Manufacturing

Read the attached article and answer the following questions:

1. Why is China the worlds factory floor? Is it only because of lower wages? Why will it be years or decades before Vietnam and other aspiring manufacturing destinations are ready to replace China in this role?

2. Since most manufacturing companies can rarely exit China altogether, what are the alternatives? Just as importantly, what are the costs and downsides of these alternatives?
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 1 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visithttps://www.djreprints.com.https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989BUSINESSManufacturers Want to Quit China for Vietnam. TheyÕreFinding It Impossible.Global companies are rushing to seek alternative bases, only to find even promising countries like Vietnam donÕt match upHO CHI MINH CITY, VietnamÑWith the U.S. and China tangled in a nastytrade Þght, this should be VietnamÕs time to shine. Instead, it is becomingincreasingly clear that it will be years, if ever, before this Southeast Asiannation and other aspiring manufacturing destinations are ready to replaceChina as the worldÕs factory ßoor.The specialized supply chains that made China a production powerhouse forsmartphones and aluminum ladders and vacuum cleaners and dining tablesare nowhere near as developed in Vietnam. Factories with U.S.-focusedsafety certiÞcations and capital-intensive machinery arenÕt as easy to Þnd.And Vietnam, with less than one-tenth ChinaÕs population, is alreadyrunning into labor shortages as global manufacturers rush to set up shophere to avoid U.S. tari?s.ÒChina has a 15-year head startÑwhatever you want, someoneÕs doing it,Ósaid Wing Xu, the operations director for Omnidex Group, which helps makelarge pumps for Pennsylvania-based industrial equipment manufacturerMcLanahan Corp.Omnidex has shifted some production to Vietnam, but out of more than 80parts of a pump used in mining operations, factories here have been able tobegin work on only 20 so far because molds must be created from scratch.ÒYou canÕt just shift your business to Vietnam and expect to Þnd whatyouÕre looking for,Ó she said.Business leaders say they are preparing for a protracted Þght between theworldÕs two largest economies. Few companies are planning to leave Chinaaltogether, but those that heavily clustered production in the country areurgently looking to diversify.Some companies are relocating parts of their production lines to SoutheastAug. 21, 2019 10:33 am ETBy Niharika Mandhana | Photographs by Linh Pham forThe Wall Street Journal
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 2 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989Asian countries or elsewhere, while continuing to manufacture in China forthe Chinese and non-U.S. markets, a strategy they call ÒChina+1.Ó Otherswith huge orders are hoping to nudge their Chinese suppliers to moveoperations out of China.As a result, a new global manufacturing landscape is starting to take shape,executives say. Production leaving China is getting divvied up amongdeveloping countries, with a small portion going to the U.S. on the back ofautomation. The reordering of supply chains is likely to leave China with adiminished but still signiÞcant share of the pie.The creation of new industrial clusters wonÕt happen overnight. Vietnamo?ers cheaplabor, but its100-millionpopulation issmallcomparedwith ChinaÕs1.3 billion,and its roadsand ports arealreadyclogged.India has themanpower,but skill levels fall short and government rules are relatively restrictive.ÒThe question everyone is asking is: ÔWhere should we go?Õ Ó said Giang Le,a Singapore-based analyst for strategic consulting Þrm Control Risks. ÒTheanswer is not obvious.ÓCalifornia-based camera-maker GoPro Inc. is moving most of its U.S.-bound production to Guadalajara in Mexico while keeping its Chinaoperations for other markets. Universal Electronics Inc., which is based inArizona and makes smart-home technology, has a new partner in thePhilippines and is also expanding operations in Monterrey, Mexico.Hong Kong-listed Techtronic Industries Co. Ltd., which makes Hoovervacuum cleaners, will set up a new plant in Vietnam and add capacity to itsMississippi operations. It will maintain some production in China for atleast a decade, the company said.The Chinese model of the past 20 years thrived on suppliers being close toeach other, making production quicker, less expensive and more efficient.Now, as operations become more fragmented, they are threatening to raisecosts, stretch delivery times and expose companies to multiple tax and laborregimes.Workers make cast-iron parts at the Duc Kim Tinh factory in Binh Duong Province.
