China has been the undisputed king as a global manufacturing hub for many decades. Its cheap labor costs coupled with excellent infrastructure and logistics made companies from the U.S. and Europe to shift their manufacturing to the Asian country. In recent years, the Trump administration has been actively seeking to bring back manufacturing jobs to America and other allied nations and end China’s dominance in the sector. The Wuhan coronavirus seems to have triggered what could eventually turn out to be a mass exodus of foreign manufacturers from China.
According to a recent survey conducted by electronics industry trade group IPC, almost 40 percent of electronic manufacturers feel worse about the impact of coronavirus on their business than they did a month back. The survey points out that “China’s economic recovery won’t get kickstarted until May in a best-case scenario, and that is especially true for consumer-driven sectors hammered by the fact that the locals are restricted from travel and are staying home out of fears of infection. Discretionary retailers and restaurants face the biggest potential impact,” according to Forbes.
This is just the short term effect. What is interesting is how the world is going to respond once the coronavirus outbreak is over. Will companies continue to rely on China as a manufacturing hub or will they decide that relying on the Asian nation is a risk. The US-China trade war had already forced several businesses to move out production units from China and explore places like Bangladesh and Southeast Asian nations to set up shop. Businesses were worried that if the US-China relationship were to worsen any further, Trump would slap Chinese imports with even more tariffs, a move that would affect their revenues and profit margins.
And then suddenly, the virus appeared. China shut down entire factories. Supply chains got disrupted. Weeks have passed since China has been manufacturing at its normal pace. Businesses dependent on China are now asking whether it was a wise decision to manufacture in the Asian country. China does not have the significant cost advantage that it earlier had. There are other countries with far cheaper labor costs and that too with a government that won’t be watching over you like a hawk.
In Europe, retail pharmacies are unable to stock surgical masks since they have been procuring them from China. The current supply disruption might make them think about producing it locally or at least in neighboring countries. This is true for all businesses.
Betting on a single country to handle a huge chunk of global manufacturing is now proven to be a disaster. Manufacturing activity spread across multiple nations is likely to be preferred in the future. This way, if few countries had to shut down some of their production, businesses at least have a chance of procuring supplies from other regions where factories might be working just like any other day.
A Mexican advantage
The disruption in supply from China is expected to benefit Mexico the most. Many U.S. businesses have been considering Mexico as the best alternative to China for a long time. As the risk of running a manufacturing center in China keeps rising, these considerations will likely turn into concrete plans. After all, Mexico offers some excellent advantages as far as American businesses are concerned.
“It is the only low-cost border country with a free trade deal with the United States… Thanks to over 25 years of NAFTA, Mexico has become a top exporter and producer of trucks, cars, electronics, televisions, and computers. Shipping a container from Mexico to New York takes five days. It takes 40 days from Shanghai. They manufacture complex items like airplane engines and micro semiconductors,” according to Forbes.
The only problem with Mexico is safety. Businesses worry that establishing a business in the country means dealing with systemic corruption, drug cartels, kidnapping gangs, personal protection rackets, and so on. If the Mexican government can crack down on its criminal elements and make the place a safer region, the country will easily have an advantage over China in the manufacturing industry.