing goods into the United States, and we have also written about Puerto Rico as an attractive destination for U.S.-bound manufacturers. But given Vice President Harris’s choice of Singapore and Vietnam for her Asia trip, it’s worth looking at Southeast Asia for its possibilities as a manufacturing alternative to China.
As background (that you probably already know), the ASEAN region comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. ASEAN has a significant middle class consumer base (around 135 million) that is expected to more than double (to 334 million) by 2030. ASEAN also has the world’s third largest labor force, trailing only China and India.
Leaving aside India for another discussion, manufacturers looking at Asian alternatives to China need to consider a number of factors:
1. Political stability – does the system of government (and the government itself) provide a stable platform for business operations, and especially for foreign-owned businesses? How easy or difficult is it to set up and run a company? How much corruption is there? What is the tax rate for companies in your industry?
2. Rule of law – does the country have a judicial system that is fair and transparent, and that allows businesses to protect their interests and resolve disputes?
3. Intellectual property protection – this relates to the rule of law, and for decades has been a major complaint of China-based manufacturers (and even those who are not based in China).
4. Infrastructure – it doesn’t matter how cheap the labor and materials are; if you can’t get your goods to market reliably, you don’t want to go there.
5. Labor force – how educated and skilled is the labor force, and how expensive?
6. Materials/components access – this is one of China’s continuing advantages; if half the components you require to manufacture your widgets are made in China, does it really make sense to relocate your manufacturing to Vietnam?
7. Manufacturing capacity – this is another continuing advantage for China; Malaysia may be an easy place in which to do business, but the labor force is small. The same is true of Cambodia and Laos.
The question of where to go – if you go anywhere – will always depend on the specifics of your business, e.g. garment manufacturers face different supply chain and intellectual property protection issues than electronics manufacturers. And local politics and regulations (especially as concerns foreign investment) are always changing. In addition, the pandemic and resultant constraints on international travel have made it much more difficult to conduct due diligence on potential manufacturing partners.
For U.S. companies, another factor may prompt exploration of manufacturing alternatives to China. On July 14, the U.S. Senate passed the Uyghur Forced Labor Prevention Act. Potential liability extends beyond manufacturing facilities (e.g. factories in Xinjiang) to suppliers (e.g. companies that produce garments made with cotton harvested in Xinjiang). How can manufacturers be certain there is no forced labor (even forced labor that is not Xinjiang-based) in their supply chains? Given the constraints on conducting due diligence in China, that is very, very difficult. And yet, the onus is on the manufacturer to demonstrate to U.S. Customs and Border Protection (CBP) that goods are not made using forced labor.
In consideration of the above, and recognizing that every company’s situation is different, if you’re thinking about shifting your manufacturing away from China, or expanding your manufacturing outside of China, the best strategy is to research the possibilities (including regulatory and tax considerations), talk with people who have done something similar, get recommendations of manufacturing partners, and then (if possible, i.e. if your business size and structure permits) test your new paradigm. You will be testing all the factors listed above (infrastructure, labor quality and cost, access to materials/components, and the ease of doing business). In a year, you’ll have a much better idea if [insert name of new manufacturing destination] is for you.