Why Manufacturers Need to Get Out of China Now: Strategic Insights from Align Manufacturing

Casey: Hi everyone, I'm Casey Ross, Partner at Align Manufacturing. I'm here today with Benjamin Unruh, Partner at Align Manufacturing, and Alex Chiu, Deputy General Manager at Maesot Heavy Industries, to discuss the critical shifts in global manufacturing landscapes and the strategic importance of relocating production from China to more favorable markets in Southeast and South Asia. Ben, Alex, thank you for joining us here on this podcast. Alex, why don't you introduce yourself? You have a very interesting background. So please, tell us about your background and also a little bit about your business.

Alex: Hi. Thank you, Casey and Ben for having me in this podcast. My name is Alex. I'm from Maesot Heavy Industries. Um, we are actually a family owned business. We predominantly do foundry and sand casting, furan resin, green sand and shell molding. I actually graduated from the US with a bachelors in mechanical engineering. We have been in Thailand for a bit more than I would say 8 to 9 years. Yeah. And, we work with many different companies, including foreign like North American companies, Japanese companies, and of course the local Thai industries. Right.

Casey: And I think you actually, you have a really interesting background because being Taiwanese and living in Thailand, owning a factory here gives you a very interesting perspective on what we were going to discuss in this podcast. So yeah, thank you for joining us. So, let's let's dive into it. What is driving the necessity for OEMs to get out of China, or at least have a China plus one?

Ben: Yeah, I mean, the the big one on everyone's mind in our industry is, of course, the tariffs, the duty, the 301 tariffs, which were started under the Trump administration and continued under Biden. It's kind of been a progressive tax on imports from China that started off small and a little bit negligible and have scaled up. And so, you know, every business, every importer is and should be concerned with their bottom line. And, you know, these punitive tariffs that were put in place by the Customs and Border Protection, they wanted to, they're enacted to encourage American businesses to divest from China and seek alternatives. So, you know, that's probably the main driver. But there are some other points as well.

Casey: Sure. And Alex, how have you seen the tariffs impact your business?

Alex: For me as a manufacturer, I would say it's a positive impact for me. We have many customers originally ordering from China due to the tariffs, the cost constraints and they are slowly starting to order from us, a non-Chinese source. So, like for business wise, it's actually a good thing for me. Yeah.

Ben: And yeah, I mean, I would just say, you know, the cost is one thing and that's, you know, first and foremost on everyone's mind. But there's other factors as well. And large companies, like Apple and Sony and multinationals all over the world that, you know, saw this and in kind of earnest and started divesting from China to alternative markets like here in Thailand or Vietnam, you know, more than a decade ago. But now it's kind of small and medium enterprises are making the switch and experiencing, you know, some growing pains associated with that. But, you know, ultimately, it's important for importers to be able to have free access to their goods, and things like increasing authoritarianism in China, clamp down on Western businesses, and just general saber rattling on the geopolitical stage all present pretty large risks to importers who are solely reliant on Chinese manufacturers for their imports.

Casey: I think you bring up a really good point because, you know, like you said, like 10, 15 years ago, these large companies like Panasonic and Samsung, I mean, they started moving their manufacturing a long time ago even before the tariffs, because, you know, I think they saw something coming. And it's true, like a lot of these SME companies,  they're now making the jump and they're experiencing a lot of pains, you know, moving their supply chains. So I mean, with your business, is your factory capacity filling up quite quickly?

Alex: Yeah, we actually especially before Covid but especially after Covid, I think people seeing the situation in China. We constantly get more orders each year from like from compared to last year. We also our sales volume increased mostly from the redirected orders.

Casey: So, you know, I would like to talk about maybe the differences between the three countries that we actually work in. So we work in India, Thailand, and Vietnam. And I think, you know, every country has its competitive advantages and its noncompetitive advantages. So, maybe let's talk about the differences between these countries. Let's start off, Ben, like what do you see out of India?

