There has been a lot of speculation in the news about the many ways that life will be different in a post-COVID-19 world.
Will we return to crowded restaurants, sporting events or festivals?
Will we sit at small open-office desks like we used to?
Will we work from home more?
The influence of the global coronavirus pandemic will definitely affect all these behaviors, but will it have other global effects?
Many in the real estate community are just starting to discuss the potential effects on manufacturing. As part of our research for this article, we spoke with a variety of our real estate clients in both the U.S. and Mexico. For decades, the United States has relied on Mexico as a robust manufacturing partner. Yet in the late 1990s and early 2000s, many manufacturers chose China as a lower-cost alternative. Like many strategies, there were pros and cons to manufacturing in China.
One downside to manufacturing in China is many corporations found their valuable intellectual property was not secure. After a year of having their product built there, it was not uncommon for a U.S. firm to find a copycat product on the market. However, the prices from China were often so low that industries took the risk of intellectual property loss for the reward of immediate profits.
In 2015, the yuan, which the U.S. government accused China of artificially manipulating, was allowed to adjust to market forces. Influenced by this, Chinese labor costs rose, and the price of Chinese-built products increased as well. Another consideration in selecting a manufacturing location is speed to market. Goods manufactured in China can take 30-40 days to transport via ship to crowded ports in California, or even longer through the Panama Canal or around South America. Meanwhile, Mexican goods are easily and cost effectively delivered north via rail. For these reasons, Mexican manufacturers argued that the benefits of manufacturing in China no longer outweigh the benefits of manufacturing in Mexico.
Fast forward to 2020. President Donald Trump made U.S. trade agreements a huge target for change. NAFTA was amended with a few changes relatively swiftly and renamed the USMCA – United States Mexico Canada Agreement. Finalizing this agreement removed the uncertainty of working with Mexico and Canada for U.S. businesses. China, on the other hand, is still embroiled in a trade war with steep tariffs which continues to drastically transform or eliminate the benefits of Chinese production over other alternatives. Recently, the exchange rate of the dollar to the peso has made Mexican manufacturing even more lucrative. Then the novel coronavirus appeared in Wuhan, China, and spread globally.
After the rapid spread of COVID-19, China went into extreme lockdown and factory production declined or was halted. Shipping of goods were also stopped or drastically curtailed. One example of this was the production of the N95 masks needed worldwide as personal protective equipment; these were not coming out of China, which exacerbated a critical shortage. This supply chain reliance on China highlights a weakness for many U.S. and global organizations. For some companies, a disruption like COVID-19 can mean a stop to all their product flow. Alternatively, businesses that produce in multiple countries have the strategic advantage to shift their production to other manufacturing bases; this has been a strategy employed by many firms trying to stay competitive in turbulent times.
As the coronavirus has spread globally, no country is immune from the production and shipping disruptions it has created, not even Mexico. While the pandemic has not benefited or hurt only one country, its main lesson has been that the resilience of a firm’s supply chain is of key importance.
For many it is not a question of eliminating Chinese production, but rather, diversifying the supply chain to eliminate having all of one’s eggs in one basket. While Mexico is not the only option to China, it offers proximity to U.S. markets, a young workforce at competitive salaries, and protection of intellectual property. This makes it one of the top contenders as a manufacturing option. Even Chinese companies are now choosing to manufacture outside China – often in Mexico – to speed up the supply chain into the U.S. and avoid tariffs. No matter how they each achieve it, companies today need to protect their own businesses by analyzing all the options and creating a robust and flexible supply chain.
Featured photo by Sebastián Berho