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 3 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989Companiesare startingto focus onthe intricaterules thatgovern howmuch of aproductneeds to bemanufactured in a country, say Vietnam, to be considered ÒMade inVietnam,Ó said Willy C. Shih, an economist specializing in manufacturing atHarvard Business School. ÒThe era of the benign trading environment isover,Ó he said.The shake-up is just the opportunity Vietnam has been waiting for.Labor-intensive manufacturing of sneakers and sweaters moved hereyears ago in response to rising Chinese wages. South Korean giant SamsungElectronics Co. has invested billions. Hanoi is eager to further expandelectronics and engineering industries that are high up the value chain.Industrial parks have been ßooded with inquiries. BW IndustrialDevelopment, backed by U.S. private-equity Þrm Warburg Pincus, beganbuilding factories-for-rent last year. Its facilities are booked throughDecember. Marketing head Michael Chan said some tenants are rushingfrom site visits to signing contracts in just a week.Vietnamese Þrm Hanel PT, which makes electronics for Þre alarms andmotion sensors, says it is negotiating its biggest deal yet, equal in value tohalf its current contracts. The 20-year-old manufacturer counts bigJapanese companies as clients, said director Tran Thu Trang, but U.S. Þrmshave made contact for the Þrst time.Ho Chi Minh City-based Seditex Co. Ltd., which connects foreign Þrms tolocal factories, began receiving 20 requests a week after tari?s wereincreased last September, up from 20 a month. Foreign companies wantedto know about making a range of products, including backpacks, pliers,Bluetooth speakers, boat covers, suitcase wheels and clothes racks.Founder Frank Vossen said companies accustomed to operating in China arestruggling to adapt. ÒThere is no ready-made solution in Vietnam, thatÕs thereality check,Ó he said.Workers are already getting tough to Þnd. A local exporter of pipes andhoses is swamped with orders for tari?-hit products, but it has only beenable to hire 30 of the 100 workers it needs. A Japanese furniture maker forThe Duc Kim Tinh factory.
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 4 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989brand Muji said it has had production delays since January because of laborshortages.Yotaro Kanamori, the planning manager for the Tokyo-based ÞrmGeneration Pass Co. Ltd., said the Þrm is now renting a factory for itselfinstead of relying on contract work. He struggles to explain to hisVietnamese suppliers why a tableÕs underside needs to be as well-made asthe top.The manufacturing shift toward Vietnam has been a long time in themaking. Early movers such as Nike Inc. began buying shoes fromVietnamese factories in the mid-1990s. As minimum wages in China grew,more orders for clothes, toysand shoes shifted to lessexpensive destinations inBangladesh, Myanmar andVietnam.Japanese multinationalCanon Inc. began makingprinters in northern Vietnamin 2012. But supply chains forproducts like printers andcameras are vast and difficultto re-create. Of CanonÕsnetwork of 175 suppliers inVietnam, only 20 are localcompanies, said seniormanager Dao Thi Thu Huyen.They mostly make plastic parts and packaging.Nearly all the electronics components come from Japan, China and Taiwan,she said.Readers Weigh InIf not China, nor Vietnam, wherewill global manufacturing end up?Join the conversation below. 1 of 5ÒI am surprised that India is notseizing this moment. India has portson two coasts, China is land-locked tothe west. Indian labor costs are low,while ChinaÕs labor and regulatorycosts are rapidly rising.Ó Ñ DavidThompsonA factory developed by BW Industrial Development JSC in Binh Duong Province has been rented by aJapanese woodworking company which plans to move production here in September.
