As supply chains shift, others get their economic miracles
Chris Pereira says the world’s factory is turning on a dime to bring factories to rest of world
As global supply chains divide and expand out of China, including for geopolitical reasons, other countries are taking on a bigger role in supply chains linked to the country.
Mainland companies often gain little from this beyond continued access to Western markets, but the biggest beneficiaries are the countries taking on manufacturing roles with significant investment, job creation and knowledge transfer from China.
Over the four plus decades since China’s reform and opening up, the country built some of the world’s largest and most important supply chains.
Much of this manufacturing takes place in the Yangtze and Pearl River deltas, where factories and industrial estates, roads, bridges, ports, railways and other infrastructure combine with a large workforce making socks, smartphones and everything in between.
These supply chains evolved, most prominently in cities like Shenzhen, as companies and industries went from only assembling goods to designing, manufacturing and shipping globally leading products.
But just as China’s industrial capacity is nearing the height of its prowess, many parts of the supply chains are shifting abroad as trade restrictions in Western markets reshape entire industries.
To maintain sales in these markets, Chinese companies are investing huge sums and building manufacturing facilities in places like Vietnam, Indonesia, Mexico and even the United States. The world’s factory is turning on a dime to bring factories to the rest of the world.
This massive shift in trade is often discussed in terms of how it’s impacting prices, the American consumer market, the Chinese economy or the cat-and-mouse game of US policies trying to curtail Chinese goods entering the country.
But what’s often left out of the discussion are the benefits received by these new manufacturing countries. The most immediate and obvious benefits are investments and job growth in these thirdparty countries.
With its proximity to the US and its large low-cost labour force, Mexico might be gaining the most.
One industrial estate in Mexico’s state of Nuevo Leon being built by Lingong Machinery Group is expected to generate US$5 billion in investment and create 7,000 jobs. The estate will, no doubt, house many Chinese companies looking to shift manufacturing there. Trina Solar is reportedly investing up to US$1 billion in Nuevo Leon; Hisense has announced another industrial estate in the same state.
Meanwhile, closer to China, Vietnam is hosting more Chinese manufacturing. Just one helmet factory in Vietnam is expected to create 400 new jobs.
A subsidiary of another major Chinese company, Tsingshan Group, the world’s top nickel producer, is reportedly planning to build manufacturing facilities in Indonesia to produce electric vehicle (EV) batteries.
Such manufacturing and investment were major factors in China developing its own world-class supply chains and logistics, and eventually the impressive technology companies coming out of the country today. Why can’t the same be true for Vietnam or Mexico?
A Morgan Stanley report quoted an equity analyst as saying: “Nearshoring is expected to be a long and sustained race that could help build new ecosystems in Mexico’s existing manufacturing hubs.”
Other Chinese companies in the clean energy and electric vehicle space are reportedly seeking to build factories in the US to gain direct access to its market, though these projects are being met with significant political resistance. Would proposed EV battery manufacturing in Michigan’s decaying auto heartland not help in reviving that industry?
There is, of course, some merit to the argument made by industry lobbyists like the Alliance for American Manufacturing, which said the “introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the US auto sector”. But it can also be argued that this sector has been in decline for decades due to reasons unrelated to the recent Chinese auto boom.
Now that Chinese-backed production facilities, along with significant job creation, are coming to these communities, they are often unwelcome. Regardless of the complicated geopolitics, the undeniable fact is that these facilities will create much-needed jobs.
As China has become the global leader in clean energy technology, and the US seeks to limit its reliance on the mainland for such technologies, this knowledge transfer from China to America will also have significant implications in the long run.
While the US and other Western countries seek ways to counter China’s increasing tech prowess, and Chinese companies skirt these restrictions by manufacturing in third-party or destination countries, new winners and losers are emerging in this complex global trade matrix.
The biggest winners appear to be these third-party countries and the United States. Chinese companies will still be able to do business, but they will eventually lose the hard-fought gains of dominating the supply chain and the technology behind it.
Regardless of the complicated geopolitics, the undeniable fact is that these facilities will create much-needed jobs