News Analysis
The manufacturing supply chain shifts out of China, which commenced during the U.S.-China trade war, is gaining critical mass amid the coronavirus crisis.
Later this year, U.S. consumers will begin to see Microsoft Surface laptops and Google Pixel smartphones labeled “Made in Vietnam.”
Despite calls by Beijing leadership to restart factories quickly, many production facilities are still lacking upstream supplies or workers as migrants are largely still quarantined due to the coronavirus outbreak. This supply chain constraint is one reason the Dow Jones Industry Average slumped 3,600 points last week, the worst weekly drop since the 2008 financial crisis.
Concurrently, companies are accelerating their efforts to move manufacturing capacity away from China, which has gained increasing urgency since the coronavirus outbreak.
Microsoft will start production of its PC hardware, such as Surface laptops and tablets, in Vietnam as soon as the second quarter, sources with knowledge of the matter told Nikkei Asian Review. “The volume in Vietnam would be small at the beginning, but the output will pick up and this is the direction that Microsoft wants,” sources told Nikkei.
Alphabet Inc. is also set to manufacture the Google Pixel 4A and Pixel 5 smartphones with partners in Vietnam “as soon as April.” The company is shifting production of smart home devices such as the Google Nest Mini from China to Thailand.
Apple is also shifting some production capabilities out of China. Assembly or a portion of its new iPad Pros, AirPods, and Apple Watch will shift from China to Taiwan, according to Taiwan News. Apple is widely expected to launch a new iteration of the iPad Pro in March, and the supply constraints from lowered China production and a partial shift to Taiwan will lower the initial supply of the popular tablet.
Coronavirus Latest Catalyst for Shift
Previously, the hardware manufacturing capacity of all three tech companies rested almost entirely within China, underscoring the huge dependency of U.S. companies on Chinese manufacturing.
But the January coronavirus outbreak became the latest catalyst in an accelerating shift of production out of China, a trend which began two years ago during the U.S.-China trade war.
Back in July 2018, The Epoch Times wrote that Vietnam would be the biggest beneficiary of the manufacturing shift. President Trump in August 2019 also urged U.S. businesses to diversify out of China.
“Something like 90 percent of all footwear under $100 at retail are coming out of China. And we all need to diversify that strategy,” Terry Ludgren, CEO of department store giant Macy’s from 2003-2017, told CNBC on Feb. 26.
Companies operating on the lower end of the value chain—such as apparel and toys—are slightly ahead in shifting production out of China. That was more of a cost consideration, as tariffs enacted two years ago by the Trump Administration and the uncertainty of increased tariffs, made production in China less cost-effective to continue. It’s also much easier to shift production of low-tech items, which don’t require as much technical expertise, than computer components, for example.
A Years-Long Process
Chinese factories unable to fulfill procurement contracts have been increasingly invoking the “force majeure” clauses, which under most legal contracts are deemed to be outside the control of the suppliers and thus they’re not required to pay penalties for breach of contract.
As of Feb. 17, the China Council for the Promotion of International Trade has issued more than 1,600 such “force majeure” certificates to companies covering a total contract value of 110 billion yuan ($16 billion), according to Chinese state-controlled media Xinhua.
Despite the impact on supply chains, there’s a practical limit as to how quickly companies can shift production abroad and it will be a years-long process.
There are capacity constraints for countries such as Vietnam and Thailand, and costs are increasing due to demand. Smaller companies will find it harder to get a foothold in Vietnam today. “If you do not use a sourcing agent with really good factory contacts in these countries you will likely find it difficult to impossible to find a factory willing to take on your product manufacturing,” according to the China Law Blog.
Another constraint is existing infrastructure. China became the manufacturing hub it is today due to a decade-long buildup of infrastructure—highways, rail network, and ports—that don’t always exist in other emerging markets.
