For global companies, China’s skilled labor force, extensive supplier ecosystem, and fast-growing domestic markets have long acted as a magnet for manufacturers. As a result, complex, tightly integrated supply networks now link China with the rest of the world.
But now, some of those companies are asking themselves whether the attractions that made so much strategic sense over the past twenty years still do—and what might come next. The economic and operational impact of the COVID-19 pandemic, for example, highlighted the risks inherent in manufacturing networks that rely on long-distance supply chains and geographic concentration of key suppliers.
The global economic landscape is also changing, as many governments seek to preserve and develop their own countries' manufacturing capabilities, complicating global sourcing strategies. Rising tariffs, constraints on technology transfer, and financial incentives (often concentrated in sectors deemed strategically important) only add to existing pressures.
Meanwhile, in the eyes of Chinese consumers, strong local competitors have eclipsed certain once-powerful Western brands, making China a tougher market for multinational players. Those trends are also intensifying competition for top manufacturing talent in the country.
Time to revisit?
In the face of these shifts, foreign multinationals are reassessing the role China plays in their supply chains. Almost every multinational will likely need to make strategic decisions about its manufacturing footprint over the coming years. The critical question: How can China best fit with our sourcing strategy?
For many companies, answering that question will mean reevaluating their entire global production network. Five key criteria provide an objective means for assessing the suitability of any location for manufacturing operations:
- Intellectual property (IP). Does the location offer the necessary technologies, R&D capabilities, and manufacturing knowhow to produce the goods?
- Resource availability. How available are skilled labor, robust infrastructure, and a suitable upstream supply base?
- Cost efficiency. How do capital, operating, and logistics costs compare with alternative locations?
- Market adjacency. Can products be delivered quickly and cheaply enough to meet market demand?
- Regulatory requirements. Do goods produced in the location face tariffs or other restrictions in their intended markets?
The significance and impact of these criteria are different for every sector and every organization. As a result, multinationals have evolved four basic archetypes for manufacturing in China (exhibit).
The road to resilience
Taking a fresh look at manufacturing networks means assessing how each criterion has changed in recent years—and how it is likely to evolve in the future. That involves significant uncertainty, but there are strategies that could help each of today's manufacturing archetypes become more robust and competitive under a wider range of scenarios.
Companies that produce in China for China (archetype 1), for example, can increase the breadth and depth of their local supply chains. That would mitigate supplier concentration risks, and also allow multinationals to benefit from the capabilities of competent and cost-effective emerging players. Similarly, companies with customers but no production in China (archetype 2) could explore the localization of some manufacturing. This could give them cost and agility advantages, while providing a degree of insulation from future regulatory shifts or logistics challenges.
Companies that produce goods in China for the rest of the world (archetype 3) may want to explore diversification. “China+N” strategies can involve the sourcing of new suppliers in other regions, or working with existing Chinese suppliers to develop additional manufacturing capacity in overseas locations. Either way, this strategy mitigates a range of risks, including uncertainty about regulations, tariffs, and the impact of supply chain disruptions due to natural disasters.
Finally, companies with little to no presence in China (archetype 4) may want to consider whether the market is really as impenetrable as they think. Setting up a new, China-specific business or brand, designed to serve Chinese customers while being fed by regionalized supply chains, could prove more viable in both economic and regulatory terms.
For each of these approaches, decisions about manufacturing location are about much more than just “China or not.” Determining the best place to produce depends not only on the five criteria outlined above, but also on how well each location integrates into an organization’s wider manufacturing and supply networks. That calls for careful analysis against a range of performance measures, including cost, risk, and alignment with the organization’s environmental, social, and governance goals.