As China Risks Grow, Manufacturers Seek Plan B—and C and D

Apple, with a sprawling production base in China, is rapidly expanding in Vietnam and India, an emerging smartphone-making hub. Crocs, which shifted production of a large share of its colorful shoes from China to Vietnam, recently stepped up sourcing from Indonesia and is also setting up in India.

Universal Electronics, a Scottsdale, Ariz.-based maker of security sensor products and home-entertainment devices such as remote controls, plans to close one of its two Chinese factories, expand its Mexico facilities and kick off a new manufacturing unit not far from Vietnam’s capital, Hanoi.

Part of the reason is that no single country can accommodate all the production leaving China. Vietnam is business-friendly, but it doesn’t have enough skilled workers. India has a large labor force, but infrastructure is patchy. Mexico is near the U.S. market, but a long way from China’s component suppliers.

The diversification, which some experts call multishoring, also reflects a stark new reality: The world is a far more complicated place to do business than it was a decade ago.

“This is just a crazy time we’re in," said Neale O’Connor, a professor at Australia’s Edith Cowan University who advises corporate supply-chain teams. “The objective is to decentralize risk so you can deal with—number one—the acts of God, you can deal with the acts of politicians."

According to a March report by auditing firm KPMG that studied 132 companies, mainly Fortune 500 multinationals, two-thirds of their supply-chain overhauls since 2018 involved pushing production to two or more countries. Less than one-third of the shifts were to one country, said the report, which O’Connor co-wrote.

Spreading out production doesn’t come cheap. Businesses have to scout new locations, invest in training workers and cultivate relations with local governments. New suppliers often have to be brought up to acceptable quality standards and sourcing components locally can be a headache.

Still, companies are taking the plunge.

When they first began moving out of China, their main concern was costs. Wages were rising in the country that had long been the world’s factory floor, prompting a search for cheaper frontiers. Then in 2018, the trade war between Washington and Beijing added urgency to their mission.

In recent years, the uncertainties have exploded.

The Covid-19 pandemic laid waste to supply chains. Great-power competition between the U.S. and China hardened into bitter rivalry. Beijing has become more unpredictable toward foreign businesses. Russia’s war in Ukraine was a reminder that major conflicts can still arise.

“Everything is fine until it’s not fine," said Shawn Nelson, chief executive of Lovesac, a Nasdaq-listed maker of upholstered furniture. “That I think is the underlying paranoia that drives us."

The Stamford, Conn.-based company started relocating production from China’s southern industrial hubs to Vietnam after the Trump administration imposed tariffs on Chinese imports in 2018. But the company didn’t stop there. As Nelson saw it, more geopolitical turmoil could be around the corner.

By the time the pandemic led governments to shut borders in 2020, Lovesac was making its modular sofas in two additional locations, Malaysia and Indonesia, and certain sewn products in India. Nelson said the decision paid off: When it faced disruptions at one or even two sites, the company never ran out of stock.

Now, Lovesac is working with partners to establish highly automated factories in Mexico and the U.S. The goal, said Nelson, is to build up a footprint in the Western Hemisphere, giving the company the ability to boost production there if a crisis erupts in Asia.

For footwear maker Crocs, the need to spread out operations became clearer during the pandemic. After years of transferring footwear manufacturing out of China, it was expecting to make 70% of its production in Vietnam in 2021. That summer Vietnam’s government imposed severe Covid-19 restrictions.

Crocs was forced to shift orders in a flash to a small unit in Bosnia and Herzegovina and to Indonesia, where it opened a second factory later that year. It now produces around half its Crocs-branded products in Vietnam, down from three quarters in 2020. The company is also working to set up a production base in India.

“Diversification is overall beneficial without many downsides," Anne Mehlman, the company’s chief financial officer, said in an email. Given the unpredictability of global macro events, having a diverse manufacturing base helps, she said. Crocs’ classic clog has just three components, making it easier to increase production at new sites.

Apple electronics are more complex, but the iPhone-maker is also spreading out. Apple’s disclosed suppliers in India grew from seven in 2018 to 14 by 2022. J.P. Morgan estimates India will produce a quarter of all iPhones by 2025.

Over the same four-year span, its suppliers in Vietnam, which produces earphones and other devices, increased from 14 to 25. The company has increased spending with European suppliers by more than 50% since 2018.

The world’s largest shoemakers, which had years ago split production three ways between China, Vietnam and Indonesia, are branching out even more. A manager at a Vietnam factory said major Western sneaker brands that buy from them had urged his company to set up in Bangladesh and India.

Taiwanese shoe manufacturer Pou Chen, which supplies Nike and Adidas, will through a subsidiary set up a $280 million manufacturing facility in the Indian state of Tamil Nadu, a local Indian government agency announced in April. Earlier that month, the agency said it had given another Taiwanese shoemaking contractor 130 acres of land for a factory that is expected to generate 20,000 jobs.

Some analysts say high interest rates and a sluggish global economy will force businesses to slow-walk ambitious diversification as finance directors become wary of expenses such as new factories. “The spirit is willing but the flesh might be weak in many of these instances," said Chris Rogers, head of supply-chain research at S&P Global Market Intelligence.

Lovesac’s Nelson acknowledges the difficulties. Spreading out across Asia involved making adjustments for the impact of different humidity levels on the wood they use. Local workers had to be trained from scratch.

The biggest challenge in moving westward is raw materials, such as textiles and plastic pellets, said Nelson. He would like his North American factories to source components from the region. But many fabrics Lovesac needs are hardly made in the Western Hemisphere and when they are, they tend to be 50% to 100% more expensive, which could mean coming to terms with higher costs.

Nelson said he has asked himself if having factories in multiple Asian countries might be enough. “I’m not sure, and that is why we won’t stop," he said of the company’s diversification drive.