fbpx

COVID-19 made China a riskier place to manufacture

 In Newsletter

Issue No. 122

 

Assets Covered: United States Imports from China, United States Imports from Mexico, United States Imports from China Vs. Mexico

 

 

As we push through the coronavirus/covid-19 crisis, it’s hard not to wonder how we’ll change in its wake. We will, without a doubt, see economic and political changes that seemed unimaginable just 6 months ago.

 

One obvious area is trade. Coronavirus first manifested in China, forcing the closure of manufacturing and supply chains for weeks. Although factories are open again, nearly every supply chain manager is now keenly aware of the risk of concentrating supply chains in a single location.

 

According to this article, “China produces about 80% of the world’s air-conditioners, 70% of its mobile phones and 60% of its shoes.” As many Americans learned in recent weeks, 80% of antibiotics used in the US are made in China, as is 95% of ibuprofen, 91% of hydrocortisone, and 70% of acetaminophen. It’s likely that globalization – centered on China – gives way to trade regionalization as one way to reduce risk.

 

While this note is not an endorsement of Mexico, it’s hard – from a US perspective – not to see Mexico as a legitimate sourcing alternative to China. Part of the USMCA free trade agreement, Mexico allows for a diversity of transport methods to the US (trucking, rail, air and sea) with faster transit times, lower relative transport cost to China, convenient time zone, etc.

 

So, let’s first look at what China exports to the US:

 

2020 Forecast China Exports to US

 

United States Imports from China in 2019
This chart was generated using CI Futures. Book a demo to see it in action.

 

As one would expect, there are a lot of electronics exports as well as some lower value goods like toys, furniture, lighting and suitcases. For all of the hype we’ve heard about China’s sophisticated supply chain, it’s hard to believe they’re still concentrated in low value goods like toys, seats and suitcases. Maybe China isn’t as sophisticated as we’d assumed.

 

Looking at Mexico’s exports to the US, we see a huge concentration in automotive, but also some overlap with China in areas like televisions and computers (“Automatic data processing machines”). If Mexico can produce computers, TV and telecom equipment, it’s feasible it can impinge on China’s cozy spot at the top of electronics supply chains.

 

Us imports from mexico 2019

 

United States Imports from Mexico in 2019
This chart was generated using CI Futures. Book a demo to see it in action.

 

While there is overlap, China’s exports to the US are 160% larger than Mexico’s. Why is China so much larger? At one time it was due to an extraordinarily cheap and productive workforce, but that’s changed in recent years. China’s wages have risen more than 60% since 2011 and are now on par with Portugal and South Africa. Wow.

 

China Vs Mex US Imports 2020

 

United States Imports from China Versus Mexico in 2019
This chart was generated using CI Futures. Book a demo to see it in action.

 

With wage competition eroded, the risk associated with supply chain disruption in China will – no doubt – be top of mind for CEOs, CPOs, supply chain leaders, category managers, and many more. A bold move away from China-centric supply chains is just one of the major trends we see in the post-corona world.

 

Need help understanding your component costs or optimizing your supply chain? Complete Intelligence can help. Please email our CEO at tnash@completeintel.com or book a demo with us today.