China’s Declining Manufacturing Dominance
International options looking worse all the time. The Chinese economy is looking very shaky right now. Between bad export numbers, disappointing growth, and the terrible real estate sector, the economic environment in China has never been this bleak. Compliance with US rules hasn’t gotten any easier, but steering clear of violations on the China side has never been more difficult.
The Potential of Mexico
Is Mexico the answer? Well, Mexico could be part of your solution — but there may be cause for pause. The Peso has been appreciating like mad and has risen 16.7% since July 2018 — putting it within spittin’ distance of the average Chinese tariff that went into effect at the same time. In addition, Mexico is presently reporting industrial occupancy rates of 99% in all the places you want to be, implying a wait of 6 to 12 months for space.
Vietnam – Promise and Risks
What about Vietnam? It’s a great option IF you already have a partner or are in serious discussions AND you can guarantee the integrity of your supply chain AND hostility between US and China doesn’t spin out of control. There’s a lot that can go wrong in VN and it’s not the easiest place to get started, but if you are up and running then you should be fine for a while. Just remember that if your VN factory relies on a China supply chain (and there’s a good chance they do), then you are responsible for making sure that all of your productions are compliant – especially with UFLPA.
The Future of Global Operations
The US does good work if you can find the workers and facilities, but quite frankly it still looks better as a market than a production center. TSMC had to push back on its deadline for the Arizona facility due to a lack of qualified technical workers.
For a while, I was looking for some kind of North American “Travelling Wilbury’s Super Band” type of corporate entity to develop. Cutting-edge new products would be designed in California or Texas, produced in Mexico, and sold in the lucrative US market. We’d find something for Canada. Mining perhaps. I’m not sure. It could still work, I’m convinced, but there seems to be growing hostility towards Mexico by the right-wing in the US. Maybe this isn’t the right time to push the envelope on cross-border distributed development.
If you’re still in China, you’ve probably assessed the options and risks and are at peace. Excelsior, sir. I wish you the best. For those who have been diversifying supply chains away from China, this seems like a time for near-term consolidation and mid-term planning.
2024 may bring the geopolitical signals we need. There will be presidential elections in both the US (November) and Mexico (June), and if the news is positive then you can take it as a good business-friendly(er) sign. (I must remain impartial, but let’s just say that in Mexico the good news would sound a lot like Blaudia Bleinbaum.). With a few minor tweaks (currency, crime, infrastructure, internet, capitalism), the Mexican economy could finally come into its own.
Final Word
In the long run (+ 24 months), production is most likely going to move closer to markets as automation in the factory and AI in the marketing department put a premium on customization and quick delivery. The giant MNCs have already doubled down on production in Mexico, but SMEs have tended to take refuge in VN. SE Asian production will probably be safe for a while, but eventually, hostilities between China and the US will poison the well. Smart actors will keep their options open and be ready to react to environmental shifts (war, regulations, crisis).
As the world economy continues to segment itself into opposing blocs and regions, geopolitics and compliance costs will force production close to home. This might not be the absolute best time to pull the trigger on a Mexico production/logistics facility — but it’s a good time to start aiming.
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