Electronics NOT Made in China: 5 Options To Avoid Tariffs

Electronics are the most strategic of the various categories impacted by the trade war, so it’s interesting to see how much the trade war diverted US electronics imports.

ELECTRONICS NOT MADE IN CHINA: WHICH COUNTRY CAN REPLACE CHINA?

As the tariff war between the world’s two biggest economies goes on, quite a few electronics companies are looking for alternatives to China.

The big question is: What are the alternatives to manufacturing electronics in China?

For us, unless you produce electronics in the millions, remaining in China is still your best option for electronic manufacturing in Asia.

Source: McKinsey Global

When it comes to electronics manufacturing, it only makes sense to move out of China if your electronic device is already in a mature stage and you know which parts you need and from which factory.

You’ll most likely have to source parts from China wherever you move.

Only at this stage can you sincerely try to pick up your bags and move your production anywhere.

The tricky part here is finding a country with the most qualified workforce, expertise, capital, logistics, and set of government regulations that will allow you to maintain your business profitably. In this scenario, we’ll explore the alternatives to manufacturing electronics in China.

When you’re still developing a new electronic device, you have to evaluate and develop many parts, and China’s component ecosystem has 10 suppliers for every possible component within an hour’s drive.

Source: McKinsey Global

Source: US Census

So much electronics manufacturing continues to be done in China because of its vast ecosystem of mechanical parts and the availability and lead time of electronic components.

China still accounts for most of the electronics imports from the US in 2022 (35%). However, countries with lower manufacturing labor costs, such as Mexico, accounted for around 18% of all electronics imported by the USA.

Once your device is entirely mature, you can collect kits of components and send them from China to wherever you want, but doing this too early is asking for trouble. Missing components can completely kill your Time To Market.

In the words of Etienne Charlier, Partner at Riverbanks Investment:

“China has built very strong ecosystems in particular industries, and the electronics industry is an excellent example.

While costs rise in all aspects of electronics manufacturing and many suppliers have to restructure or disappear, China has developed an ecosystem whose density and extent are second to none.

From the variety and scale of component suppliers to the availability of production and test equipment solution providers, including technical and engineering talents,. I have yet to find a place that combines it all.”

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Let’s first understand something

What brought many manufacturers to Chinese lands during the ’90s was a system composed of government benefits, ready-to-use industrial zones, and export promotion.

This system is unique and appears unlikely to be replicated by any other country.

It’s also worth noting that China’s transport infrastructure—roads, ports, and airports—is by far more developed than most South and Southeast Asian nations.

So, when moving operations to another country, expect challenges to arise. Things won’t be as easy as moving components and tooling from A to B.

Let’s look at the pros and cons of moving electronic manufacturing operations to some of the most likely alternatives.

WHERE TO PRODUCE MY ELECTRONICS: VIETNAM

PROS	CONS
1. Low labor costs	1. Lack of experience in manufacturing electronics
2. Ease of doing business for foreign companies and investors	2. They rely heavily on components imports from China to manufacture all kinds of products
3. A good location to import the necessary electronic components	3. A lack of manufacturers focused on electronics
	4. Weak and saturated logistics infrastructure
	5. There is not enough manufacturing capacity
	6. Lack of educated and trained personnel to manufacture sophisticated electronics
	7. High office staff turnover
	8. Corruption
	9. Vietnam is not ready for new electronic products manufacturing

Vietnam started to gain popularity as an electronics-not-made-in-China option, mainly because of its lower labor costs.

And the value of electronics exports has indeed surged in recent years.

Nonetheless, as reported by The Economist:

The value of shipped goods conceals an underdeveloped domestic industry with limited local linkages.

Vietnam is beginning to secure vertical integration in the production of smartphones, with the largest foreign investor in this industry, Samsung, opening a research and development facility and a phone screen manufacturing plant in addition to its existing assembly operations.

However, this manufacturing activity is dominated by foreign intermediate inputs (especially from China), with little domestic contribution. Similarly, the country’s output of integrated circuits is dominated by a single, large plant operated by Intel in Ho Chi Minh City.

The facility is for assembly and product testing, with very little demand for domestically produced capital inputs.

In this industry, we expect Vietnam to lag behind the indigenous capabilities of middle-income economies such as Malaysia and Thailand until at least later this decade.  

