The events of the last several years – including escalating tariffs on trade between the United States and China, the COVID-19 pandemic and a global shipping container shortage – have caused many companies to reevaluate their supply chains.
While many North American and European companies continue to prioritize manufacturing in China to serve the Chinese market and the “China-influenced world” (a solid strategy which we make the case for in our latest whitepaper), these same companies need to evaluate whether having manufacturing capacity in another low-cost country might be needed to reduce risks associated with exporting to North America and European markets and supporting global supply chains.
This is sometimes referred to as a “China Plus One” strategy. Which country, then, makes the most sense as the “plus one” option for a second manufacturing base?
While the “reshoring” efforts of bringing factories back to the US have been much talked about in the media, we have yet to see it materialize in practice. According to surveys done by the American Chamber of Commerce in China and the European Chamber of Commerce in China, 83% and 91% respectively of their member companies are not considering shifting their current or planned investments and manufacturing to outside of China.
Of those that are moving operations, however, they are not looking to move back to the headquarters country. Instead of relocating to the US or Europe, we are seeing many companies relocating to other Asian nations, like the Philippines, Thailand and Vietnam. These nations offer the benefits of low import duties into both China and the US, and as of now, are on good terms with both nations.
The recent signing of the 15-nation Regional Comprehensive Economic Partnership (RCEP) will continue the “Asia for Asia” trend. The reduction of tariffs and easing of regulations will make manufacturing in one Asian country for other Asian markets an attractive option that all companies should consider.
Reasons for establishing a manufacturing base within Asia but outside of China include:
· Protect sensitive intellectual property
· Sensitivity to unpredictable swings in China-USA relations
· Minimize the impact of the 25% tariffs on import of Chinese goods to the USA
· Maintain low cost of manufacturing with low cost of labor, utilities
· Close to China for sourcing
· Close to compatible supply chain
· Access to the China domestic market
· Access to other Asia domestic markets
PRI, with its longtime presence in Asia, has identified the Philippines as a top candidate for its own operations and for that of its clients.
First, the Philippines is a relatively stable country with a growing economy – and room to grow further, especially in the manufacturing sector. The Philippines GDP growth in 2019 (growth statistics for 2020 amidst the COVID-19 pandemic are not a great indicator of long-term trends) was 6.1% according to the World Bank, well above the 4.0% and 3.6% posted for the larger regions of South Asia and East Asia respectively.
The Philippines large population of around 110 million people is young and educated with a median age of just over 25. The Philippines placed 13th in the world in the World Bank’s recent ranking of nations according to “ease of finding skilled employees” – narrowly behind Malaysia but well ahead all of the other regional competitors.
The cultural and linguistic links between the West and the Philippines are another advantage. According to a global ranking done by the English education company Education First, the Philippines has the second-best English skills in Asia – outdone only by former British colony Singapore.
The ranking places the Philippines 27th in the world with a rating of “High” English skills – above regional competitors Malaysia (Moderate, 30th), China (Moderate, 38th), Vietnam (Low, 65th), Indonesia (Low, 74th), Cambodia (Very Low, 84th) and Thailand (Very Low, 89th). It’s also well above Mexico, another popular destination for new manufacturing operations, which has a “Very Low” rating and places 82nd in the world.
Finally, the Philippines natural geography and abundance of access to global shipping routes provides options in case of a future crisis that could restrict access for countries to the world’s supply chains. To date, the country’s management of COVID-19 has not seen widespread port closures and resulting bottlenecks as have occurred in China and Vietnam – a huge positive for businesses operating in the country.
In determining the best location for a relocated or additional manufacturing location, the micro-climate of the specific locality is often as, or more important than, the macro-environment of the nation as a whole. This has been PRI’s experience in partnering with a long-term, successful business on the ground in the Philippines that can navigate local issues and has a reputation for being “above board” in all it does with no tolerance for corruption.
No tolerance for corruption is an important point as one key factor for a company’s investment decision should be the potential risks related to corruption. According to Transparency International, the regional average for Asia Pacific for “percentage of people who think corruption in government is a big problem” is 74%. The Philippines is at 86%, above China (62%) and Malaysia (72%) but below Indonesia (92%) and Thailand (88%).
There are positive signs for the Philippines – it ranks third out of 17 nations surveyed in the region with 85% saying the government is doing well in tackling corruption, well ahead of the regional average of 61%. Only 24% of Filipinos surveyed said corruption was on the rise in the previous 12 months in their country, again much better than the regional average of 38%.
Identifying a partner on the ground with a track record of not participating in corrupt activities is the most important factor here – something that PRI has done in the Philippines.
PRI’s planned Philippines operation is located in Mariveles at the southern tip of the Bataan Peninsula, just across the Manilla Bay from Manilla itself. The urban area is home to nearly 24 million people, making it the fourth largest urban area in the world behind Tokyo, Delhi and Jakarta.
The land is part of a larger, gated and secure facility operated by PRI’s partner – a key contributor to providing security for intellectual property as well as for safe daily operations.
In addition to PRI’s own manufacturing, there are possibilities for other companies to “piggyback” on PRI’s future factory on this site with their own manufacturing operations.
Photos of site selected for PRI's future operation in the Philippines.
With supply chain resiliency at the top of many companies’ to-do list, engaging an experienced partner that can navigate with you through scenario planning and evaluating options for relocation and expansion is a must.
PRI’s recent experience includes in-depth and relevant studies that help understand future strategic options and “what-if” scenarios. For example, one company needed to show, as part of a due diligence study, that it had a manufacturing plant located outside of China available for startup within a year if a crisis were to unfold. PRI conducted an extensive review of options throughout Southeast Asia for an ideal location with quality infrastructure, favorable investment policies and a low cost of labor.
In a world where “strategic decoupling” is being talked about at least as much as globalization, , having manufacturing capabilities in both China to serve the China market as well as in another country with zero or low tariffs to the US and Europe helps to minimize risk and boost supply chain flexibility and resiliency.
About PRI: PRI Management and Consulting helps companies thrive in China because we think like owners. With offices in each of China’s major economic super-regions, we help you develop growth strategies, hire and administer some of the world's best engineering talent, build your supply chains and sell your products and services to the world's fastest growing and biggest market.
To schedule your free consultation with PRI’s experienced team of consultants and managers, write to Jonathan Kendrick at jonathan.kendrick@priusa.com
To download our latest whitepaper “Six Critical Steps for China Success in 2021: What Mid-Sized US Companies Must Do Now to Thrive in the World’s Fastest Growing Large Market” and subscribe to our monthly newsletter, visit: https://www.pri-usa.com/six-critical-steps-for-china-success-in-2021