A manufacturing exodus due to tariffs puts companies that rely on U.S. sales at a disadvantage

Anna-Katrina Shedletsky

When tariff hikes began in the spring of 2018, companies associated with manufacturing immediately went on alert. Over the last year and a half, continued escalations have increased pressure on U.S. and China relations, leaving international companies who rely on Chinese manufacturing looking to reduce uncertainty with short and long term solutions. One of the hardest hit is the electronics industry. As the CEO of a manufacturing intelligence company providing products to some of the most admired electronics brands in the world, I’ve seen the ongoing internal debates and witnessed the ramifications of decisions to move first hand. While there remain many open questions that companies must answer as they prepare to move their supply chains out of China, the impact on innovation is already visible for companies that took early action – and it’s unlikely to get better.

New technology adoption has slowed for those leaving China

For those companies that took action early, investing in plans, creating new relationships, and moving resources became the foremost priority. While companies have long had production lines outside of China to contend with other local tariffs (such as in India or Brazil), southeast Asia has opened its doors to companies looking to relocate not only production lines, but also their new product development activities. Companies that have decided to move portions of their supply chains have had to focus on rebuilding in other locales, eschewing all other improvement or innovation activities in the meantime.

That means less investment in quality improvement, robotics, digitalization, and connectivity in their factories. Mark Jagiela, CEO of Teradyne, a leader in automation for the semiconductor and electronics manufacturing verticales, shared “Some clients began moving quickly when tariffs first came up and that meant some sales lost momentum. Because of the move and upheaval they didn’t want to implement quickly [in the new location] so that slowed things down.” Stories about the slow-down in anything that is not directly part of a supply chain move are common and I’ve heard them from all types of manufacturing stakeholders: brands, factories, and technology providers.

The irony of this slowdown is that a supply chain move is the perfect time to implement new technologies, as many of the factories accepting new programs in southeast Asia are undergoing significant upgrades to get ready. Tai-Yi Huang, CTO of ASUS, said “I see short term and long term impacts [of tariffs]. It is a good opportunity for smart factories. Since you are building a new factory somewhere, you have the chance to start a whole new pipeline and prioritize efficiency, that means implementing technology like AI.”

Should tariffs continue, innovation will be delayed for a different reason

As the number of companies transitioning out of China increases, a new issue surfaces that will continue to delay the adoption of new technologies and innovation – financial strain caused by higher costs in the supply chain, the need to invest heavily in new local teams, and loss of tribal knowledge.

Moving the production of products out of China creates longer supply chains that increase shipping time and costs. Longer supply chains means slower development timeframes and slower reaction times to changes in market demands – both of which will put companies who have moved at a disadvantage to their competitors who have not. To reduce this impact, companies may seek to move upstream parts of their supply chains closer to their final assembly factories outside of China, but this endeavor will take years.

Lost human resources will also create higher costs. Depending on where the final assembly factory is relocated, the local labor itself might actually be lower cost than in some parts of China. There won’t be, however, enough mechanical, electrical, antenna, test, and production engineers in place – so new ones will need to be trained, or moved from elsewhere, a costly process. For companies who have developed deep and lasting relationships with manufacturing partners, working with the same development and production teams year after year, the biggest loss will be in the loss of tribal knowledge and know-how of the local China teams. These teams know what issues to keep an eye out for, remember the battle scars of previous programs, and have political networks at upstream suppliers to get things fixed quickly.

Lastly, continued tariffs may begin to negatively impact global trade, encouraging companies to buckle down to survive the downturn versus investing in growth.

Tariffs are not a problem unique to U.S. companies

While the U.S. manufacturing sector and U.S. brands that manufacture in China are facing major uncertainty in the market, they are not alone. The U.S. makes up 22% of the global revenue from consumer electronics, second only to China at 38%. Any company that relies on the U.S. market for a significant portion of sales and builds their product in China is impacted. All of them will be spending their executive time and resources on moving supply chains, not adopting new technologies. While few companies can escape the burden of dealing with these repercussions, some will: Chinese companies who are market leaders in the Chinese market. While their competitors are distracted with moving their supply chains, they will be free to continue developing and adopting new technologies that will make their products higher quality, more competitive, and able to come to market more quickly. This is an unintended consequence of the escalations of tariffs, and likely creates a long-term disadvantage for U.S. companies.

Innovative technology is needed now more than ever

With the upheaval of ingrained processes and the loss of tribal knowledge as relationships shift out of China, technology that bridges the gap is needed now more than ever. The manufacturing exodus will weaken production processes, decrease product quality, and increase communication barriers between factories and brands. Companies who rely on manufacturing must adapt quickly and prioritize implementing technology that can help them keep a competitive edge during this transition.

With new manufacturing partners comes new uncertainty. Increased visibility onto the factory floor will be key to ramping new products and preventing quality escapes from factories still learning the ropes of a new product line. Companies must invest in technology that leverages assembly line data, provides remote process monitoring, and increases transparency to reduce risk and lay the foundation for a strong competitive advantage in the future. A great place to start is by implementing Instrumental, a manufacturing intelligence solution. Instrumental is a drop-in camera system that aggregates visual data and processes it with AI, allowing your team to detect unanticipated defects, to remotely monitor the factory floor, and to increase yields with insightful data. Plus, Instrumental can provide impact in weeks rather than months: Instrumental doesn’t require systems integrators to setup and uses intelligent algorithms that require little training. Implementing Instrumental and other innovation efforts will pay off immediately in the short term and provide competitive protection for the long term.

As leaders in manufacturing facing change, we also have an opportunity to build better. This is the time to double down on innovation and to start fresh with production processes that are built digital-first, versus retrofitting processes that were built paper-first. Tabling these kinds of initiatives risks ceding significant competitive advantages to those who aren’t as impacted by changes in global trade – and ultimately a step backwards for Industry 4.0 as a whole.