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As the global economy continues to reel from the ongoing crises stemming from 2020, China manufacturing is in a tailspin. Their downward spiral as the “factory of the world” is evidenced by recent data showing new manufacturing orders are continuing to decline at a rapid pace.
Several factors are driving this trend, but the Asian country’s ongoing handling of COVID is primarily to blame for growing disillusion regarding China’s ability to safely and predictably manufacture for export.
Long the favorite destination for offshore manufacturing efforts, China has been on the decline since prior to the COVID crisis. From corporate loan crises to the Trump tariffs to the 2020 public health crisis, China’s manufacturing economy has grown less and less appealing for leading companies in the US and abroad.
China manufacturing has historically been the cheapest way to outsource labor for manufactured goods. For years, the Asian giant has been called the “factory of the world.” Home to sprawling industrial megaplexes and factories, China manufactures almost everything Americans consume. But recent data shows they’re shopping elsewhere in increasing numbers.
According to recent numbers, US manufacturing orders for Chinese-made goods are down a staggering 40%. Supply chain disruptions and other challenges are reducing demand for goods made in China. Many US companies are now finding it’s just too difficult or expensive to outsource there.
In November, China’s manufacturing purchasing managers’ index recorded the lowest reading in seven months at 48. And China’s non-manufacturing PMI, representing general business sentiment in services and construction, dropped to 46.7, down two points from October to November.
And in a stunning reversal of a historic container shortage and backlog at US ports, total vessel container volume between August and November dropped 21%. Trade data shows US imports from Asia have dropped to their lowest level since 2020. Far from being congested, US ports are now relatively inactive as demand for China manufacturing continues to slide.
Without a doubt the largest factor driving this shift away from China manufacturing has been China’s ongoing Zero COVID policy and its devastating effects on the country’s manufacturing sector. Seemingly endless waves of lockdowns follow only very small outbreaks of COVID. Recently, Foxconn – China’s largest manufacturing plant for iPhones – locked down over 200,000 workers when their entire plant was closed for about a week. Workers eventually broke out of the facility and fled into the surrounding villages.
Now, three years since the world was introduced to this virus, China continues to disrupt entire supply chains in a fruitless attempt to eradicate every trace of it. As a result, their overall economy is in danger of plunging into a deep recession as leading companies shift their operations elsewhere.
But other factors are also at play. With fuel prices on the rise, it’s just not as attractive to transport cargo from across the ocean. And because of the recent tariff war, duties on Chinese-made goods are becoming prohibitive. Disruptions, shortages, and quickly changing demand trends compound the situation and make large, global supply chains untenable and unattractive. More resilient and localized supply chains are becoming the new paradigm, as global brands rethink globalism.
Certainly not all China manufacturing is being reshored to the US. Many large companies like Apple are shifting to other Asian countries. Vietnam is expected to be the largest beneficiary for technology manufacturing leaving China. India is also seeing much of this rearrangement in the global manufacturing configuration. Gradually, China is losing their manufacturing market share.
Since 2016, China’s share of manufactured goods has dropped in many categories, some of which include:
Meanwhile, Vietnam has increased market share in these same categories. And India is poised to take on a large portion of the semiconductor chips market, along with Taiwan. But many companies are looking outside of Asia entirely. To many, the answer is not another Asian offshore destination, but rather nearshoring their operations to North America – specifically to Mexico.
Mexico’s market share for manufacturing has been on the rise in recent years. And recent numbers show the economy is in growth mode again after the 2020 crisis. Mexico is attractive to US firms for its proximity to the US market as well as its low-cost, skilled manufacturing labor. Mexico’s skilled labor costs are on par with or in many cases actually lower than China’s. Shipments are usually made by truck and therefore not subject to port congestion or high fuel costs of transoceanic freight.
And most importantly, Mexico’s response to COVID was mild and business-friendly. For the past two years, Mexico’s economy has been entirely open with little to no restrictions on workers, factories, or international travel. As such, much of the loss in China manufacturing is Mexico’s gain.
More and more, China is looking like an old answer to the new challenges the world now faces. And with global markets likely entering a recession in 2023, this contrast will appear in stark relief. China’s days as the world’s factory are numbered.