American brands face growing pressure to divest from China due to threats of higher price lists and geopolitical instability, but the truth is that most can’t pull out. Despite industrial wars, the United States simply cannot abandon China. But it’s not for lack of effort.

There has been a trend over the last six-plus years toward shifting manufacturing activities away from China. According to a 2023 report published by Boston Consulting Group (BCG), Harnessing the Tectonic Shifts in Global Manufacturing, US goods imports from China declined by 10% from 2018 through 2022 in inflation-adjusted terms, they rose by 18% from Mexico, 44% from India, and 65% from the ten countries of the Association of Southeast Asian Nations.*

Wage inflation, or the emerging costs of hard work, is the number one explanation for why corporations turned their backs on China. According to the China Business Council of the United States, for more than a decade China has not been considered a manufacturing base that requires little hard work. Thus, since the mid-2010s, labor-intensive and cost-sensitive industries such as textiles have moved from China to countries such as Vietnam and Bangladesh.

But over the last six years, a cascade of other factors have bubbled to the surface, signaling to US companies, the China party is over and it is time to “break up”. First, in 2018, geopolitical factors intensified, with President Trump’s imposition of tariffs on almost all Chinese exports. Then, in 2020, the COVID-19 pandemic exposed underlying weaknesses in the global supply chain as factories shut down and ports were closed, logistics networks that were essential for critical goods such as medical supplies, semiconductors and consumer goods were disrupted and freight costs surged due to high demand (The cost to ship a container from China to the west coast of the US increased ten-fold from around $2,000 to over $20,000 in the first nine months of 2021). Next, in 2022, the Russia / Ukraine conflict led to an increase in the price of commodities like oil, gas and grain, which China imports from Russia, leading to volatility in its domestic production costs.

Furthermore, escalating security breaches, coupled with China’s sending of spy balloons to the US in 2023 and the hacking of major telecommunications providers in 2024, have exacerbated already tense geopolitical tensions. According to a report by the House Committee on Homeland Security released in October 2024, the FBI opens new files to counter the Chinese Communist Party’s espionage and intelligence operations approximately every 12 hours. And finally, China’s ongoing military exercises, which threaten to annex Taiwan, have a direct effect on: (1) US national security interests, as the US views Taiwan as part of a ” island chain” of allies (along with Japan, South Korea and the Philippines); and (2) the economic interests of the United States, since Taiwan is the main manufacturer of semiconductor chips and computing devices for American companies such as Nvidia, Qualcomm and Apple.

Needless to say, many companies have been “de-risking” their supply chain by diversifying into more stable regions in Asia, and near-shoring to Mexico and Central America. The automotive industry, particularly electric vehicle production, has seen substantial reshoring activity. The semiconductor industry has also significant reshoring activity, spurred by national security concerns and government initiatives such as the CHIPS and Science Act of 2022 (CHIPS Act).

I spoke with Scott Ellyson, CEO of East West Manufacturing (East West), a global engineering and manufacturing company founded in Atlanta, Georgia, to get an “insider’s look” at how his company’s supply chain has evolved over the past few years. years.

Scott Ellyson, Chief Executive Officer

East West was originally founded in 2001, with the aim of leveraging production arbitrage on a global scale to help its consumers reduce their overall prices and increase their competitiveness – and this mainly referred to establishing themselves in China – in the Shenzhen region. The company, which makes thousands of products for one hundred and five hundred Fortune companies, adding medical devices such as defibrillators and ventilators, electric motors, robots, exercise equipment and HVAC/refrigeration devices, has since expanded its operations to nine locations in seven countries.

Ellyson explained that the solution to identifying production operations in a specific region is complex and based on several key points. And cheap, hard work rarely constitutes the ultimate vital focus (which makes sense since China has not been a production region with little hard work). for several years). The most critical points include: access to raw fabrics and a network of suppliers, a professional workforce, distribution and logistics infrastructure, and tax incentives.

For example, East West was able to move some of its production capacity from China to Vietnam in 2002, because rubber was easy to obtain in Vietnam and the chain of origin was not very complicated. Additionally, the company was able to deepen its operations after identifying additional resources that were only available in Vietnam. “In my experience, raw fabrics are the most important,” Ellyson explained.

Ellyson elaborated that they have also acquired a facility in Costa Rica, for medical manufacturing, in part because Costa Rica has a free trade agreement with both China and the US, so raw materials and components can be imported, and finished products can be exported, without tariffs. However, the logistical costs there are very high, so “we focus on small products with value density” in that region where you can “air freight in, air freight out, without major expense.”

East West also has two facilities in Juarez, Mexico. Ellyson shared that for products that have a high amount of mechanical components like plastics and metal, it is a pretty “immature supply-chain” and the costs are 15-20% higher than Asia. But, some of this is offset by better lead-time from final assembly to delivery (one week vs. one month or more); lower freight costs ($2-4K to drive a truck over the border vs. $6-7K to ship a container from Asia); and low tariffs due to the free trade agreement through the United States-Mexico-Canada Agreement, or the USMCA.

And then, with such transparent logic and a demonstrable effort to dissociate ourselves from China, why can’t we “separate” now?

Understanding why China is suffocating the United States and many multinational corporations has a lot to do with the government’s creation of special economic zones (SEZs) in the 1980s, designed to attract foreign investment, stimulate innovation and drive growth. commercial. The first SEZs were considered experiments because in the past China was a “closed” economy, where the government controlled almost every facet of production, costs and resource allocation, thus isolating itself from the global market and restricting personal businesses and foreign trade. .

