Will Covid19 eliminate China as the world’s manufacturing center?

To say that the pandemic has had far-reaching effects is an understatement. It extends across people, across the globe and across many industries we rely on. From pharmaceuticals, transportation, food, clothing, events, and entertainment beverage and retail, virtually no industry can escape unscathed from this economic threat. The impact of the coronavirus on shipping all these products from China has exposed just how heavily the world relies on Chinese manufacturing.

China has been the world’s leading manufacturer for close to 35-years. Its global status has made it an economic powerhouse. But, in the wake of the coronavirus, many say that “There is no way it can be the low-cost, world manufacturer anymore.”

The Forbes article presents a bigger question. Are there any alternatives? Other overseas locations or even domestic manufacturing? How realistic are these given how tightly Chinese manufacturing is woven into the fabric of the world economy? China is so completely integrated into global manufacturing and supply; a complete decoupling is near-impossible. Is it possible to find manufacturing hubs that can supplement Chinese production?

How COVID-19 Affected Shipping from China

The coronavirus is impacting shipping by causing major shipping delays. The shutdown of Chinese factories meant demand for freight capacity dropped drastically.

There was a 25% increase in empty sailings out of China leading to a reduction in spot rates in container sea shipping and 3.7% unemployment in sea freight capacity. Maersk, canceled more than 50 sailings since the outbreak and predicted a 5% drop in earnings.

Airlines have cut passenger routes to China by 90% - including Singapore Airlines, Qantas, British Airways. This represents a corresponding drop in air cargo capacity. However, now that China seems to have been brought the virus under control and factories are beginning to start up again, there’s been an increase in manufacturing. However, without a corresponding increase in air cargo belly capacity, air rates have spiked by a massive 27%.

Of course, this doesn’t mean shipping from China has completely shut down. Martini-Vispak still offers access to courier solutions from China. Since trucking to Hong Kong is currently operating at about 70%-80% capacity, we ship our customers promotional products to Hong Kong by truck and use our local warehouse and courier services to make sure your goods get where they need to go.

The China Challenge

Chinese manufacturing is the lifeblood of companies around the world. From fashion and tech to car manufacturers and pharmaceutical producers, almost every company that produces consumer goods turned to China for supplies and manufacturing. The main attraction was access to a massive low-cost workforce, supplemented by logistic global supply links that ensured easy shipping.

The pandemic has put the over reliance on Chinese manufacturing into perspective. Before this all happened, there was concern about whether continuing to use China as the world’s production center was realistic. Increasing wages and tighter environmental regulations meant companies that relied on China’s manufacturing capabilities were looking for viable alternatives.

That honest question was being asked globally. Then, President Trump kicked off a bitter trade war, sparked by staggering unbalance. While the “phase one” trade deal is positive, many believe phase two of the deal will fail in the post-coronavirus world. The tariffs imposed by the US on Chinese goods, caused US imports from China to fall by 16% in 2019; however, during this time frame, imports into the US only dropped by 1.7%, meaning companies were getting their products manufactured elsewhere. The numbers are staggering! Where exactly were goods manufactured?

The Covid19 impact has further prompted companies to consider alternative manufacturing hubs once the pandemic subsides. Supply chains have been a huge concern these past 3-months. Given the factory shutdowns and airlines slashing passenger routes, shipping from China is highly reduced compared to previous years.

Shipping companies cancelled sailings and air cargo is limited. Apple is unable to get components for its iPhones, and Jaguar is flying China-made car parts in suitcases to keep its UK operations going.

What Are the Alternatives?

Companies were already using alternative hubs long before the coronavirus. US companies turned to Cambodia and Vietnam. The US imported 28% and 26% more goods respectively from these two countries in 2019.

Vietnam supplies automotive, aerospace and electronic manufacturing systems. It has a reliable supply chain and industrial experience, its workforce eager to learn and work for lower wages. It’s not involved in any trade war, so it doesn’t present tariff issues. They have a favorable tax system. Vietnam is an appealing manufacturing hub.

