'Made In America' Sounds Great, But What If You Don’t Build Your Own Product?

It’s no secret that American consumers prefer the “Made in the USA” brand label. But will people pay a premium for products made domestically?

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In late 2020, the Reshoring Institute conducted a survey examining those very questions, with revealing results for American brands. Nearly 70% of respondents indicated that they prefer American-made products, with more than 83% of respondents willing to pay a premium of up to 20% for domestic-made products.

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Manufacturing your product domestically proffers additional advantages beyond the ability to attach the “Made in the USA” label. In comparison to production in Asia (particularly China), domestic production requires a shorter supply chain, enabling companies to be more agile and capable of shifting production more rapidly in response to changing consumer tastes or demand patterns.

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Made in China: Pros and Cons

Companies relying largely or exclusively on production in China can not only miss out on these benefits, but they also have some additional challenges to navigate, including tariffs on goods produced, the risk of intellectual property theft, ever-rising landed costs and lack of trust in Beijing, to name a few.

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As a result, many well-known companies, as well as the smaller producers that supply to them, have shifted to or added domestic or nearshore production — whether entirely or for certain components — to leverage these benefits and mitigate risks associated with an over-reliance on China production.

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For large household brands, complementing production in Asia is a relatively straightforward exercise in site selection of the best and most cost-effective location for your new facility. This so-called "China plus one" strategy has become increasingly popular in the past 4-5 years, as China’s clearcut advantages over the rest of the world have started to erode.

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But shifting production is much more complicated for one type of company in particular: small-to-midsized brands that rely wholly or partly on subcontract manufacturing in China. These companies don’t actually manufacture the product that bears their name. They might outsource manufacturing entirely or for one or more key subcomponents.

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Before exploring China production alternatives for those companies, it’s useful to examine how we got here in the first place. After all, these midmarket companies are the very same ones that turned to subcontracting in China to stay competitive with larger brands in the first place.

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A Timeline of Subcontract Manufacturing in China

Companies turned to that strategy because it paid benefits for a long time. Subcontracting in China enabled companies to crank out products bearing their name, without the substantial upfront capital investment required for their own facility, production lines, processes and labor force. By working through a subcontractor, such companies could ramp up production and launch quickly, enjoying limited barriers to entry.

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And it’s no surprise that so many companies went this route. China’s strengths as a global manufacturing superpower are well-established: rock-bottom labor costs, strong logistics and supply chain, a supremely scalable and elastic workforce, engineering know-how, advantages conferred by Beijing to the manufacturing industry and so forth.

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But then tariffs hit. And for a lot of companies working with subcontract manufacturers in China, this 20% hit to the bottom line was the straw that broke the camel’s back. I don't believe it was the sole reason. As I mentioned above, China’s advantages as a production location have been waning over time, and larger companies already put measures into place to diversify their global production footprint.

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But the imposition of 20% tariffs caused many companies working through subcontractors to more seriously look at alternatives, possibly for the first time in many years. That interest in alternatives remains, even as the Biden administration assumed office, because some companies have learned they are better off having options to relying solely on China for production.

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Of course, one key question remains for some companies: How do you shift from being a company that buys and distributes a product made by someone else into a company that makes and sells its own product? How do you suddenly make the transition to a manufacturer when you weren’t one before?

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The Steps to Moving Away From Subcontracting

Making the shift from subcontracting to building a product on your own is achievable if you follow some key steps.

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One of the first hurdles you’ll need to overcome is the extraction of your intellectual property. Because you haven’t been making your product — your subcontract provider has been — you will need to re-engineer your own production process from scratch. Once your subcontractor catches wind that you are thinking of ending your contract with them, it will be challenging and possibly expensive to extract information from your provider without putting your IP at risk.

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So, when we work with clients looking to move away from a faraway subcontractor, IP process re-engineering is the first step. Next, examine key requirements for human capital and supply chain. What types of indirects will be needed to meet your production requirements? What headcount will be required from a direct labor standpoint and what skills and capabilities must they possess?

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Once those elements are clarified, look at your supply chain and the logistical requirements of moving your product from A to B. What compliance, certification and regulatory obstacles must you evaluate when looking at your supply chain?

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Then make a blueprint of your production process and select a suitable location (that meets your budget) for your first production lines. Finally, choose a team to set up your initial production lines and you'll be in a position to choose a launch date.

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At that point, you would have officially transitioned from a brand that you distribute to a manufacturer. Your production costs in the U.S. will certainly be higher (if Mexico is an option for you, the increase over China in operating costs is less extreme), but you’ll be closer to your customers and more conveniently located for site visits, maintenance and repair trips.

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