The U.S.-China trade war is causing irreversible damage. It's creating new business opportunities, too.
One such opportunity is for small and medium-sized enterprises (SMEs) to move their production facilities to an alternative country, which offers lower production costs than China.
Tariffs imposed by the U.S. on Chinese goods apply to all competitors in a given category of business. This means that companies, regardless of their size or infrastructure, have to face the same expense. Unlike the industrial giants, however, SMEs can be flexible in sourcing new suppliers in emerging countries, such as Vietnam, Cambodia and Myanmar.
By contrast, a bureaucratic environment and lengthy decision-making process are hurdles for large organizations seeking to move investments out of a country. That leaves the playing field relatively open for SMEs.
SMEs might have to step out of their comfort zone when investing in an alternative country, but the payoff is simply too high to ignore. Take U.S. imports of PU (synthetic leather) bags, where a firm can save up to 25 percent on tariffs if it switches suppliers from China to Myanmar.
You might be surprised to learn that Myanmar’s production costs are lower than those of China. In total, an SME can save between 50 and 60 percent in production costs, giving it a considerable price advantage over large companies that lack the flexibility of switching to alternative sourcing.
Between 2018 and 2019, we’ve seen a sharp rise in quality inspections in Asian countries other than China. Order variations range from 7.8 percent in Pakistan to 120 percent in Myanmar. This positive trend in inspections of other regional players is a clear sign of the fact that investors are moving their investments to countries that offer lower production costs than China.
Though the opportunity to invest in new countries might seem lucrative for SMEs, it does come with its fair share of challenges. They include:
Establishing new supply-chain routes. Since most emerging countries lack the raw materials that are required for production, they must be imported from China or other developed countries. Rerouting the supply chain is a time-consuming process that involves multiple potential obstacles, including meeting local regulatory requirements and higher shipment costs.
Experiencing longer lead times. The establishment of new supply-chain routes will likely lengthen order lead times. Though this challenge will exist during the teething phase of the investment, it can be smoothed out with time when the proper flow of goods is established.
Dealing with different cultures. Each country has its own procedures, regulations and business culture. As such, SMEs need to evaluate each scenario individually and accurately. This can be a particular challenge in the case of differing custom requirements. Companies might need to work with a third-party inspection company or local agency in order to avoid violating local regulations.
Overcoming quality inspection issues. SMEs experiencing a change of suppliers need to ensure the continuing quality of their products. One solution is to hire a professional inspection agency, which can enable a seamless transition from one supplier to another. Such an entity can help to prevent shipment rejections, resolve quality issues during production, eliminate costs due to rework, avoid violations of local regulations, and protect brand image.
With these considerations in mind, SMEs stand to benefit greatly from the shift in sourcing caused by growing trade friction between China and the U.S.
Mohamed Afilal is founder and CEO of Tetra Inspection.