Mexico could also be a good option for US and Canadian companies. President Trump and Mexican President Obrador encourage US companies moving manufacturing operations to Mexico.

Mexico is ready to manufacture complex items. They ranked eighth in the world for engineering degrees and already produce airplane engines and micro-semiconductors for General Electric, Boeing, and Kia. Thanks to the USMCA, Mexico offers fast, free trade of trucks, cars, and electronics to the US and Canada.

In Asia, it’s all about the “Mighty Five.” The name given to the five most popular alternative manufacturing hubs - Malaysia, India, Vietnam, Thailand, and Indonesia.

Malaysia is courting manufacturing contracts with a good economy, and open trade and investment. The country is well-placed geographically, offering trade links to the rest of the world, has a good infrastructure of ports that could help the country rival shipping from China, and a skilled workforce.

Thailand ranks well for ease of doing business, its infrastructure is similar to China’s, especially for supporting international trade. It plans to upgrade its infrastructure and attract more Chinese manufacturers as part of the Belt and Road Initiative.

Communication is a big draw for companies looking at manufacturing in India. Since English is one of the country’s official languages. India has a massive workforce and low wages.

Are Alternatives Realistic?

Yes, it’s possible to use other countries as manufacturing hubs. However, these countries present challenges that China doesn’t, and it all depends on your business’s needs.

While Mexico is a good alternative, it has safety issues keeping companies from investing. Kidnappings, drug cartels, and personal protection scams are serious issues that push away foreign investment and manufacturing.

Vietnam produces only a fraction of China’s capability. It’s workforce of 55-million pales in comparison to China’s 800 million and its infrastructure is not as developed. Shanghai ships 40-million containers a year; Saigon Port manages 6-million. Also, border compliance takes double the time in Vietnam than it does in China, and there’s a risk of frequent worker strikes.

In Malaysia, political instability is the deterrent to investment. The country’s minimum wage is double China’s, so labor costs are more expensive.

India’s main issue is a lack of infrastructure. It ranks lower than China on customs, logistics competence, tracking, and timeliness. Their decentralized government system complicates doing business, and poor worker conditions are a serious consideration and a PR disaster.

While it’s true that every manufacturing hubs come with a list of pros and cons, until now China’s had the upper hand. The Chinese advantages outweighing its disadvantages but that could all be changing and could lead to many businesses choosing to manufacture in alternative hubs. For the company’s manufacturing in China, moving operations comes with a series of challenges.

1. How much do I move:Products have two stages - development and mass production. When do you move? Before you develop a new product, meaning the entire lifecycle happens in one country? Or once perfected to begin mass production?

2. Loss of knowledge:If you established manufacturing in China, you’ve invested time to build a team that knows your processes and understands how to create your product. Moving to another country means it’ll take time for you to rebuild and could slow your production in the meantime.

3. What about your current team:You may have a staff watching different parts of your manufacturing in China, from merchandisers and engineers to line workers to operations and logistics managers. If you shut down your China operations what happens to your team there?

4. Language barriers: This means needing skills in a new language. Will you hire translators? Will you need to retool staff? Nothing replaces native proficiency so you may face issues either way.

5. Costs: This isn’t as simple as picking up your current operations and dropping them into another country. Be ready for a significant expense outlay to recruit or move staff, find new premises, and get new suppliers. Are you ready for this?

Is China Still Viable?

With so many companies so tightly linked to China and its factories, it’s will be difficult to completely decouple. These alternatives are being used to supplement Chinese manufacturing instead of replacing it. Because of its size, stable environment, and infrastructure, it’s unlikely that China post-coronavirus will cease to become a top choice for global manufacturing, despite the issues that were exposed with the spread of the coronavirus in China.

Martini-Vispak has been manufacturing promotional products for 25-years. Raw materials are responsibly sourced, then produced in our clean factory in Montreal, Canada. Our China office qualifies partners in the region for sourcing raw materials and decorated products. Martini-Vispak is one of the first companies to bring lanyards and microfiber products to market for our industry. We are proud of our ability to offer innovative new products every year to support our growing distributor base. Learn more