The strong interruption of the supply chain caused by the pandemic I’m almost done, but it has generated a bigger and more permanent change in the global economy. One of them is the relocation of large Chinese factories to Mexico, the courtyard of its main market. The topic was covered in “The Daily”, the New York Times podcast. Below is a summary of the material.
During the pandemic, products were not available in the United States because they were stuck at sea due to supply chain disruption, and especially because factories in China were shut down, which disrupted the entire freight system across the Pacific supplying the Americans. But now there has been a big change.
Mainly no more giant container ships sitting outside major US ports for weeks, and sometimes months, waiting their turn to enter. There are trucks moving and transporting containers. Much of the shortage has ended.
Shipping costs have gone down and it’s pretty much back to pre-pandemic normality. But the kind of globalization that has prevailed for decades has given way switch to something much more regional.
For decades, China was the center of globalization. Multinationals have landed in the Asian country. “China Price” was the code for the lowest possible price.
It was assumed that China had an unlimited supply of workers willing to work in factories, who came from rural areas, and that this was an unbeatable combination, added to investment in ports, government infrastructure works and the construction of Supply Chain .
But since the pandemic, the multinationals have reconsidered this almost blind faith in China. The CEO of Columbia Sportswear, the Oregon-based sportswear giant, said, “For years, when we invested in China, we operated as if freight was essentially free. Freight was cheap and reliable. And now the challenge is how to get your products closer to your biggest markets.
Companies are looking for alternatives to their factories in China. And this leads to Mexico, the obvious place that has manufacturing with low wage costs and easier ground transportation to the US.
As production moves from China to Mexico, many products are transported through the Port of Laredo, Texas, the border city that has long been the primary inland port of the United States.
For their part, authorities in Nuevo León, a Mexican state bordering the United States, say the place is getting something like half of all foreign investment that comes to Mexico.
An hour’s drive north of Monterrey, the capital of Nuevo León, in a desolate spot on the map, a colossal construction zone suddenly appears. It is the Hofusan Industrial Park, where 28 Chinese companies are now pouring billions of dollars into factories to supply the US market.
Some are already in production. Others are under construction, such as Man Wah, a Chinese furniture maker, which is building a $300 million factory on the site. The United States is its most important market.
Even before the pandemic, President Trump’s trade war had begun, imposing punitive tariffs on Chinese goods, making them more expensive for the American consumer. That’s why, long before Covid-19, Man Wah was looking for alternative locations to manufacture his products for the US market.
But when the pandemic hit, they were on the wrong side of the Pacific, so they explored the possibility of opening a factory in Mexico.
They came to Mexico out of proximity and did not settle in the United States due to labor shortages and much higher wages than in China and Southeast Asia.
And as for transportation savings, they calculated that they would be very close to the total costs of making a product and shipping it to a customer. Also, since Mexico is part of a free trade zone with the United States and Canada, if they manufactured in Mexico and qualified for the “Made in Mexico” label, they could ship their products to the rest of North America tax-free.
Adapting to Mexico will not be easy for the Chinese factories set up there. First why the supply chain in Mexico has neither the length nor the sophistication of the Chinese one. That’s why they have to bring many of their key components.
The most immediate challenge is manpower, as they will be operating in a country with very active trade unions.
Chinese companies they are used to operating in a place where unions are forbidden. But in Mexico they will compete for manpower with companies from Europe, the United States and Latin America. And expectations are very different between Chinese managers in Mexico and their bosses in China.
The relatively low wages these companies planned to pay when they set up shop in Mexico may not last long: Workers may ask for more, knowing how badly China needs them.
They will have to distinguish themselves as good employers or they will have difficulty recruiting staff. Man Wah, for example, needs 6,000 workers in a place with 3.5 vacancies for the giant factory he’s building.
The good thing for China is that it will continue to maintain its gigantic market in the US, but the big risk is whether or not it will be able to work with a completely different labor market.
The model has changed. Walmart, for example, 20 years ago preferred Chinese-made products because they were produced at the lowest possible cost. Today, It no longer depends only on Chinese factories.
They insist there is a greater diversity of supplies, of location options, if you sell in the US, have a factory in Mexico or Central America, to avoid the vulnerabilities of manufacturing in China – the trade war and the supply chain – and adopt this regionalization model.
Anyway, China will remain the world’s leading producer because nothing else can match it in terms of supply chain scale and intensity. It’s the one place where you have all the components and raw materials for an infinite number of industries.
But multinationals, not just Chinese ones, have emerged from the pandemic, coupled with the trade war, with the deep awareness that production must be kept close to its main markets.
Source: Clarin
