China’s economy has been struggling for quite some time and the news is only getting worse. In late March, its manufacturing sector shrank for the fifth straight month following weak investment, industrial production and export numbers at the beginning of the year. And while China usually experiences a seasonal rebound after their New Year holiday, that rebound didn’t occur this year.
Seeing as how China has the world’s second-largest economy, what could this mean for the United States?
Right now, the U.S. is China’s largest trading partner and China is the second largest supplier of U.S. imports. But right now, sourcing from China brings huge risks that can impact supply chain stability.
The good news for U.S. supply chains
Over the course of the last decade, Mexico has increased productivity and manufacturing expertise and is now challenging China. Mexico’s labor costs are lower, their wages are higher, and their productivity per worker is also higher. And, of course, it is closer to the United States. This means better lead times, more manageable logistical costs and an advantage on energy costs for U.S. companies that look to Mexico to fulfill their supply chain.
Mexican Supply Chains
Companies initially rushed to move manufacturing to Mexico after the North American Free Trade Agreement came into law in 1994 because its labor was cheaper. But they moved on to China when China joined the World Trade Organization in 2001—because China could then offer similar legal security to working in Mexico at lower labor costs. But after the 2008 recession, many companies found themselves holding too much stock due to long supply chains and started looking for options for making goods closer to their main markets.
China is no longer as cheap for goods as it used to be, and the length of time it takes a company to receive cash from customers after paying out the costs of making a product can be far longer with longer supply chains. The cycle is greatly shortened with closer or local sourcing.
And Mexico has a particular strength in many industries in labor-intensive final assembly of products. The US auto industry has been in Mexico for years, and Whirlpool and General Electric have both built plants there.
But there are steps you can take to prepare your supply chain for a crisis. The conditions in China are just another reminder that it can be crucial to do just that.
At ZDA Supply Chain Recruiting in Denver, we can help you find the right talent to help plan for situations such as this and who can stay ahead of supply chain trends. To learn more about how we can help you grow your business, contact us today!