© Khunaspix Dreamstime.

SAVILLS reports:

The disruption associated with Covid-19 brought the resilience of manufacturing supply chains into sharp relief. China has long played a dominant role in global manufacturing, but rising labour costs, the US-China trade war and, most recently, Covid-19, has led to a reassessment of increasingly stretched global supply chains. Calls are growing to bring supply chains and manufacturing closer to final destination markets. What does this mean for global trade flows, and what are the real estate implications?

An accelerator rather than a disruptor

The US-China trade war, which began in 2018, had already started to re-shape global manufacturing and supply chains. US manufacturing imports from China declined by 17% in 2019, a total fall of $90 billion. This served to boost trade with other parts of the world, with US trade from other Asian low-cost countries increased by $34 billion in the same year. Mexico was a major beneficiary, with exports to the USA rising by $13 billion. The trend continued in the first three months of 2020, intensified by Covid-19, as US manufacturing imports from China were down by 29% in Q1 2020 compared to Q1 2019.

The Covid-19 pandemic turned supply chain resilience into a global, increasingly politicised, issue. French President Macron has called extensive offshore manufacturing or relocalisation ‘unsustainable’. Japan’s recent Covid-19 stimulus package includes subsidies for firms that repatriate factories, while India’s prime minister has spoken about a ‘new era of economic self-reliance’.

But supply chains are complex and tangled. It is never as simple as closing a factory in one location and opening one in another. Relocating manufacturing is costly, so redirecting future investment is a more likely trend. The perceived benefits of nearshoring will also vary depending on the type of good. Some sectors, such as automotive, are already largely organised at a regional level.

Cost: a key part of the manufacturing equation

China’s comparatively low labour costs are one factor that helped the country become the major player in global manufacturing. Low land costs, favourable tax legislation, good infrastructure and skill base are also factors. The Belt and Road Initiative further established the country’s dominance, forging stronger political, economic, social, and trade ties with the neighbouring countries and in turn opening up new markets for China’s exports, and imports.

But as China developed its cost competitiveness has been eroded. Unit wage costs (the average cost of wages per unit of output) for manufacturing have risen by 285% over the past 20 years. By comparison, manufacturing unit wage costs in India, Thailand, and Cambodia have increased 132%, 26% and 12% respectively in the last 20 years. Only Vietnam has seen manufacturing unit wage costs increase by comparable levels, up 270% of the same period, although wages remain half those of China’s.

To read the full post, please click here.



Comment on this article

You must be logged in to post a comment.