Sunset in Shenzhen, China

For example, the city of Shenzhen was once a small fishing town of 30,000 before being designated as one of the first SEZs in 1980. Today, Shenzhen, ranked among the ten smartest global financial centers in 2024, is the home to generations of multinationals. Companies like Huawei and Tencent (maker of Wechat) and ranked in 2023 by Forbes as one of the 10 cities with the highest number of billionaires, some consider it the “Chinese Silicon Valley. ” The Shenzhen experience illustrates what happens when dense clusters of suppliers, logistics infrastructure (including roads, railways and ports), professional workers, economic investment and tax incentives come together. In fact, the World Economic Forum estimates that 90% of the world’s electronic products are manufactured in Shenzhen, including mobile phones, televisions, air conditioners and drones.

The other main element that gives China its competitive advantage is critical raw materials such as cobalt, titanium, lithium, magnesium, and rare land parts, either by mining them directly or by uploading them from other countries and refining them. The U. S. Geological Survey released a list of 50 minerals critical to the U. S. economy (and national security), and China is the most sensible source of 26 of the 50 minerals. CRMs are used in a variety of industries, adding force generation, communications technology, transportation, and national defense. They are a must-have for everything from cell phones and PC hard drives to electric vehicle batteries, precision-guided missiles, and high-speed missiles. Missiles. – Technological ammunition.

Top sources of imports (2019-22) of non-fuel mineral products with US net share of more than 50%. . . [ ] Import dependent

As a consequence, US companies are heavily reliant on Chinese companies to source component parts, and manufacture products more cost effectively. Boeing has stated China has a component role on every current Boeing commercial airplane model — the 737, 747, 767, 777 and 787 Dreamliner; and that more than 10,000 Boeing airplanes currently fly throughout the world with parts and assemblies built in China. Apple has been relocating factories into Southeast Asia and India, but still relies on several Chinese-made components in its products, such as acoustics, glass, connectors, and display panels. Apple also assembles the majority of iPhones, iPads and MacBooks and other accessories in China (in Shenzhen, Chengdu, and Zhengzhou), through its contract manufacturing partner, Foxconn. And, while Tesla manufactures its vehicles for the US market in the US, forty percent of Tesla’s EV battery suppliers are Chinese companies.

Ellyson of East West drilled down on the economic realities of the supply chain trickling back to China, elaborating that they had two plant closures in North Carolina in 2024, which were a direct result of the 25% tariffs imposed by President Trump in his first term. He shared, “we were one of the largest electronics assemblers east of the Mississippi and many of the components have to come from Asia…there is no domestic source,” so when faced with already higher labor costs in the US, combined with the rising cost of important component parts due to the tariffs, “we had to move most of those assemblies to Costa Rica and Mexico.”

I also spoke with Cres Ferrell, Managing Partner of ReNEW Manufacturing Solutions (ReNEW), a Build-to-Print manufacturing and machining company with five locations, all located in the United States. He explained that the relocation to Mexico is just a “back door for China. ”

United States Map – Border with Mexico

ReNEW produces machinery parts for large Original Equipment Manufacturers (OEMs) – mostly using carbon steel, including components for railcars, locomotives, and heavy construction equipment. However, they are constantly negotiating with their OEM customers that want to cut costs by moving to Mexico. Just across the border, Chinese companies have set up shops and are “importing steel at a 70% discount to US steel” and then the OEMs can import product to the US, tariff-free, under the USMCA. As a consequence, ReNEW has to remain competitive by creating operational efficiencies through automation and by extension, reducing spend on US labor.

With so much fragmentation of the global supply chain, it begs the question, what can and should be manufactured and assembled right here in the USA, at competitive prices.

Ferrell emphasized that there is opportunity in the machining and fabrication industry, explaining that there are actually 200,000 component parts of a locomotive but there is a huge shortage of skilled labor because technical trades like welding, for example, are no longer taught in high school as a vocation.

Ellyson and Ferrell agree that certain products may be prioritized for U. S. production, such as complex or new technologies that require a lot of precision, validation, and high-level, hands-on experience.

The fact that the Biden management passed 3 large pieces of law funneling trillions of dollars and/or tax incentives toward innovation and commercial productivity in the U. S. is an vital step in the right direction, which in the end fueled a production renaissance in the U. S. Since 2021, more than $2. 1 trillion has been allocated via the government for pro-production projects via the Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022, and the CHIPS Act. And according to Blackrock, as of November 2023, the personal sector had pledged an further $614 billion for the production of semiconductors, electric vehicles, and batteries.

But much more capital and investment will be needed to build a US manufacturing ecosystem in line with China’s SEZ model, and its development could take decades. Meanwhile, “Made in China,” directly or indirectly, is the sad truth we face. .

*The ten members of the Association of Southeast Asian Nations are: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

Scott Ellyson is the CEO and co-founder of East West Manufacturing (EW), a global engineering and production facilities company that specializes in bringing products to life from design to distribution. With more than 30 years of experience in production and source chain management, Scott has been instrumental in the company’s expansion and innovation. East West serves key industries such as smart devices/IoT, automation/robotics, commercial generation, and medical/wellness by offering scalable solutions, speed to market, load effectiveness, and uncompromising qualityCommitted to making the world cleaner, safer, healthier, and wiser, the company collaborates with its consumers for end-to-end support throughout the product lifecycle.

Cres Ferrell is the Managing Partner of ReNEW Manufacturing Solutions, a Build-to-Print manufacturing and machining company with five locations in the United States, with 225,000 feet of production area and over 175 employees.   

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