If companies wanted to diversify their production facilities away from China, where would they go?

Potential destinations for relocating or expanding manufacturing capacity emerge when we look at our newly developed Global Supplier Index (GSI).¹ While China cannot be easily replaced as a manufacturing hub, rising wages in China, high transport costs, and the Chinese government’s Zero-COVID-19 strategy are forcing firms to consider other regions for production. Our research suggests that North America (and Central America by proximity) and certain other Asian economies may be optimal alternative locations. Globally, some economies can easily support a new expansion of their manufacturing capacity because of low labor costs and geography. Others will benefit from reshuffling of supply chains because their industrial bases can support new industries with the required intermediate inputs.

As firms diversify their supply chains, they must be strategic and targeted and not seek one-size-fits-all solutions.²

Insights for What’s Ahead

• Geopolitics should be a deliberate consideration in decisions to locate manufacturing plants, along with labor costs, existing supplier bases for available inputs, and other structural factors such as labor shortages, particularly for the US and European economies.
• North America (the US, Canada, and Mexico) has a sizable supplier base capable of supporting more manufacturing activity than it currently does. But not everything can and will be reshored because comparative advantage is not just about a supplier base. Labor costs are still critical for deciding where to locate manufacturing, as are other institutional characteristics of an economy, including ease of doing business and property rights. Given high labor costs, high taxes, and regulation in the United States and Canada, Mexico and Central American economies could be beneficiaries.
• Given new disruptions to commodities markets (e.g., metals and food) associated with the war in Ukraine and weather events, new opportunities could develop for upstream suppliers in Australia and Brazil, even though they too are being negatively affected by shifts in global supply.
• Companies now recognize that shifting to regional and domestic suppliers, and diversifying supply sources away from China, should be strongly considered. China’s Zero-COVID-19 strategy and ongoing large-scale shutdowns could accelerate this shift. These China-specific pressures, as well as pressures from governments looking to make supply chains more resilient and higher transport costs (e.g., fuel, shipping containers, warehousing, etc.), will lead to either duplication of supply chains in the broader Asia region or moving closer to other regional manufacturing hubs.