As U.S. tariffs and rising geopolitical concerns prompt manufacturers to reassess global supply chains, Southeast Asia is emerging as a viable alternative. Read on to explore your options and find the right location for your company.
Over the past 20 years, China has become a favored global manufacturing hub with its vast labor market, low production costs, established infrastructure, and favorable government incentives. But in recent years, geopolitical risk, shifting trade policies, and supply chain disruption have altered the equation. Today, company priorities are moving from low cost to low risk.
Tariffs and geopolitical concerns
Several factors are responsible for the shift in outlook. First, high tariffs in the United States on Chinese-produced goods are driving more companies to relocate manufacturing and sourcing centers away from China. Tariffs on Chinese-manufactured products are currently at 25% and tariffs on a new range of products took effect in September 2024. Some expect the problem to get worse with both leading candidates in the U.S. presidential election signaling a willingness to keep or even increase the tariffs. In addition, CHIPS Act restrictions and U.S. export controls are creating hurdles for Chinese manufacturers in the semiconductor and high-tech industries.
High tariffs in the United States on Chinese-produced goods are driving more companies to relocate manufacturing and sourcing centers away from China.
These aren’t the only problems manufacturers are facing. Rising geopolitical concerns — for example, the tensions between China and Taiwan — are leading some manufacturers to relocate to more stable regions with countries that have solid relationships with the United States. In some cases, such as automotive suppliers, OEMs are actively requiring their suppliers to move production out of China.
What are the alternatives to China?
Companies looking to mitigate supply chain risk are considering a range of choices in Southeast Asia, North America, and Eastern Europe. Countries in Southeast Asia, including Singapore, Thailand, Vietnam, Malaysia, Indonesia, and the Philippines — part of the Association of Southeast Asian Nations (ASEAN) group of countries — are well positioned to benefit from this shifting trend. They’re moving quickly to attract business and foreign investment in key industry sectors.
The Association of Southeast Asian Nations (ASEAN) group of countries — are well positioned to benefit from this shifting trend.
Advantages to locating operations in Southeast Asia
There are several advantages to considering Southeast Asia as an alternative to some or all of your Chinese operations.
Favorable trade status with the United States: ASEAN countries that are in compliance with the U.S. rules of origin aren’t subject to the 25% U.S. tariff that’s currently imposed on Chinese products.
Growing population and economy: The ASEAN countries are home to over 600 million people, ranking the third-largest labor force behind India and China. The region is expected to become the world’s fourth-largest economy by 2030. ASEAN countries are seeing a rapid growth of the middle-class population and a rising consumer market, with high demand for automobile and electronics products as well as recreation, healthcare, and educational services.
Competitive labor costs: Countries such as Thailand and Vietnam can offer lower labor costs and sufficient labor resources compared to China, making them attractive for manufacturing operations that rely on labor-intensive processes.
Strategic location: Southeast Asia’s proximity to major global shipping routes and its strategic location between key markets in Asia, Europe, and North America make it an ideal option for supply chain diversification.
Regional trade agreements: The Regional Comprehensive Economic Partnership (RCEP) and other trade agreements in Southeast Asia provide multinational enterprises with easier market access and reduced tariffs, enhancing the region’s attractiveness as a manufacturing and sourcing hub.
Political stability and foreign investment policies: Most Southeast Asian nations offer a stable political environment with policies that are conducive to foreign investment, including tax incentives, streamlined business registration processes, and investment protection agreements.
Challenges to manufacturing in Southeast Asia
While relocating manufacturing operations to Southeast Asia offers many benefits, it also comes with some challenges to consider and prepare for.
Key materials dependency: Many Southeast Asian countries still rely heavily on imports of raw materials and key components from China and other countries. Leveraging the supply chain from China can be a plus in some cases, but in others it could be a negative if it exposes you to U.S. tariffs. Relocating operations can also increase the risk of supply chain and logistics disruptions for certain industries.
Infrastructure readiness: There are still underdeveloped areas in some of these countries, with limited infrastructure to satisfy the production and operation demand. Companies may face challenges relating to initial facility construction, utility supply stability, transportation, warehousing, and logistics.
Regulatory and compliance issues: Navigating the regulatory landscape can be complex, as the local rules and regulations may vary greatly and be subject to constant changes.
