China Manufacturing & Coronavirus: The Beginning of The End?
Will individuals and companies in the UK think outside the box when it comes to sourcing products in future or will they still automatically think of ‘China’. Nomad Genie looks at why China has become the first choice for manufacturing and how likely that is to change in a world rocked by Covid-19.
Globalisation and global trade is facing its biggest headwinds in a generation - that’s putting it lightly. For the past decades, worldwide economies have benefitted enormously from free movement of goods (and people) throughout countries across the world. China’s exports alone total around $2.5 trillion USD and the UK import almost 7% of their imported goods from China, a country 8,000km away. Covid-19 looks like being the ultimate catalyst to change this.
The Perfect Storm
When China first began accelerating its manufacturing it was mainly down to demand from savvy companies in the US, UK and other top European economies. They would send their products to China and ask for a copycat version. The benefit of this was that an identical replica could usually be produced for a fraction of the price - even when shipping was factored in. It did, however, mean factories beginning to close closer to home in addition to mass redundancy of experienced engineers and production operatives alike.
China Manufacturing Coronavirus
Eventually, China began to lure top overseas engineering and creative talent with handsome salaries and benefits. Nowadays, China has proven it can dominate on a world scale with not just manufacturing, but also innovation and creation of new products. If you want something making - China has long been the first port of call. In fact, this leading role in global manufacturing has been held for almost 30 years. However, Covid-19 threatens to be the catalyst that changes this landscape forever. Supply chains are not currently being disrupted; but totally destroyed.
Trump Tariffs on China
Tariffs placed on goods imported from China pre Covid-19, specifically from the US, already signalled which direction things appeared to be heading for China and the struggle they were about to endure. Sourcing companies began to head elsewhere, in search of sustainable low prices with less uncertainty and fluctuation. Donald Trump was very vocal from the outset and the trade war worsened. He was keen to redress the balance of trade surpluses and negotiations of deals to ensure they were far more favourable to the US. China found itself relatively limited in its ways of fighting back. They suggested they could make life difficult for American companies in China with additional red tape, but Trump was relentless.
'Worse than Great Depression'
Furthermore, the International Monetary Fund (IMF) head Kristalina Georgieva is predicting a worldwide crisis worse than the Great Depression. Three months ago, the IMF was predicting that 160 nations would experience positive income growth on a per capita basis. Now (April 2020), they are expected to report that 170 nations will have negative per capita growth this year.
So what does all of this mean? In a nutshell, it means countries may follow the increasing trend of country-first politics. Reducing global trade, shortening supply chains and that is a potentially big problem for China in particular - a country that relies on a strong global economy and high value of exports.
Made in Great Britain
From Brits’ point of view it would be great to see manufacturers in the UK manufacturing closer to home and proudly displaying the ‘Made in Great Britain’ logo that used to be so common on many reassuringly expensive and quality goods.
Is it feasible for the UK to expect a boost in manufacturing post Covid-19? Certainly when you look at consumer data, suggesting consumers are prepared to pay up to 22% more for Brand Britain. We take a closer look…
For manufacturing you need materials. Steel is one such material used in a huge amount of manufacturing. And, you’ve guessed it, China is the biggest producer of steel in the world. Accounting for more than 50% of the entire world’s supply.
However, the UK’s exit from the EU could be a boost to its manufacturing base. It could provide access to cheaper raw materials from Africa and South America, for example. On the downside, UK exports to the EU may come under pressure and EU countries will be encourages to source within the bloc and from other allies.
Manufacturers in the UK
For companies in the UK or close by looking to sell products made in the UK, there are several benefits. Quality control is much easier. Rather than sending quality controllers out to oversee operations 8,000km away they can pay regular visits to oversee production and liaise with manufacturers if and when necessary. However, perhaps the biggest benefit of all comes to lead times and order quantities. The cheapest way to import goods from China is in bulk, and ship them via the sea or rail. This can take 25-30 days. It means stock is more difficult to manage than if ordered in a little-and-often fashion. If the worldwide economy suffers as expected, companies may realise the importance of cashflow more than unit price alone. Rather than paying thousands up front in order fees to receive goods up to a month later, businesses could receive their orders in a matter of days. A higher cost per unit may still result in a net gain due to a faster turnover, less storage costs, and better cashflow. That could prove to be a big boost for manufacturers in the UK, who are not likely to be the cheapest on a global scale.
Eco-Friendly Products From China
In niche markets, such as eco-friendly products made of bamboo - China is by far the biggest manufacturer - bamboo actually originates from there. Other Asian countries such as Vietnam, Cambodia and the Philippines contribute, but on a much smaller scale. If the raw materials have to be shipped in the first place, it often makes financial (and environmental) sense to manufacturer them in the country that the raw materials are found (or close to them). For the time being at least, Asia looks to have the upper hand with bamboo!
From an eco-friendly perspective we hope goods are produced in a more responsible and sustainable way. It appears that we’ve been stuck with a ticking time bomb in the way goods are manufactured at huge scale and bulk distributed by whatever means. A worldwide recession will mean consumers, and businesses, are more careful about cashflow, what volumes they order, and where they source products from. For the environment, and generations of the future, that has to be seen as a positive.