US companies are leaving China. Companies like Apple, Microsoft, Google, and 33% of global supply chain leaders, have moved out or planned to move out over the next three years—and this was before the covid crisis. So where are they going? To Mexico.
Political instability, technology infringement, data security, and privacy issues have long been major concerns for US companies doing business in China. The trade war made matters worse. Then covid exposed the vulnerability of extended supply chains. In the first three months of 2020, China’s exports to the US dropped 11%. In 2019, a US Chamber of Commerce survey found that only 28% of its members planned to make investments in China in 2020, down from 81% in 2016. The popular alternative is Mexico, which has been luring companies by advertising proximity to US markets. (Vietnam is the other popular alternative, appealing to companies targeting Asian markets.) China’s rising labor costs have been approaching parity with Mexico. Add in cheaper logistics, faster time to market, and lower risk, Mexico becomes even more appealing.
This is regionalization at work. “As a result of the covid, many global value chains are going to form regional chains for reasons of efficiency, profitability, and also for safety, said Ernesto Acevedo, Mexico’s Deputy Economy Minister. The recently re-negotiated trade agreement, USMCA, only added more incentive, helping to make Mexico the US’s top trading partner in 2019, with $614B in two-way trade.
And this is not a fleeting occurrence. Says Ben Simpfendorfer, founder of Silk Road Associates, “The supply chain shifts under way now are comparable to the shift of production by northeast Asian companies from Japan, South Korean and Taiwan into China in the 1990s.” This sentiment is echoed by Young Liu, chairman of Foxconn, a Taiwanese high-tech company: “The past model, where [manufacturing] is concentrated in just a few countries, like a world factory, will no longer exist. What we think is more likely in the future are regional production networks.” The future is arriving quickly—America needs to exploit it.
Sources:
Kevin Sieff, “Mexico tries to wrest US firms from China as supply chains shift,” Washington Post, 16 Aug 2020, A16; see also https://www.washingtonpost.com/world/the_americas/us-mexico-china-factories/2020/08/12/c29f4a9a-d0f1-11ea-8c55-61e7fa5e82ab_story.html
Robert Bowman, “The Near-Shoring Trend: Will China’s Loss Be Mexico’s Gain?”, Supply Chain Brain, 23 Feb 2021; accessed from https://www.supplychainbrain.com/blogs/1-think-tank/post/32683-the-near-shoring-trend-will-chinas-loss-be-mexicos-gain
Euijin Jung, “Vietnam and Mexico could become major players in global supply chains,” Peterson Institute for International Economics, 3 Aug 2020, accessed from https://www.piie.com/blogs/trade-and-investment-policy-watch/vietnam-and-mexico-could-become-major-players-global-supply
Kathrin Hille, “The great uncoupling: one supply chain for China, one for everywhere else,” Financial Times, 6 Oct 2020; accessed from https://www.ft.com/content/40ebd786-a576-4dc2-ad38-b97f796b72a0
Photo: Price Waterhouse Coopers
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