Relocation can reduce transport costs

Factory in Shenzhen (file image courtesy of Chris / CC BY 2.0)

Posted on July 15, 2022 at 9:33 PM by

The Maritime Executive

Following the indiscriminate shutdowns of major manufacturing hubs in China, most Western companies are looking at relocation and other alternative sourcing options. Reliable supply chains are now a top priority, despite the cheap labor that once drove many manufacturers to prefer China.

Unfortunately, however, some consumer industries find the barriers associated with leaving China insurmountable.

Inter Parfums, the New York-based global perfume and cosmetics maker, recently resolved to leave China. When Shanghai was locked down two months ago, millions of dollars worth of designer perfumes and cologne stored in warehouses became inaccessible. As a result, Inter Parfums lost significant sales during the period.

“How good is it to have cheaper components when you can’t get them? For a consumer products company like ours, you need to have super supply stability,” Jean Madar, founder and president of Inter Parfums, told The Wall Street Journal.

But to manufacture a perfume bottle, a company like Inter Parfums needs 15 to 25 separate glass, plastic and metal components, most of which are historically sourced in China. Thus, building a full US-based supply base remains elusive in the near future.

A country wanting a key manufacturer to relocate production should also support its suppliers, who may also need to relocate for the supply chain to function properly. This regulatory headache is unresolved in many countries and remains uncontrollable for companies wishing to relocate.

Between March and April, McKinsey surveyed supply chain executives, and 20% said they had moved some production to a neighboring country in the past year. What was evident however, is that there are still multiple limitations and barriers to relocation. Therefore, companies with narrow profit margins may find it risky to bet against China. Economic choice will always reign supreme.

For example, Intel intends to move its chip manufacturing to the United States. However, last month he announced the indefinite postponement of a groundbreaking ceremony for a multi-billion chip factory in Ohio. Intel cited frustration over uncertainty in Congress over the passage of the bipartisan Innovation Act, needed to sustain the U.S. chipmaking industry.

Peloton, the US exercise equipment and media company, has also scrapped plans for a $400 million factory in Ohio. According to Peloton, uprooting its China-based factories and supply chains is more difficult in practice.

Other obvious barriers to changing supply chains, especially for US-based companies, are the high cost of labor and real estate. Additionally, the varied regulatory environment between different states can prove challenging for manufacturers wanting to have all of their suppliers based in the United States, according to Daniel Swan, manufacturing and supply chain expert at Mckinsey.

Top image: Shenzhen factory (file image courtesy of Chris / CC BY 2.0)