The Economist, Vietnam’s role in Asia’s shifting supply chains.

The electronics manufacturing industry in Vietnam, seen as one of the alternatives to Chinese manufacturing, is heavily dependent on Chinese inputs, that is, components.

This clearly shows that cheap labor is not the focal point for electronics manufacturing.

Labor cost might be a deciding factor for textiles and shoes, but for electronics, labor typically makes up no more than 5% of the cost; it is only a minor factor when selecting a new country for those non-Chinese Electronics you need.

The fact that Samsung invests in creating a complete supply chain for smartphones in Vietnam shows where China’s advantage is: its vast electronics supply chain.

Another critical point to mention is that as more companies are making or trying to move to Vietnam, the country’s logistics infrastructure and manufacturing capacity are being pushed to the limit.

All this, together with a lack of expertise in manufacturing complex electronic products, makes moving to Vietnam, especially for companies with new complex electronics, a challenge within the realm of alternatives to Chinese manufacturing.

Lead times of Electronic Components

WHERE TO PRODUCE MY ELECTRONICS: INDIA

PROS	CONS
1. Affordable labor costs	1. Electric power availability for plants averages 8 hours a day
2. Ease of communication ( They speak English)	2. Electric energy for industries is very expensive.
3. A skilled workforce with strong technical and engineering capabilities	3. Most of the skilled workforce for electronics manufacturing is already employed
	4. Weak logistics infrastructure
	5. Government bureaucracy makes it very time-consuming for foreigners to open a plant or outsource one
	6. Laws favor small-scale manufacturing, which makes it difficult to run large productions
	7. The manufacturing industry in India mostly focuses on jewelry and textiles.

Ease of communication and low-cost labor might sound promising for anyone looking to settle in India to manufacture electronics not made in China.

However, when you realize that moving manufacturing to India comes with particular challenges, such as:

• Government laws that protect small local manufacturers
• A lack of expertise in electronics manufacturing
• Lower productivity rates are due to idle time in factories

India might not be the best choice.

In the words of Balaji Viswanathan CEO of Invento Robotics.

“If India has to compete with China, we have to completely overhaul all the economic laws—taxes, labor, factories—we have put in place since 1947. Otherwise, we will continue to be costlier than Vietnam and Bangladesh.”

WHERE TO PRODUCE MY ELECTRONICS: THAILAND

PROS	CONS
1. Thailand’s has a sound logistics infrastructure	1. High labor costs
2. Tax incentives for investors	2. Language barrier
3. Right to lease government land for up to 99 years	3. Political instability
4. The ease of doing business in Thailand outranks that of China’s	4. Geographical location: Monsoon flooding happens from time to time
5. Expertise with integrated circuits	5. Highly dependent on imports of electronic components
6. Development of electronic clusters
7. Geographical location, right in the center of SEA

Before everyone moved to China, Thailand was a significant place for electronics manufacturing; many non-Chinese electronics brands were made here.

That base is still there, and as of today, Thailand is positioning itself as an excellent alternative to Chinese manufacturing, as it offers an environment that incentivizes companies to do business in the country, a trained workforce, and excellent logistics infrastructure.

Please bear in mind that labor costs in Thailand are higher than in China. So if low-cost labor is what you’re going after, Thailand might not be the best option.

WHERE TO PRODUCE MY ELECTRONICS: MALAYSIA

PROS	CONS
1. Malaysia is next to Singapore, which gives it access to experienced engineers	1. Highly dependent on imports of raw materials and machinery
2. Well-educated English-speaking office staff	2. Malaysia’s multi-ethnic background creates tensions among different ethnic groups
3. More affordable labor costs than some areas in China (i.e. Qingdao with about 30-40% lower after payroll taxes)
4. There is no export tax

Malaysia works for electronics not made in China manufacturing; ease of communication, highly skilled workforce, and proper supply chain management set it apart from other Southeast Asian countries.

WHERE TO PRODUCE MY ELECTRONICS: TAIWAN

Taiwan started its electronics industry some 20 years ahead of China, and behind the scenes, Taiwanese firms still dominate the world’s electronics manufacturing.

Apart from Acer, Asus, and HTC, Taiwan has few electronic brands, as most firms prefer to leave the marketing to foreign brands and stay focused on design and manufacturing.