Ben: Yeah, India, you know, it's a huge manufacturing market. It's probably the number two for heavy industrial outside of China. So, India is relatively new as an import source for American companies, but they've been exporting to countries in Asia, particularly in the Middle East as well as Africa, for a long time as the primary supplier. You know, India has a lot of foundries, a lot of forges, there's multiple regions that are kind of manufacturing hubs. At a really high level, you can get great stuff out of India, and it's probably the most cost competitive option of the three. Where you really have to tread carefully is choosing the correct partner. And, there's a lot of incorrect partners out there where, you know, they may promise you that everything is going to be great and you might get your sample, and it just doesn't always work out that way. And so, you know, a lot of what we do behind the scenes when we're not in a studio like this is we're in country. I've been to India four times this year. And we're driving around and we're visiting foundries. We're checking up on our existing projects and always looking for, you know, the next great supplier. And so, to try to just choose someone off of Google, it's a risky proposition. I would say you don't always have the best bet.

Casey: I would say in India, everyone says, yes, it can be done. And then after you sort of start digging down, you find out very quickly that they just say yes to everyone. Yeah. I think that's one of the biggest pitfalls that we see in India and also the infrastructure. You have to be very careful about picking a partner, not just for them, but also their location. You know, I'll give you just a quick example. We were auditing. We were going to an investment cast factory. And when we were going up the road, I noticed that it was dirt and also a lot of potholes. And India has a very strong monsoon season. So we were talking, we were like, well, how is a container going to get up this hill when it's the monsoon season? Because it's going to be muddy. So even like simple things like that, it's very important to know the factory, the layout and also the surroundings of the factory. So yeah.

Ben: Yeah. I think, you know, it's certainly helpful to have an advocate who has boots on the ground and does the hard part of weeding out the duds for you so that you can have confidence in placing your project in India and take advantage of all the, you know, advantages they have for low cost and high quality that certainly does exist.

Casey: What about Thailand?

Ben: Yeah. I mean, I think I'll pass this one over to Alex in a second because of course he has a factory here. Our experience in Thailand is that generally the communication is quite good. The level of English is certainly good, and the quality tends to be right at expectation. So, you know, it's more of a market where people do what they say and say what they do.

Casey: Good infrastructure.

Ben: Good infrastructure too. You know, some of the challenges are just benchmarking against those kind of target costs can be a bit of a challenge with, you know, a relatively higher GDP than surrounding markets. But, you know, it's a good place. I mean, Alex? Right.

Alex: For me, yeah, it's...our factory in Thailand, we rarely see power outages. So the infrastructure is pretty decent. And around the surrounding area, the roads, logistics is very convenient. You can have third party logistics and DHL like or just some like large FCO transporters like everything is in place, but there are some issues, for example, in some RFQ, right? Some parts might not just be casting like for casting, we can just use our like molding machines, and everything is in-house, but sometimes they are like forging parts or like a rubber parts. And then I have to go find suppliers in Thailand, right? And sometimes they kind of reply quite slowly, sometimes. Yeah. Or they don't really have to follow up from phone calls and maybe take some time. Eventually they will quote yes. But it takes some time in the requesting for the RFQ stage. Yeah. And the pricing sometimes is, sometimes our price, our casting parts, machining parts is in targets. It's right for right under the target price. Right. But the accessories, like the parts, stamping parts and a lot of different smaller parts that in the assembly with the casting. It's too high. Right. Yeah.

Casey: We've actually seen, it's kind of funny, like in India everyone says yes, but in Thailand it's very hard to get people to a lot of times to take a project because when they decide to quote and take a project, they do a very good job. But a lot of the times getting them to quote, they're very hesitant, a lot of Thai factories. Once they do it, they'll do it very well. But getting them to do it is sometimes tricky. Yeah. And I guess the third country. What about Vietnam? What do you see? Yeah.

Ben: Vietnam is definitely emerging. A lot of, you know, multinational companies are setting up factories there for both finished goods and industrial parts. In general, it kind of, I would characterize it as kind of being in the middle of the two countries we just described in terms of, you know, generally being a little cheaper than Thailand and generally being a little bit more transparent and communicative than India. Like we touched on earlier, you know, there's a little bit different offerings in terms of the manufacturing processes there. There's fewer heavy industry options like forging or casting. It's more injection molding or machining generally. There are some some larger old forges in the north that, you know, the other challenge with Vietnam is it is kind of still, you know, it's geographically it's a little bit of a challenge, because in Thailand you use kind of one central port no matter where anything is being manufactured. But in Vietnam, there's a main port in the north and a main port in the south, and so that can make things like consolidation tricky. It can also make things like subcontracting, you know, if your coating supplier is in the south, but your foundry's in the north, it's a lot of roadways to cover. And the infrastructure is not amazing for facilitating that yet. There's some changes in the works. High speed rail from the north to south of Vietnam, we're looking forward to. But yeah, it's a geographical challenge.

