Is outsourcing manufacturing the right decision for your organization? Which countries should you outsource to? Are there advantages to outsourcing to India vs. China, or even Vietnam? How do you begin a relationship with an overseas manufacturer?
These are all legitimate questions that this article will help you answer.
The advantages of subcontracting or offshoring your manufacturing include reduced labor costs, low or no infrastructure costs (no fixed capital expenses including the original cost of equipment), zero equipment maintenance costs, lower material costs, and in certain cases – capitalization on a favorable exchange rate.
With that list of benefits, it comes as no surprise that companies have moved to outsourcing their manufacturing. Major industries such as chemical, automotive, aerospace, marine, and food and beverage have weighed the pros and cons of outsourcing manufacturing in India, to China, and Vietnam.
International manufacturing partners can have various metalworking capabilities such as casting, CNC machining, metal injection molding, sheet metal stamping and they even perform plastic injection molding.
This guide on outsourcing manufacturing will help you explore all of your options.
Benefits of Outsourcing Manufacturing
Improvements in communication, transportation, and cost savings make outsourcing manufacturing an attractive production option. Parts can now be designed in the U.S., manufactured by a shop in Vietnam, India, or even China, and then sold worldwide. Moving production overseas comes with enough benefits that massive brands have been doing it for years.
- Lower Overhead Costs: Operating a manufacturing facility is expensive. With substantial overhead costs such as machine maintenance, utilities, shipping and receiving, personnel, material handlers, equipment technicians, and quality assurance personnel.
- Lower Labor Costs: This is probably one of the biggest benefits companies receive from moving manufacturing overseas. In locations such as Vietnam, China, and India, labor costs are a fraction of that in the states. With the right partnership, companies can see real savings and increase their margins.
- Company Can Focus on Core Competencies: Outsourcing production lets companies focus on what they do best. This way, resources are not wasted on trying to learn the manufacturing process or the countless mistakes that come from learning a new skill. It also eliminates the need to find and hire reliable labor.
- Meet Demand: Overseas manufacturers are equipped to handle changes in demand. There are also plenty of manufacturers available to supplement a sudden change should that partner be at capacity. Fluctuating to meet the ebb and flow of changing demand can be costly for an in-house manufacturer.
- Improved Distribution Resources: When a company invests resources in its core competencies, it gains a competitive advantage. Partnering with a shop overseas helps mitigate risk and better utilize resources where they are needed. Companies that try to bring things in house can create logistical and financial issues that can be difficult or impossible to recover from.
- Access to Industry Knowledge: By offshoring manufacturing, organizations can work with partners who have both industry and production knowledge already available. These partners know how to determine the best materials and processing methods to achieve a company’s desired cost and part specifications.
- Improved Efficiency: Companies who continually win thrive on efficiencies. Working with overseas partners gives companies access to personnel and resources to remain competitive in the marketplace. This approach allows smaller companies the opportunity to partner with production giants in a cost-effective way.
- Supplier Diversification: The world economy is unpredictable. Whether it’s a pandemic, unexpected government sanctions, geopolitical tensions or other industrial happenings, it’s always beneficial to have a diversified set of suppliers to avoid interruptions in production.
How to Find the Right Manufacturer
Before signing any agreements, you need to consider a few things:
- Does the manufacturer have access to the best and newest technology?
- Can they meet your standard part or component requirements?
- What are their capabilities?
- Wha quality management systems do they have in place?
- What key performance indicators do they use to track quality?
- How long will it take for your final product to arrive?
- Have they worked with other U.S. companies in the past and will they provide trade references?
- How long has their foundry been operational?
- What payment options are available?
- Are they a reputable foundry?
- Will they manufacture 100% of your product, or will they subcontract production?
- Are they willing to work on a trial basis?
An unwillingness to discuss customizations, provide certifications and quality assurances, or work out payment plans are all red flags to look out for. Most overseas manufacturers want to show potential customers; they are a solid choice as a long-term partner.
Manufacturers who display red flags this early in the process could mean problems down the road. They could deliver inferior parts, miss deadlines, or even fail to deliver altogether.
