1. 60 Supply Chain Management Review • January/February 2015 www.scmr.com
GLoBALpERSPECTIVES
John A.Caltagirone
is the Founding
Director of the
Supply Value Chain
Center at Loyola
University Chicago’s
Quinlan School of
Business.He can be
reached at jcaltag@
luc.edu.For more
information,visit
www.luc.edu/quin-
lan/scm/index.shtml.
Anjali Menon is a
Graduate Research
Assistant at the
Supply andValue
Chain Center (SVCC)
at Loyola University
Chicago’s Quinlan
School of Business.
She can be reached at
amenon2@luc.edu.
Where’s the Next China?
After a decade long offshoring boom,companies are
seeking new destinations to optimize their gross profits and
asking:Where’s the next China?
The last decade or so wit-
nessed an offshoring boom. At
the start of the boom, compa-
nies decided to outsource their
operations internationally to
low-cost countries in order to
benefit from the economy of
scale and scope offered by ven-
dors, to mitigate technological risks and uncer-
tainty, and to improve their focus on retained
core competencies.
China became the first choice for interna-
tional outsourcing of manufacturing. The coun-
try was propelled by the devaluation of its cur-
rency, a reduction of tariffs from its entrance
into the World Trade Organization, generous tax
incentives, cheap industrial land, and low labor
rates. By becoming the “hot spot” for interna-
tional manufacturing, China experienced an
influx of foreign capital, which not only simu-
lated its economic growth and development but
also eroded its costs advantage over the years.
China’s increasingly urban population now
has higher expectations in terms of wages and
working conditions.
A study conducted by The Boston
Consulting Group suggests that it is time to
“reassess” China and estimates that for some
products, the country’s overall cost advantage
could disappear in 2015. Additionally according
to The Economist, as wage advantages disap-
pear, firms are discovering the disadvantages of
distance. The cost of shipping heavy goods half-
way around the world has been rising sharply,
and goods spend weeks in transit. The maga-
zine also states that companies have found that
manufacturing somewhere cheap and far away
but keeping research and development at home
can have a negative effect on innovation; a suc-
cession of wars and natural disasters in the past
decade has highlighted the risk that long supply
chains might become disrupted.
The result: Many companies expanding
their global footprint today are seeking new
destinations to optimize their gross profits.
Some questions they are now asking include:
Where’s the next China? Where should we
outsource our manufacturing to optimize
gross profits? There are a few options com-
panies could consider. They could outsource
their operations in the inland of China, in
Mexico, or in Vietnam. They might even re-
shore manufacturing domestically in the
United States. We will review each of the
options, assess strengths and weaknesses,
and offer a solution to these issues.
Companies that would consider moving or
manufacturing in the inland China will find
lower wages. However, this option might not
be attractive to many industries. Chinese cit-
ies in the interior of the provinces do not have
an abundant pool of skilled labor, established
supplier networks, or an efficient transporta-
tion infrastructure; these factors would offset
much of the savings afforded by slightly lower
labor costs.
Vietnam is developing rapidly and offers
significant cost advantages, especially in terms
of labor. However, the country is still acclimat-
ing to Western manufacturing methods and
standards; therefore foreign companies will
have to accept some tradeoffs and be vigilant

2. www.scmr.com Supply Chain Management Review • January/February 2015 61
GLoBALpERSPECTIVES (continued)
about quality. Vietnam is also often perceived as being
part of a China Plus One strategy, in which firms main-
tain production in China but add operations in another
Asian country to spread out risks and avoid supply chain
disruptions. One important drawback is that Vietnam is
experiencing skills shortages; many workers lack basic
workforce readiness. Companies might have to invest in
training to meet the production and quality standards of
American consumers.
Mexico has the advantage of geography: A shared
border with the United States and proximity to mar-
kets means that lead times are shorter; thanks to the
North American Free Trade Agreement (NAFTA), goods
imported from Mexico can enter duty-free. Additionally,
the wages in Mexico are significantly lower than in China
and the country has a skilled labor force. By some esti-
mates, Mexico graduates some 115,000 engineering stu-
dents per year. Unfortunately, the country’s drug war and
income disparity could deter foreign investment due to
concerns about safety.
When the Boston Consulting Group conducted
research about U.S. domestic outsourcing, it concluded
that by around 2015, it might start to be more
economical to manufacture goods in the U.S.,
leading to a potential renaissance of American
manufacturing. U.S. federal, state, and local
governments have increased incentives to
outsource activities domestically. Companies
would enjoy increasingly competitive U.S.
labor costs and productivity, shorter lead
times, a better synchronization of production with other
business functions, and a greater ability to innovate.
Currently, it is still more cost effective to manufacture in
China, and many companies are still wary to come back
in the United States because of investments they have
already made overseas.
According to the consulting firm McKinsey, “compa-
nies continue to indulge in herd behavior” when deciding
where to base their operations and how to arrange their
supply chains. The consulting firm also states that many
companies follow each other around to low-cost countries
or are drawn by foreign government incentives.
So, where is the next China? Unfortunately, there is no
one clear answer to that question, especially for companies
looking for low wages. Rather than fixating on labor rates,
companies should instead undertake a rigorous and prod-
uct-by-product analysis of their global supply networks
that takes into account the total cost of production. Firms
should also think about proximity to the consumers they
are planning to serve; doing so will allow them to earn a
competitive advantage because companies would have to
enhance their ability to customize their products to adapt
to the new market trends. Being closer to the customers
would be a way for companies to spur innovation, and
quicken the delivery time. Firms that are looking to expand
their production capacity to better respond to the custom-
ers’ needs should also take into consideration the following
factors:
• location (i.e. effective infrastructure of the country,
cultural compatibility and differences);
• the availability of skilled labor;
• quality of products from primary suppliers and their
suppliers;
• sustainability throughout the supply chain;
• the business environment (i.e. protection of intellec-
tual property, sound business regulations, corporate taxes);
• political stability of the targeted country (i.e. war,
level of corruption);
• the environment (whether the country is subject to
regular natural disasters);
• and other factors such as lead time and transportation
costs.
It’s clear that choosing the right location for producing
a good or a service is not an exact science; it will vary from
industry to industry. If a company is considering expand-
ing its production capacity in a cost-effective way it should
identify its targeted customers and analyze the total pro-
duction costs. According to The Economist, firms are mov-
ing away from the model of manufacturing everything in
one low-cost place to supply the rest of world. To distin-
guish themselves and earn a competitive advantage, firms
should distribute their production more evenly and selec-
tively by being closer to their main customers.
Like the expression goes, you shouldn’t put all of your
eggs in one basket and in this case you shouldn’t put
all of them in the same region. Most important, once a
company decides that they should move part or all of the
sourcing from China or any location for that matter, the
implementation of that decision should be planned with
a laser-like focus. jjj
Like the expression goes,you shouldn’t put all
of your eggs in one basket and in this case you
shouldn’t put all of them in the same region.