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 5 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989The pace of companies moving production lines to Vietnam began speedingup last year as executives who had been weighing the countryÕs potentialdecided to take the plunge.Christopher Devereux had started a company called ChinaSavvy in the early2000s that took orders from Western Þrms for complex metal products andworked with factories in China to get them made at what he used to tout asÒChina prices.Ó By late 2018, after the U.S. imposed tari?s, his clients beganasking: How quickly can you move out of China?Mr. Devereux inspected dozens of factories in Vietnam, sometimes six a day,and rebranded his company ÒOmnidexÓ to project a global proÞle.Relocating the manufacturing of pumps for PennsylvaniaÕs McLanahanCorp. is taking some doing. The pumps are made up of seven dozen piecesthat must be cast precisely to avoid leaks. Mr. Devereux Þrst tested thewaters by making the small parts in factories near Ho Chi Minh City. Eventhat wasnÕt easy, said Truong Khac Long, the Vietnam manager.The brightred DuPontpowdercoating wastough to get.TherewerenÕt asmanyqualiÞedfoundries tochoose from,and thoseproducing forthe domesticmarket didnÕt always have quality-control specialists. Engineers from ChinaEngineers from Omnidex Manufacturing Vietnam supervise the production of their order at Duc KimTinh factory.Truong Khac Long, general director of Omnidex Manufacturing Vietnam.
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 6 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989had to travel back and forth to Vietnam, where suppliers made samplesagain and again to get it exactly right.Executives decided the manufacturing of bigger parts couldnÕt be moved.The pump would be produced in two countries, unable to fully escape tari?s.By spring 2019, Peter Zhao, who was in charge of getting products made forWisconsin-based electrical tools company ECM Industries, had given uphope the trade war would end. He turned to Google to search for agents inSoutheast Asia and contacted Vietnam-based intermediary Seditex.Mr. Zhao directed them to Þnd a factory with experience makingmultimeters, which measure voltage and are currently made in China.Seditex agents scoured their networks but couldnÕt come up with one. Theclosest Þt was a Þrm called Viettronics that made TVs and other devices.In their office, a Viettronics R&D expert dismantled the sample multimeterMr. Zhao had sent. His conclusion: The company could Þnd local suppliersfor the instrumentÕs plastic casing and cables and assemble the multimeterin its factory, but some of the major parts, like the integrated circuit, wouldneed to be imported.That was a problem for Mr. Zhao. He was used to buying nearly everythingin China since production of the multimeter moved there a decade ago fromTaiwan. Over time, Chinese factories created their own tweaked model thatdrew on the strengths of their well-developed supply networks.Mr. ZhaodidnÕt getinvolved withsolvingdesignquestions orÞndingcomponents,concerninghimself onlywith theÞnishedproduct andÞnal price. Heinteracted largely with the main supplier, not the tiers of vendorsunderneath, and maintained a lean operation.To move production to Vietnam, he said he would have to develop a cross-border supply chain from scratch, identify factories in China for parts theVietnamese canÕt make and negotiate quality standards, compatibility andprices. He didnÕt have the manpower or budget for that, he said.Aerial view of a factory complex in Binh Duong Province.
1/20/20, 4(00 PMManufacturers Want to Quit China for Vietnam. Theyʼre Finding It Impossible. – WSJPage 7 of 7https://www.wsj.com/articles/for-manufacturers-in-china-breaking-up-is-hard-to-do-11566397989Copyright ? 2020 Dow Jones & Company, Inc. All Rights ReservedThis copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visithttps://www.djreprints.com.Still, he is thinking about brokering a partnership so that major Chineseparts can be encased in Vietnam-made plastic covers and assembled in aVietnamese factory. He worries though that if something goes wrong, hisChinese and Vietnamese vendors will each blame the other.ÒItÕs risky,Ó he said. ÒIt may not work, and the costs may be too high.ÓÑLe Giang Lam in Hanoi and Eli Binder in Singapore contributed to thisarticle.Write to Niharika Mandhana at [email protected]

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