Why Finding the Right Partner is Important
To get the best quality at a reasonable price, it is important to explore your options. We always hear that cost is the driving factor in choosing a manufacturing partner, but it should not be your only consideration. Part quality and a reputation for timely delivery are also important factors to consider when your business’s reputation is on the line.
Do Your Research Before Offshoring Manufacturing
- Does the foundry have the proper authorizations and licenses to conduct business?
- Can the manufacturer meet or exceed your quality and production standards?
- Can they perform the final part testing?
- Will they package products for you?
- Does the manufacturer have a reputation for delivering orders on time and in full?
- Do they have the right infrastructure to provide you timely and accurate production updates?
Failing to answer these questions can spell trouble down the road. It is important that a manufacturing partner can meet your company’s needs and fulfill expectations in order for outsourcing to be worth it.
Pros & Cons of Outsourcing to India
With today’s geopolitical tension in countries like China, organizations are creatively turning to new options, including outsourcing manufacturing to India. The obvious advantages include reduced labor costs and access to raw materials. But, there are other perks to moving manufacturing to India that you may not realize.
- Access to Raw Materials: Indian foundries are strict about testing, retesting, and certifying, where they get raw materials. Working with manufacturers in India will also provide cost savings in raw materials because many metals are native to the region.
- Talent: India has lots of engineers and many are bilingual. They have the second-largest English-speaking population in the world, with a whopping 225 million English-speaking residents.
- Lower Labor Costs: India makes a reliable manufacturing alternative to China because of its lower labor costs. Additionally, their 500 million pool of skilled and unskilled laborers is an added benefit. According to the Bureau of Labor Statistics, their manufacturing sector has only seen an increase in wages from $0.68 USD per hour to $1.46 USD per hour since 1999.
- High-Quality Machines: Most people are surprised to learn that many Indian factories house Japanese machines. They also heavily rely on world-class measurement tools that are also manufactured in Japan.
- Family Factories: It is common that manufacturers in India are family run and owned. These family businesses are known for being more reasonable, trustworthy, and flexible.
- Transparency: Manufacturers in this region take great pride in their processes and outputs. One of the most important displays of transparency is how owners are open and welcome to inviting you to their facility.
- Political Instability: Civil unrest in India has in the past led to unexpected closing of businesses for days.
- Weak Infrastructure: India does not have an efficient system for transporting manufactured goods. They spend a megar 9% of GDP on infrastructure projects. A majority of their roads are in poor condition and their traffic system is chaotic. Additionally, even though it has a whopping 3,400 miles of coast, India only has three main ports. These factors make India a logistical nightmare for outsourcing.
- Poor Power Supply: In 2018, India was ranked 80th out of 137 economies in overall electrical supply reliability by The Global Competitiveness Report. Demand is predicted to triple by 2024 and the country still heavily relies on coal. Limited electricity makes it difficult for foundries to meet production requirements.
- Complex Labor Regulations: India has a long list of regulations and protections for workers. They have over 170 local labor regulation laws and over 50 central labor regulations. While they are strict to protect workers, they limit a company’s ability to lay off workers. For this reason, some manufacturers have remained small so as not to violate labor laws. This smaller workforce could stifle production.
- Difficulty Enforcing Contracts: If a manufacturer fails to uphold their end of a contract, you can expect a long journey ahead to get reparations. The entire process from filing a suit, awaiting trial, receiving judgement and getting the judgement enforced can take upwards of four years in Mumbai.
Pros & Cons of outsourcing to China
It is no surprise that rising labor costs and tensions with the U.S. are making outsourcing to China a less viable option. However, China has over 30,000 foundries that produce a variety of metal parts and components. This means companies can quickly source materials without the additional cost of importing from another country. Let’s look at some benefits China still has to offer.
- Cheap Manual Labor: Labor is usually one of the highest costs and also the most important resource in manufacturing. Companies can reduce costs between 30% and 80% by outsourcing manufacturing to China. Their minimum wage runs $162 USD to $358 USD per month compared to $66 USD to $202 USD per month in India.
