COVID-19: The end of made in China?
There are many reflections that must be made after the Coronavirus health crisis. