Situation in China's manufacturing industry
According to statistics, China's manufacturing industry accounts for one-third of the world's share, ranking first in the world. Products mainly come from the chemical industry, steel, cement, automobiles, and color TVs, air conditioners, refrigerators, washing machines, personal computers, tablets, smartphones, and other industries. Although there is still a long way to go with the world's leading level in high-tech and high-end products, in terms of basic manufacturing, it has long occupied a dominant position, and it can be said that China is a global manufacturing center.
However, with the outbreak of The Covid-19, this situation has begun to change, and China's position as the world's leading manufacturing country for nearly 30 years may become the final scene.
The outbreak of The Covid-19 has hit China's economy more severely than the market currently realizes. Judging from the current impact, Wall Street has been greatly affected. Last week, the S&P 500 Index fell by more than 8%, making it the worst-performing market among all large countries infected by The Covid-19. Even in Italy, which has more than 1,000 of the Covid-19 cases, the situation last week was slightly better than that of the United States, which shows that the United States is more dependent on the China market than other important countries.
On January 23, 2020, China, Beijing ordered the extension of the Lunar New Year holiday to postpone rework. The Covid-19 spread rapidly in Hubei Province, the epicenter, and caused great impact and panic. The CCP does not want this situation to repeat itself in other places and shut down. The travel restrictions and quarantine of nearly 60 million people across China have brought commercial activities to a halt.
The most terrifying thing about the Covid-19 crisis is not the short-term economic losses it caused, but the potential long-term damage to the global supply chain. China automakers and chemical plants have closed more production lines than other industries; not only that, most IT company workers have not yet returned to work; shipping and logistics companies reported higher than the national average level of downtime. He said: "The global auto parts, electronics, and pharmaceutical supply chains will all feel the chain reaction of this severe disruption in the coming months."
The topic returns to the United States. A large number of American companies have been affected by the inability to guarantee production capacity due to the suspension of production of China cooperative factories, particularly the pharmaceutical and medical product industries. In the previous year and a half, the United States tried to reduce its trade deficit with China and has reached an agreement with China on the first phase of trade negotiations. However, companies do not like the uncertainty of tariffs. They need stable partners and hope to purchase elsewhere. Many companies have moved their cooperative companies to Vietnam, Bangladesh, and entire Southeast Asia. With the outbreak of the new crown virus, this situation Is accelerating.
It is no longer possible for China to become a low-cost global manufacturer, and the days of dumping cheap products all over the world are coming to an end. And companies worry that if the second phase of the trade agreement between the United States and China fails, greater changes will occur, which will speed up the process. It is not easy to choose one or more new countries. No country has such a complete logistics system as China. Few major countries have tax rates like China, and Brazil certainly does not. India? It seems to be a good choice, but its logistics is very bad, at least for now.
What about Mexico? President Trump signed a new United States–Mexico–Canada Agreement (USMCA) with Mexico last year, and Mexico is the biggest beneficiary. Mexico and the United States have been cooperating for a long time and are close to each other. It is estimated that more and more foreign direct investment may shift from the United States to Mexico. After a period of rising, in the manufacturing sector, the multiplier effect of foreign direct investment on the gross domestic product (GDP) may lead to Mexico’s annual rate of 4.7%. increase. Mexico is the best place to take advantage of the long-term geopolitical rift between the United States and China to try to change. It is the only low-cost border country with a free trade agreement with the United States.
Thanks to the North American Free Trade Agreement for more than 25 years, Mexico has become the largest exporter and producer of North American trucks, automobiles, electronics, televisions, and computers. It takes 5 days to ship a container from Mexico to New York, and 40 days from Shanghai. They also manufacture complex products such as aircraft engines and miniature semiconductors. In engineering, Mexico ranks eighth.
Security remains the top issue for foreign companies in Mexico, who have to worry about kidnapping, drug cartels, and fraud in the name of personal protection. If Mexico can have half of China's security level, it will be a boon for Mexico. On the premise that security is guaranteed, Mexico will be the best country in Latin America, and Mexico will replace China as the largest trading partner of the United States.
According to Foley's survey report, more than half of the companies surveyed produce products outside the United States, and 80% of companies producing in Mexico also produce elsewhere. Among Mexican operators, 41% of their products come from China. When asked whether global trade tensions caused them to move their business from another country to Mexico, two-thirds of the respondents said that they have done or planned to do so within a few years. As a result of the trade war, a quarter of respondents have moved their business from other countries to Mexico. For those companies considering relocation, 80% said they will relocate in the next two years. Among companies that have recently transferred or planned to transfer their supply chains, approximately 64% said they will transfer their supply chains to Mexico.