The COVID-19 pandemic has spread around the world, revealing the worldwide dependence and connectivity on the manufacturing industry, production lines and supply chains.
According to the 2020 Global Manufacturing Risk Index, developed by Cushman & Wakefield’s Market Research team, workers in Asia are already allowed to return to factories and goods can already be exported from the region, however, Europe and the United States are still in the early stages of reopening production plants and restarting their economies.
Undoubtedly, COVID-19 has generated serious consequences for global manufacturing. Before the pandemic, Oxford Economics had announced that the negative impact of possible trade wars and geopolitical instability had ended for both world trade and manufacturing. However, in February, following the outbreak of the Coronavirus, China took control of the region, and Oxford Economics predicted that the disruption of global supply chains and imports would affect the rest of the world, particularly the Asia-Pacific region, as well as triggering an economic slowdown in Asia.
A month later, in March, when the pandemic’s impact had spread globally, Oxford Economics updated its predictions to explain the disruption of activity generated by the global spread of the virus beyond China.
After World War II, in response to expanding consumer markets in Europe and lower-cost labor in Asia, manufacturing globalization fueled a long wave of ‘offshoring’. In the early 1950s, while Europe was being rebuilt, the United States represented 40% of global manufacturing, and Japan and East Asian countries such as Taiwan and South Korea increased their share of global manufacturing output.
Since the late 1970s, with an acceleration in the 1990s and up to the 2000s, China has hosted most of the offshore production from developed countries. From 2000 to 2018, China’s exports increased nearly 5 times, reaching 1.2 billion dollars, and its global share increased from 3.9% to 28.4%.
The COVID-19 pandemic has exposed the vulnerability of the manufacturing sector, and dependence on global production lines and supply chains. The most affected sector in the global manufacturing industry is the automotive sector, which is facing an unprecedented crisis. In Europe, most automotive plants closed temporarily due to falling demand, supply shortages, government measures, and coronavirus cases in employees. Even though some plants have started to reopen, it will take time before they reach the production levels recorded before the current crisis.
According to the Cushman & Wakefield report, manufacturing companies are expected to take certain steps to address the current situation.
In the short term, they seek to replenish and maintain their inventories with more products and components, in the medium term, they will emphasize ‘nearshoring’ for components to be closer to producing plants, and in the long term, they will reorganize some sectors, including the relocation of plants and component sources, as well as the restructuring of the supply chain and production lines, which will make the management of inventories in time possible again. All of this is intended to give businesses increased flexibility and less vulnerability to disruption in the event of a second wave of the pandemic, or extended blackout periods.
As part of the current challenges, the Cushman & Wakefield report reasons that trade agreements such as Brexit and the NAFTA were already causing an increase in tariffs, both for finished products and raw materials, and were eliminating some of the cost advantages of offshoring.
With global manufacturing significantly disrupted, and taking into account the current global situation, manufacturers of finished products can move forward with the discussions and nearshoring plans that pre-dated the pandemic. This reorganization would shorten supply chains, reducing long lead times and giving manufacturers greater control over production quantities to allow greater flexibility in response to demand.
In addition, automation, robotics and additive manufacturing can make nearshoring a viable cost solution, which was already a real concern for manufacturers before the pandemic when responding to rising wages in China and other Asian countries.
Without a doubt, most countries want to have a strong, job-generating manufacturing sector, as direct manufacturing jobs are better paid because these companies tend to spend more on research and development.
As feasible as the solution may be, it is certain that reorganizing the production chain on a massive scale is not a realistic scenario and will not happen in the short term. For some sectors, such as robotics, microprocessors, and electric cars, nearshoring could pose even more risks to production, because it is difficult to replicate reliable supply chains.
To improve resilience, in the event of a second wave of the pandemic or prolonged periods of national or regional gridlock, manufacturers are more likely to address component supply and supply chain disruptions in the medium term.
Therefore, the quickest and least costly way to address the problems described above is to diversify raw materials and component supplies. Furthermore, as proximity to consumers is essential for decisions regarding manufacturing plant location, nearshoring could be considered as a way to shorten supply chains and face global crises.
The Oradel Industrial Center in Nuevo Laredo, Tamaulipas, seeks to contribute to nearshoring in order to shorten value chains and benefit companies in the manufacturing industry that want to invest in Mexico, and establish their operations near international border crossings.