Casey: I think, we've talked to a lot of customers in the US and when they fail in Vietnam, it's a lot of the times, because they don't have a team there, because the English level in Vietnam is not so good. So it's really critical to have a good team in place there and a local team, a local Vietnamese team there to manage the factories. So yeah, we're we're lucky to have a good team in Vietnam to help us with that. Alex is actually one of our manufacturing partners, and we've worked with Alex on a few different projects. Ben, why don't you tell them about one of the projects we did and how we helped consolidate and save our customers some money? Yeah.

Ben: I mean, I think, it's the most recent project we did where we were producing parts that are ultimately used in machinery, and that machinery is specific for the braided hose industry. So we're supplying parts to a manufacturer in the United States who assembles those parts and turns them into a product that's then used all over the world. It's quite a precise product with a lot of challenging tolerances and engineering requirements. We worked with Alex and his company, Maesot Heavy to produce the parts and, you know, that's super helpful. Being that we're all locally based here, it's very easy for us to go on site to communicate in our own time zone, and to, you know, go up and inspect the goods, make sure that everything is according to the print and drawing requirements, and ultimately, we were able to help this particular client by consolidating with another foundry that they work with, with a different style investment casting foundry. And we were able to consolidate and save a lot of shipping costs. Shipping costs are are always kind of fluctuating, rising and falling. But, if you are able to consolidate it, you can create more frequent shipments that are more efficient. They just have take up. You can use the cubic meter allotment a lot better. So we were able to do that. And, that was extremely helpful for our customer because of the nature of their business, they produce a large mix of products at quite low volumes. And so it's important for them to support their just-in-time inventory to work with MOQs that make sense, and we were able to offer savings on logistics by consolidating with another process of casting.

Casey: What immediate actions should companies consider to avoid potential pitfalls in their relocation efforts?

Ben: Yeah, I would say, you know, choosing the right partner is critical. We have countless examples from our clients, horror stories where they've chosen the wrong partner, and, you know, depending on where you're going, it could be anything from like, you know, most of them are pretty good to it's a total crapshoot. And 99% of them are pretty bad. I think there's, Casey you and I have stories of being in India, to meet a prospective vendor that we felt really good about, and had been chatting with online for weeks. And, you know, we pull up to the shop and we know from the second we arrived that it's just not going to be a fit. And we, you know, we just tell our driver to put it in reverse and head on to the next meeting because, you know, it's tough to know who the right partner is. That's why we feel it's important to have the local presence. Go ahead.

Casey: Well, yeah, I was going to say, I think the reason Alex is a really good partner and we've seen this especially in Thailand. Some of these factories, they've been around for decades and some of the children are running the factories now. You know, their dad's given the reins and the children are not really hungry for business. So, Alex is great because, you know, you're very hands on. You know, you're at site, and, you know, when you're partnering with someone, it's really important to to partner with a factory owner that, you know, is hands on and and knows everything about, you know, their operation. Yeah.

Ben: That that ties straight into like, you know, we always talk about in the office about the three Ps. And, you know, the Ps are, they're 'Process', which is, you know, all of your manufacturing infrastructure, your documentation, your quality programing, which is super hyper critical. Then there's 'Price', which is important to every importer, and then but the last one is the 'People', and you need to have people who are flexible, who are willing to solve problems, to dig deep and investigate. Maybe it's not something they've done before, but, willing to study it and, you know, run a feasibility study, see if it's going to be possible, try to find potential solutions to be able to turn these concepts into cast goods or forgings or anything like that. And I think, the three Ps, the 'People' is really important. All three of those are very important. But the people is one you definitely can't miss. Yeah.

Casey: And like going into like, you know people it's hyper critical like especially you know, communication is of the utmost, you know, importance and you know, just being able to, you know, just work always on WhatsApp with, you know, all of our partners, you know, seeing what's going on, you know, send us a picture or we have to go, you know. So yeah, having a good personnel at the factory is very important. Like Alex, when you're working with companies like ours. What do you see as important to partner with a company such as ours? Right.

Alex: For us, the number one quality that we hope that we can get from our customer or partner would be like be very clear on the specification from the start. Because, like from day one, it would be the RFQ. Right. Very first step, RFQ.

Casey: And what needs to go into the RFQ to make it clear? Right.