- Efficient Legal Processes: From start to finish, the process of bringing legal action against a manufacturer takes around nine months. Additionally, The World Bank also rated the quality of Shanghai’s judicial process a 16.5 out of 18.
- Strong Infrastructure: China invests 20% of its GDP in infrastructure. They are focused on investing in their economy, a large part of which is manufacturing. The World Bank ranked China 26th out of 160 countries in its Logistical Performance Index, placing it above both Vietnam and India.
- International Expansion Opportunities: Moving production to China can bring logistical advantages by strategically positioning your product within reach of other Asian and European markets.
- Capabilities: Companies have been outsourcing manufacturing in China for years, so foundries here can produce products that meet nearly any specification requirements.
- Potential for Intellectual Property Infringement: There is a general lack of respect for international copyrights by Chinese manufacturers. You have to be careful because trademark, copyright, and intellectual property laws are different in Asian countries.
- Rising Cost of Labor: While labor costs are still lower than the U.S., they are rising at a steady rate and growing an average of 15% to 18% a year. These increases can slowly cut into product margins and make China a less appealing manufacturing option.
- Labor Shortages: According to Global Demographics, the Chinese workforce is projected to decline by 13% over the next twenty years. Even Chinese phone makers such as Coolpad, OPPO, Huawei, and One Plus are planning to move production to India.
- Longer Lead Times: Issues such as energy shortages, strikes, and other issues crop up in Chinese markets that are not an issue back home. Longer lead times are common because of high turnover. For example, manufacturers in the Pearl River Delta, have seen a 26% turnover rate over a two year period.
- Tariffs: Rules and uncertainty surrounding the new trade deal could impact the bottom line. With a 25% tariff on Chinese imports, manufacturers are now looking to other cost-effective alternatives such as Vietnam or India.
Pros & Cons of outsourcing to Vietnam
Vietnam is quickly becoming the primary destination for companies moving production away from China. Its primary advantage is its proximity to Chinese raw materials and its favorable position in shipping routes to the U.S. Vietnam is a fast-growing country with a young labor force and a stable geopolitical environment.
- Young Skilled Labor Force: Vietnam has one of the youngest labor forces in the world. Labor costs are, on average, half that of China, and they are about six years younger. In fact, Vietnam has a labor force of over 57.7 million people.
- Less Bureaucracy: They have fewer restrictions and less bureaucracy surrounding foreign investment.
- Fewer Trade Restrictions: Vietnam is actively pursuing free trade agreements with countries around the world.
- Strategic Location: One third of the world’s goods travel across the South China Sea. Vietnam can offer shipping costs savings due to its prime location.
- Average Logistics & Infrastructure: Their logistics and infrastructure are just average when compared to other countries. They will need to significantly invest in freight rail, electrical grids, new roads, and new ports if they want to remain competitive with China.
- Higher MOQs: Vietnam tends to have higher MOQ (minimum order quantities). If your company needs a smaller run to test a new product, you might find it difficult for manufacturers to shift to lower production runs.
- Lack of Price Competition: Vietnam has far less foundries than countries like China. Buyers are limited by fewer options which may translate into lack of price competition and a reduced ability to negotiate for the best pricing. It is wise to consult a knowledgeable professional with working experience of Vietnam manufacturing prior to requesting a quotation.
Moving manufacturing to another country can be difficult to navigate. A quick search online will produce endless lists of questions, considerations and warnings to heed.
Cost reduction is the driving force behind moving to a contract manufacturing relationship.
Countries such as India, Vietnam, and China offer a massive workforce at a reduced rate compared with U.S. manufacturing and they will still produce reliable products.
Each country comes with a unique set of challenges.
China’s decades of mass production experience means they can produce products to nearly any specification and any production size. But recent tensions with the U.S. make working with countries who are actively seeking competitive trade deals such as Vietnam and India an enticing option.
India, however, has massive power supply issues that could disrupt production and Vietnam just does not have the manufacturing capacity available in China and India.
We have been working with international foundries for years, and our network of vetted partners has the ability to affordably produce high-quality parts and components for your company.
We can help you source manufacturers and navigate the confusion of moving production overseas.