While there is no one-size-fits-all solution for addressing cost concerns while building agility and resiliency, there are several shared priorities. And, a recent study from AlixPartners shows that close to 94% of respondents are seeing more nearshoring; vying away from becoming source dependent on China.
“Reducing China exposure remains highly important, but this priority is increasingly shaped by a need to improve cost and deliver long-term solutions to supply constraints. This requires a broad view that seeks to optimize the entire value chain spanning inbound to outbound logistics while applying scrutiny of procurement, manufacturing, and distribution tactics and strategies. Companies will need to enhance global supply visibility, cost forecasting, and risk modeling, as well as harness generative AI simulation capabilities,” according to AlixPartners.
Key takeaways:
- It is no longer a given that China is the lowest-cost source as Mexico and Eastern Europe are often equally or even more cost-competitive. While Serbia or Bulgaria, for example, are 10-20% cheaper on direct manufacturing labor, Romania is offering similar wage ranges as China. Poland and Hungary are ~30% more expensive on unskilled labor, but offer competitive wages for skilled and managerial employees compared to China.
- Customs and duties – especially related to China imports – are on the rise.
- Working capital costs are increasing amid high interest rates.
- Costs related to the forthcoming energy transition, including taxes, are increasingly considered.
- Expenses related to production halts and other kinks make nearshoring attractive.
- As automation increases, labor arbitrage is becoming less relevant in highly automated production – the required labor resources and the share of labor in overall costs declines.
- Nearly all respondents—55% of whom work for companies reporting at least $5 billion in sales—have developed actions to reduce dependency on China. Roughly a quarter have already reduced exposure by 10%; an additional one-third of respondents will hit that threshold within the next year. Companies are targeting an overall 35% reduction in China's sourcing share—India, Eastern Europe, and Vietnam are among the supply bases that could benefit the most as a result.