Apple Expands Investment in Taiwan

Brands such as HP, Siemens, and Apple all heavily rely on Taiwan’s ODMs; 10 out of 10 ODM’s are Taiwanese.

Over the years, they have moved many of their factories to China, but rather than go “factory-direct,” the big brands have all chosen to continue to do business with the Taiwanese, valuing their engineering prowess and business ethics.

If you’re going to teach another firm how to design your notebooks for you, you do not want them to turn around and do a Huawei on you.

They are not the cheapest, but they fully master the Greater China component supply ecosystem.

PROS	CONS
1. Strong supply chain and logistics	1. Labor and overhead cost are higher
2. Rule of law and IP protection; almost no corruption	2. Global trade disadvantages due to the China policy
3. A highly skilled labor force for engineering and manufacturing
4. Great internet connectivity
5. Government support to promote advanced manufacturing
6. Higher robot density than China
7. Focus on electronics and other technology-heavy industries
8. Higher levels of productivity
9. Taiwanese firms tend to make sound business partners

The island nation has a very developed supply chain and logistics system and a skilled workforce focused on electronics.

Interestingly, salaries for engineers in Taiwan are now lower than in Shenzhen or Shanghai.

While you might find that overall, Taiwan is more expensive, you’ll also find that manufacturing electronics here is better for your peace of mind.

Especially when you compare it with other manufacturing nations that are just starting to get their act together.

WHERE TO PRODUCE MY ELECTRONICS: COLOMBIA 

Colombia can be an attractive option for moving your electronic manufacturing operations.

According to the United Nations Economic Commission for Latin America and the Caibbean (ECLAC), the manufacturing sector in the region is on the rise, and it is expected to continue growing in the years to come.

PROS	CONS
1. Skilled engineering and technical workforce	1. Lack of experience in manufacturing electronics
2. High unemployment and low turnover	2. Lack of manufacturers focused on electronics
3. Same time zone as the USA	3. Weak customs and logistics infrastructure
4. Shorter sea freight times to the USA and EU	4. Highly dependent on imports of electronic components
5. Solid public services infrastructure
6. Affordable labor costs

One of perhaps the most visible advantages of manufacturing in Colombia is the relatively low production costs. Colombia boasts a highly skilled workforce with comparatively low wages.

Source: The Economist Intelligence Unit

Moreover, Colombia’s strategic location is another factor making it an appealing destination for relocating your electronic manufacturing operations.

The country is located between North America, Europe, and Asia, which allows easy access to major markets. Proximity to major markets reduces shipping costs and time, which is a huge advantage for manufacturers.

Notably, Colombia sharing the same time zone as the US makes communication and collaboration with US clients more convenient.

On the other hand, there are some challenges that need to be considered before moving your manufacturing operations to Colombia.

One of the most prominent challenges is the weak customs and logistics infrastructure. However, it is worth noting that the country is aware of this shortfall and is investing heavily in improving its infrastructure.

Besides Taiwan, Titoma also has an office and offers final assembly services in Colombia. Having our 30 engineers on-site, we design the projects and can quickly address any potential issues. Additionally, our Titoma Colombia office is ISO certified, ensuring high-quality standards in our operations.

BUSINESS CLIMATE RANKING

Canada, the US, and Taiwan come out as excellent alternatives based on the business climate ranking by the Economist. Taiwan, in particular, ranked among the top countries for doing business due to its affordable manufacturing labor costs; it is a good option for electronics manufacturing.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

WHERE TO PRODUCE MY ELECTRONICS: OTHER ALTERNATIVES 

Indonesia, this country, poses many challenges when registering a new factory, and local talent with a good command of English is in short supply. The government requires foreigners to learn Bahasa to work in Indonesia as an added obstacle.

So, as to whether it is an excellent alternative to Chinese manufacturing, our answer would be no, but the moment we find more relevant data on Indonesia and Not Made in China, we’ll post it here.

The Philippines hasn’t yet come off as a strong candidate for Made in China alternatives. Still, their command of English and a government that is on board with developing the electronics manufacturing sector are setting them up for potential growth and a possible non-Chinese electronic source.

FAQ ELECTRONICS MANUFACTURING: CHINA ALTERNATIVES