Beyond China: US manufacturers are sizing up new and cost-efficient global footprints

Mexico and Southeast Asia should stand to benefit from shifting global supply chains

Manufacturers are taking a hard look at making changes to future-proof their businesses. Yet, with so many unknown variables surrounding the economic downturn and the trajectory of the COVID-19 pandemic, most manufacturers seem to be merely forging plans, not executing on them. While manufacturers have had to reassess supply chains in the past to build in resiliency, this global pandemic presents unprecedented challenges and uncertainty.

Key findings:

Shifting from China could yield double-digit savings

US manufacturers could cut operating costs by an average of 23% by moving production from China to Mexico and by 24% if shifting to another Asian low cost country (LCC).

Mexico is an attractive dual sourcing option

Dual sourcing scenarios (e.g., China + Mexico or Another Asia LCC + Mexico) could yield savings of 5-20% vs. sourcing and/or producing only in China.

Other Asian countries pose alternatives to China

80% of manufactured imports from China could capture cost efficiencies if produced in other Asian LCCs.

US CFOs are looking to reassess global footprint

A PwC survey found 47% of CFOs across industries agreed developing additional, alternate sourcing options was a pressing issue during the COVID-19 pandemic.

A PwC comparative analysis (of US, Mexico, China and other Asian LCCs) suggests other more attractive supply-chain options for fulfillment outside of China are now on the table. This is based on numerous factors, including landed cost, risk and fulfillment lead times. Our study estimates that US manufacturers who choose to shift production from China could cut operating costs, on average, by an additional 23% if they near-shored to Mexico, and by 24% if they shifted to another Asian low cost country (LCC). We believe these and other alternatives could—on top of these cost savings—also add resiliency and improve customer experience.

Other viable and competitive LCCs, particularly in southeast Asia, have significantly improved their supplier bases and manufacturing labor forces, making them a more attractive option than just three years ago. And, particularly for North American manufacturers, Mexico is increasingly poised as an attractive option to China, especially for US market sales, given that the USMCA went into effect on July 1, 2020.

The beginnings of a global supply-chain pivot?

The COVID-19 pandemic is casting in stark relief vulnerabilities of global footprints that have been developing for several years. For US manufacturers of all stripes and sizes, lowering costs has been the principal motivation for offshoring. For many, that has meant entrenched single-sourcing from China, due to its historical advantages for cost and scale.

A 2020 PwC survey found that, 16% of US companies operating in China were already planning to adjust production and/or supply either domestically within China and partially outside of China—or completely out of China.[1] Of course, companies that rebalance to other regions will likely do so gradually, given the CapEx requirements and the development of other key requirements including a mature supplier network, logistics, and workforce upskilling.

_{[1] AmCham China and PwC China survey conducted during March 6-13, 2020}

Some questions to consider as you reassess your global footprint

Below are some questions manufacturers might consider as they mull a realignment of supply chains. As they suggest, reassessing your global—and even domestic—sourcing and production requires complex and forward-looking analysis, and strategic thinking about how your business can operate in the right place at the right time in both short- and long-term scenarios.

Where are your customer markets today, and do you have a vision as to where they will be in the medium- to long-term future (3-5 years)?
How are your customers’ needs changing?
Can you gain a competitive advantage with customers through greater resiliency by providing improved customer responsiveness and customer experience?
What new technologies can be leveraged to reduce manufacturing costs and improve customer experience?

Beyond cost savings, what are the highest supply-chain priorities that support your company’s growth and competitive strategy in the next 3-5 years?
If you are considering a change to your global supply-chain footprint, are you doing so to move manufacturing capacity--or to add to existing capacity?
What level of capital investment is financially feasible for your company to shift to a new territory?

What geographic regions have an existing supply base for your required raw materials and/or components, particularly Tier-2 and Tier-3 suppliers?
Is your business prepared to develop a supplier ecosystem in a new locale to meet your needs?
Have you explored a comparative analysis of developing a new supply base in alternative regions?
Have you generated scenario planning that estimates increased operational savings surrounding any given move to an alternative territory?
How long will a first-mover advantage last in your industry?
What potential scenarios do you envision for changes in labor rates, duties, corporate taxes and foreign exchange rates?

See how they compare: Mexico & Southeast Asian manufacturing destinations

^{Source: World Bank, Government statistics, Trading Economics, PwC analysis}

See how they compare: Mexico & Southeast Asian industry readiness

^{Source: IBIS World, Government agencies, International Labor Organization, United Nations Industrial Development Organization, Global Business Guide, Mordor Intelligence, Fitch Solutions, Textile Infomedia, PwC analysis}

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Brett Cayot

Principal, PwC US

Kevin Keegan

Principal, PwC US

Marc Waco

Operations Innovation Leader, PwC US

Mark Hermans

Managing Director, PwC US

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