Why Some Manufacturers are Staying in China

On November 4^th, we published a blog called “Manufacturing Leaving China? Think Again”. Despite the many changes and shifts in the global political landscape, we believe that the statement remains broadly true as we move into 2025.

Over the past six months, we have had more companies come to MTG than ever before asking about moving manufacturing back to the US. Broadly, as a company, we support companies wanting to move their manufacturing closer to the customer base. However, moving operations may not be as simple as expected or even advantageous unless tariffs move to a level that is unthinkably high.

Here we will walk through a simple example based on an experience of our client. This example does not touch on the more complicated scenarios that we could see in the future depending on how the situation evolves.

Robin Brooks of the Brooking Institute gives a very comprehensive look at the possible scenarios that might occur over the next year including a weakening yuan that would negate much of the impact of tariffs. A weakening yuan and a stronger dollar would not help US manufacturing. I encourage people to read more about it here.

What is striking about this article is that, despite the many fears about tariffs, the market does not price much tariff risk at the moment. Why is that? Hard to say, though my opinion is that many market players believe the talk of tariff is all bluster to put the United States in a better position for trade negotiations. Could be yet the prudent company, especially those of a lower volume and higher mix, should take tariffs seriously and prepare accordingly.

A Simplified Example

MTG is working with a number of companies to bring manufacturing back to the US or to start new manufacturing that avoids China. Over the course of these projects, we have found significant obstacles to moving to the United States. While we could fill a book (or a lot of blogs) about the topic, the simple example we will use today is for a high mix low volume company.

The client is manufacturing in China and desperately needs wants to avoid tariffs. Yet, as bids come in to manufacture the products in the US come in, it is becoming clear that tariffed products are still more cost-effective than moving manufacturing.

Note we are not suggesting that tariffs could go as high as 60%. The difference is to illustrate what is possible and how small the difference is with a higher tariff than it is for relocation.

The scenario here shows that even with a 60% tariff, the cost of producing in China is approximately $20 per unit less expensive. The company may not pay any tariffs, but the overall costs are higher in the United States. If the product sells for $100 per unit, then the margin will decrease from $70 per unit to $50 per unit. That assumes a direct-to-consumer model. Most consumer products go through a distributor and/or retailer, each takes a percent.

The client is left with two choices: accept a reduced margin or increase prices. Smaller companies cannot usually afford to take either but are more likely to go for higher prices.

There may be good reasons outside of price to bring manufacturing back to the US. Many suppliers we work with struggle with underperforming suppliers or long lead times. That is a valid trade off to make.

Should You Keep Manufacturing in China?

The situation is different for each company. Companies that mass produce or are more open to automation could move production more easily and perhaps even reduce overall costs. If you are a high mix low volume manufacturer, staying in China will likely remain your best bet. Each product should be determined on a case-by-case basis.

You may be thinking that maybe you should move to Vietnam or Mexico. Perhaps you should. However, it is not clear if either of those countries are safe from tariffs, and both are swarmed by companies trying to move operations to both locations. A smaller producer could very easily be lost in the shuffle and ignored.

Now more than ever it is vital to really know your costs and your supply chain. You and your company will make better more rational decisions when you are armed with that information.

How can MTG help you navigate tariffs in the trade landscape? Click below to learn more.