Historically, the outsourcing of manufactured goods has proved a profitable solution for many companies the world over, providing a quality product at a reduced cost. However, as we have all seen over the past year, historical trends have the capacity to change in an instant, increasing the importance of having a backup plan. Not only this, but with a need to focus on recovery and new pathways for growth, outsourcing has exceeded its utility for cost-cutting, and has become a political weapon. The ability for this industry to be monopolised by large global economies has led to a competitive edge, where new countries, such as Paraguay, one of the focuses of today’s article, are able to present lower costs and attract the custom of businesses that had been outsourcing overseas elsewhere.
This background sets the scene for today’s topic, in which the United States and China present themselves as key players in the outsourced manufactured goods industry, where China has traditionally been the host nation for US companies. As is the dynamic nature of global trade, the presidency of Donald Trump in the United States, and his move to put tariffs on Chinese imported goods, represented a catalyst for change in the relationship between both global powerhouses. While this could prove detrimental to the stability of both countries’ economies, the door is somewhat left open to other countries to act as competitors for US custom, which is where Paraguay enters the equation.
On the surface, you could be wondering why Paraguay is such a good alternative. With an economy a fraction the size of China’s, the immediate desire to take the plunge into the Latin American country is not necessarily overwhelming. As a business owner, you will want to know what is on offer that would make the change worthwhile, and to outline some of the main reasons, Paraguay is a strong alternative due to:
1. Market potential
2. Maquila industry
3. Faster delivery times/More workable time difference
In order to ascertain the relative value of each advantage in terms of outsourcing manufacturing to Paraguay instead of staying in China and suffering the tariffs, the above ideas should be explored in further detail in order to afford you an opportunity to decide for yourself.
Market potential
International relations, and specifically, interdependence, whether it be in business or politics, plays a big part in where companies relocate and to a certain extent dictates trade links. However, when this idea is tied in with the potential for development within the market, it could be supposed that the balance of global trade may be shifting towards future planning as opposed to political security. We have already seen what a change in a country’s leadership can do to long standing international relations, and perhaps the COVID-19 pandemic serves as reinforcement to the idea that nothing is certain. By looking forward and seeking out markets with large margins for expansion within the outsourcing industry, US companies can find a sense of opportunity in the wake of uncertainty in Paraguay. This is helped by a stably growing economy in which inflation levels remain low, representing examples of the results of innovative solutions to the outsourcing of manufacturing in various sectors found within the Latin American nation and projecting it onto the global stage for recognition.
Maquila industry
Going deeper into the theme of innovative changes to outsourcing, the presence of maquiladora companies in Paraguay demonstrates the forward-thinking attitude relished by companies in a globalising marketplace. If you are unfamiliar with this scheme, we have recently published an article and podcast episode on our YouTube channel outlining it in depth, however for the purpose of this article, we will touch on some of the key features. Put simply, a maquiladora is a factory that exists outside of the headquarters of the country the business doing the outsourcing is based, where manufacturing is done often with no tariffs or other economic incentives when compared with other countries. In keeping with today’s theme, the lack of tariffs in Paraguay when compared with China following Trump’s presidency, the benefits of maquila industry are immediately evident. There is also a unified tax rate of 1% and maquila corporations are exempt from VAT, presenting further economic benefits.
Time difference and fast delivery
One part of the maquila industry that we did not mention in the above section is the reimportation of goods following assembly in Paraguay. If we look quickly at the shipping times between the US and China, maritime freight takes between 30 and 40 days and delivery of air freight takes between 8 to 10 days. This is inconvenient to say the least, as although the prices are low, a long waiting time in a world of instant gratification presents a difficult logistical battle. Let us apply this same theory to Paraguay, where shipping times between Asunción and Atlanta, Columbus and Portland, to take some examples, is only 4 days. It is clear that there are going to be some cities with a longer transit time, but the previous examples show you the contrast that exists between China and Paraguay. Shorter shipping times allow for supply and demand issues to be solved as well, as products can be assembled and reimported quickly, meaning there is less chance of excess stock stemming from over-purchasing, saving your company money.
If you operate a business in the US and have a need to manufacture your products abroad, please feel free to contact us today. At Creimerman, our team of global citizens provide a bespoke service to our clients, and we would love to explore your opportunities in Paraguay and be by your side on your outsourcing journey.