Alex: So in the RFQ we need the drawing, the material, the manufacturing process. What kind of QC standards are we talking at. Because that will all affect the price. And some customers, they are either unsure or they don't have the right person on this as the coordinator. So it's kind of frustrating for us. Like, okay, so what kind of quality are we talking about? What kind of process are we talking about? Because we have to write the code with our company name on it at the end of the day. So it's really great working with Align Manufacturing too, like from the emails and the information and the communication is very clear that we know from there what we are working with. If Align Manufacturing, if you guys did not get the information from the customer, we immediately get the feedback. Usually Align will contact the customer and get us that feedback and have been really, really helpful.

Casey: Yeah, I think like, what we found is like, you know, working with, you know, factories and guys like you is like it evolves into more of a like we're on the same team. You know, we all have the same goal. So it's  important having that clarity. Yeah, so I mean you know we always try to stress to the OEMs or customers in America, don't wait until November for the election. Like, let's like you should start now. You know, like, let's get going. Why is that these OEMs need to move quickly?

Ben: Yeah. I mean, I can understand why people would want to wait and see. This election it involves importers more drastically than probably any other election in history that I can think of. And so there's a tendency to want to wait, but I think that's a counterintuitive tendency. And that's for a few reasons. I think the biggest reason is that there's only a fixed number of factories. And when you look at that cross-section of factories and talk about which ones are actually good, it's a very, very small percentage and capacity at those factories is filling up. And they're filling up from all the first movers and everybody who already moved. And so, you know, importers who are making the switch now, they're frankly, a little bit late to the game. It's not too late, but the longer you wait, kind of the worse your options will be. And you don't want to be stuck with the wrong manufacturing partner. And, you know, on the flip side, the same point of that is, you know, pricing follows, pricing is the same anywhere, it follows scarcity. And so as capacity decreases, price increases. And you better believe if you're bidding, you know, if Trump wins and a 60% tariff is enacted, your factories are going to know that. And when they're pricing out your quotes, they're not going to be pricing out according to benchmarking your 2017 China price. They're gonna go ahead and tack on an extra 60% to that knowing that they're still competitive. Ad so, you know, moving now is very advantageous for importers to get the correct manufacturer and the correct price. And for those who, you know, want to wait and see, that's a game that any, any business is allowed to play. But it's kind of a 50-50 at this point. And, it's like going to Vegas and betting on red. It might be fun for a weekend, but it's probably not something you should do with the future of your business, especially if it's a product focused business.

Casey: And I think, especially like you're looking at timelines, you know, I mean, how long does tooling take usually at your shop, right.

Alex: Um, for the complicated one, it depends on what you do. We we are foundry. Right. So we have the pattern and then the if it's a complex with a cavity and or a different like undercut geometry, we have to have the core box. Right. So if it's just one model maybe, maybe right now we're kind of busy. So maybe around two months for the medium to simple one. Right. But if it's really complex with like multiple multiple core box, many cavities then maybe it's maybe, like, maybe three months. Yeah.

Casey: And that's the thing. I mean, that's that's just the tooling. And then we have to make the sample and then the customer has to approve the sample. And, you know, sometimes the T-Bone sampling doesn't always get approved. So you're just moving the timeline. And so it's yeah, it's really important.

Ben: And there's third party testing and a million variables that can push that timeline out. And so, you know, even if you were to start today, you're looking at, you know, first production shipping out around the election anyway. So um, it's a, you know, it's just kind of, uh, urgency and expediency is is advantageous in this situation.

Casey: We talked about the 301 tariffs, but like what are some other reasons why manufacturers need or should be moving out of China?

Ben: Yeah. I mean, we kind of touched on this. But you know, when we talk about these other factors besides the tariffs, these are what we're driving the large corporations out of China in the first place, before the trade war and before the pandemic. And there's a lot of them. There's a lot of macro trends that are leaning away. There's increasing cost of labor in China as the economy develops there. The cost of labor is is increasing. And of course, that affects the bottom line in these very labor heavy industries. There's an aging workforce associated with the demographic changes in China. And so that's going to reduce the availability of factory workers who are interested to work in the manufacturing industry. And then there's, you know, kind of the red hot one that nobody really wants to talk about. But it's, you know, in the event that kind of what this kind of cold tit for tat trade war that's going on, if that escalates into something hotter, you know, where there's a real conflict, whether it be, something with the US or something with Taiwan, something in Hong Kong or all of the disputed South China Sea territories. You know, all of these are kind of red hot button issues. And if a conflict goes from cold to hot, you can pretty much kiss your supply chain goodbye. And it doesn't matter if you're willing to pay the tariffs at 30% or 60% or 100%, you just won't be able to get it. It'll be like the beginning of the pandemic, but it lasts forever.

