Few people would argue that 2020 was not a chaotic and challenging year for everyone. The COVID-19 pandemic shook nearly every industry globally with its volatility - it was a good time to own stocks in Netflix, Zoom, Nintendo, and pharmaceutical companies, but not in travel industries such as cruise lines and airlines, or even traditional retail. The effects on the manufacturing industry overall, are more complex and do not present a clear winner or loser of the other sectors in the global economy.
At CMC, we noticed some interesting and, occasionally, counter-intuitive results from the lockdowns and restrictions of COVID-19 on manufacturing in China. We believe that many of the manufacturing trends we saw in 2020 will continue for at least the first half of 2021 when the COVID-19 vaccines are more available globally. However, we believe that some of the changes that we have seen are not likely to go away after the world opens up.
In this blog, we cover the existing trends in manufacturing that will remain unchanged, and how it will impact future trends.
Predictions for the Manufacturing Industry
The World Bank expects that global output will expand 4% in 2021 but remain well below pre-pandemic projections. While general demand has decreased, the effect on manufacturing has not been as severe. Many manufactured products are still in demand and we expect to see that increase as more people can work again outside their homes as the economy recovers. In particular, we have noticed a large increase in certain consumer products and individual sports equipment. CMC is now working with some of the companies that make bicycles, golf clubs, and tennis rackets to meet the increasing demand. Other industries, such as electronics and medical supplies, are also seeing a steady increase.
Travel Industry Trends and its Impact on Business Relationships
Travel bans are likely to continue worldwide until the number of COVID cases drop significantly and consistently. CMC found that travel bans do not have a great impact on manufacturing, but rather on foreign companies’ ability to visit and work with their factories in China. Many requests to CMC are for companies that cannot travel and want a trusted partner to have eyes and ears on the ground in China.
We foresee this trend continuing in the future as companies see the cost comparison of travel vs using trusted services in China. Flying to and within China, ground transportation, meals, translators, etc. can be expensive for foreign companies visiting China and are often not as productive as they hope for. As companies realize this, we believe that more organizations will outsource manufacturing assistance and liaison with their Chinese suppliers to capable third parties since they have experience in quality inspections.
Impact of US Trade Policy
The incoming administration of Joseph Biden is unlikely to roll back President Trump’s tariffs on Chinese products, at least not in the short-term. While we have seen a small effect on Chinese manufacturing from the tariff, it has not been as big as expected. Some companies have moved to lower-wage countries such as Vietnam, and a few have started to “re-shore” to North America, but for the most part, companies have remained in China.
There are a number of reasons for this:
- Moving is complicated and may not be worth it if the tariffs end soon
- China already has the infrastructure needed to make most products
- Registration processes in new countries can be time-consuming
- Failure to understand the “true cost” of moving production. We see this often as companies focus solely on wages and do not look at the ease of doing business, logistics, productivity, and nearness to market
We do not see the situation changing over the next few years. China is likely to remain a primary manufacturing hub for the near future, even if it is not the best location for all types of manufacturing or markets. Vietnam will likely become the next major manufacturing centre; however, it will not overcome China due to its limited capabilities and (though rapidly improving) inadequate infrastructure.
Changing price levels and the tariffs make North America a more attractive location. Price levels in much of Mexico are at the same level or lower than China, and the closeness to the American market means that manufacturing can be a lot more flexible and reactive to market forces than production in China.
The manufacturing situation will almost certainly be better in 2021 than in 2020, but the recovery is likely to be sluggish until the COVID vaccine is widely distributed. By Q3 2021, we expect to see full recovery within manufacturing, with changes that minimize frequency of personal travel for foreign employees and a continued search for new production locations.
If you are in process to build your manufacturing strategy for 2021, an added help from a manufacturing consultant will help to enhance your planning. Check out our blog "Are Manufacturing Consultants Worth the Money?" It can help you better understand not only what to look for but what to expect when hiring manufacturing consultants.
¹’Global Economic Prospects’. The World Bank. Available at: <https://www.worldbank.org/en/publication/global-economic-prospects>
²(2020)Yen Nee Lee. Spencer Kimbal.’Biden says he won’t immediately remove Trump’s tariffs on China’.CNBC.2nd Dec. Available at:<https://www.cnbc.com/2020/12/02/biden-tells-nyt-columnist-he-wont-immediately-remove-trumps-tariffs-on-china.html>