Skilled and educated labor shortages: Although labor costs are generally lower in Southeast Asia, there’s a shortage of educated and skilled workers in certain industries, especially in the areas of electric vehicles (EVs), batteries, and high-precision components production. Companies may need to invest in training and development to build a capable workforce.
Cultural and language barriers: Understanding and adapting to local cultures and languages is essential for smooth operations. The diverse and complex local cultures, dialects, and traditions can increase the difficulty in people management and business activities.
Choosing the location that’s right for you
Site selection in Southeast Asia encompasses cost and logistics considerations and extends to a variety of additional factors depending on your industry and customers.
Existing infrastructure: What foundation already exists for your industry? This could include business infrastructure, policies, incentives, and developed supply chains. From an operational perspective, which location is easiest to stand up? For example, if you’re in the auto industry, Thailand has a strong infrastructure. If you’re a chip manufacturer, Singapore is a major hub. Do you have an existing partner who may be able to help you set up an operation in a nearby country?
Customer location: Where are your customers located? Are they close to a location you’re considering? For example, if you’re an automotive supplier, Thailand is a strong contender because the Japanese, American, and European OEMs are already established there. Thailand has a good foundation for the automotive industry, including attractive policies, a skilled workforce, materials accessibility, a developed supply chain, and a robust logistics network. Thailand has issued tax exemption incentives to reward and retain long-term active investors. There are also local government cash rewards and tax exemption incentive packages to reward relocation projects that set up manufacturing facilities, R&D centers, and regional headquarters. In recent years, the Thai government has introduced several policies to support the growth of the automotive sector, especially to promote the new energy vehicles sector.
In 2017, Thailand’s Board of Investment announced the Electric Vehicle and Hybrid Incentive Program, offering various tax incentives and subsidies for companies involved in the production of EVs and hybrid vehicles.
Thailand’s 30@30 policy aims to transition 30% of its auto production to zero-emission vehicles by 2030. To promote the policy, there are subsidies and tax exemptions for EV purchases, charging infrastructure production, and EV components import tariff reductions/exemptions.
Customer requirements: Do your customers have a requirement or preference in location? Is it likely to change in the future? For example, if you’re an automotive supplier, your OEM customers are currently transitioning their supply operations out of China. You may need to follow your customers’ requirements and decisions on the choice of locations, whether in Southeast Asia or North America.
Cost competitiveness: What region is the most cost-competitive? If you’re a Chinese company serving the U.S. market, you may be finding it difficult to generate profits from China because of the tariffs. Options include setting up manufacturing in Mexico or in the United States, but they may not be cost-competitive. In those cases, an ASEAN country may be the best choice.
Cultural fit: If your operations are based in China, moving to Thailand or another ASEAN country may be easier because of the business environment: the language and culture are more familiar than in North America, and the proximity and time zone differences are more favorable.
At the end of the day, you’ll have to compare and contrast the options and evaluate them based on your industry, customers, and cost structure. There are many trade-offs to consider. If you’re in the auto industry, one set of options may apply. If you’re in another industry, the factors to consider are similar, but the weight and the importance of those variables will be different.
You’ll have to compare and contrast the options and evaluate them based on your industry, customers, and cost structure.
If you’re locating in Southeast Asia, get help
If you’re considering a move out of China to a Southeast Asia location, get help navigating the alternatives. Professional guidance is necessary to get the insights you need on local regulatory and compliance requirements and supply chain resources readiness. Your consultant should have a methodology and approach to evaluating options for a variety of industries and service offerings that include a market entry and compliance analysis and assistance with local regulatory requirements, tax implications, legal entity setup procedures, and a timeline for incorporation. Established relationships in the target region are a must. Your consultant should also be able to help with supplier search and assessment, coordination of on-site meetings, contract terms negotiation, sample ordering, international logistics support, etc.
The bottom line
In the emerging China trade and geopolitical environment, you need to be agile and ready to move quickly. If you’re planning to relocate a part or all of your supply chain to Southeast Asia, it’s important to consider the opportunities and challenges well in advance and understand what they mean to your operations. Whether you’re tapping into a new consumer market, exploring new manufacturing opportunities, or evaluating potential suppliers or trading partners in the local market, local knowledge and assistance are critical to your success.