Casey: I think it's important for us to say as well, like we're, these are all like facts. We're not against China at all. I mean, I used to live in China for a few years. I really like the Chinese people. But I think the point of this conversation is to really highlight the need to get out, at the very least.

Ben: Yeah. And I think it's, you know, something that's often overlooked or just not always talked about is that the US has placed China as a designated US foreign adversary, and that's a very short list. There's only seven countries on that list. It's North Korea, it's Iran, it's Cuba, it's Venezuela. And China is on that list. And when you look at the trade between the United States and these other countries that have been designated as an adversary, it's virtually nothing. We have strict embargoes against all of these countries. We're not allowed to import anything. It's not a matter of duty. It's just you can't get it. And the fact that the US government has placed China on this list, and most recently was said that it's actually the most potentially dangerous foreign adversary on the list.

Casey: But yet it's our biggest trade partner.

Ben: Our largest trading partner kind of knocked some reasoning behind this policy, which not everyone kind of understands the why or the how, but, you know, that's kind of the why. And the US government is interested in making sure that they can pursue their foreign policy interests without affecting US businesses. And, you know, US businesses would benefit from falling in line with that. The US government is going to keep these in place as long as China is on that list. And yeah, the government wants you to divest.

Casey: The last sort of question I would have for you guys is, you know, how do you see, like the landscape of global manufacturing evolving, you know, as this relationship between China and the US is decoupling?

Ben: Yeah. I mean, I would say, a lot of the growing pains that importers are having now come from working with less developed, less established factories that are not as familiar with the documentation requirements or the expectations and standards of the importers. You've got to remember that when China first started out, people didn't have very nice things to say about Chinese quality or Chinese suppliers. And that changed. And I expect the same thing to happen in our markets. As you know, these factories become more accustomed to working with Western importers. And, I think that some of those growing pains will change. I think we'll see new types of factories emerge as well, where right now we have mostly process-based factories that, you know, it might be a foundry, it might be a forge, it might be a machine shop. But those generally create parts and not products. And when you're talking about a packaged consumer good or even a complex assembly of an industrial good, that's a different kind of factory. That's an assembly factory. And we are seeing those emerge especially for joint ventures that are, you know, getting set up across the region. But I think you'll also see that as an independent job shops for contract manufacturing.

Casey: Yeah, that is a good point. I think, you know, a lot of the times you go to, you know, you go to a Costco or a Target and you, you see, you know, just as you think it might be so simple, but assembly is just it's extremely complex. And setting up an assembly in a factory, it takes time for it to evolve and be mature. So, yeah. Well, do you guys have anything else that you'd like to add into the conversation?

Ben: I, yeah. I mean, just on your last point, you know, other changes, I think you could see, some more friendly trade policies. You know, India has really been the shining star of this, to really recognize this opportunity and seize it with really manufacturing forward policies. The Made in India policy, which grants, you know, interest free loans as well as all kinds of tax incentives for manufacturers. I think we'll see that deployed across the region and in India. We'll see them continue. Right. Ease of doing business. I see it improving where there may be, you know, importation of child parts to be assembled or the allowance of purchasing a child part domestically. But having it be VAT exempt because it's ultimately being exported. So I think we'll see some change in the regulatory environment in these countries, which are catching on to the opportunity that's there. And it's just it really is a massive opportunity.

Casey: Yeah. I really appreciate you guys joining me. It's been a really nice conversation. Alex came all the way down from north Thailand to join us on this podcast. So Alex, thank you very much for joining us. Thank you for joining us today. If you found this discussion insightful and are considering how best to navigate the complex manufacturing shifts, I encourage you to read our recently published report Guiding US-Based Manufacturers Out of China. It's packed with in-depth analysis, real-world case studies, and practical strategies to help you make your informed decisions. To discuss your specific needs, don't hesitate to get in touch with us at Align Manufacturing. Together, we can ensure that your transition is smooth and successful. Thank you again for watching and we look forward to helping you secure your manufacturing future beyond China.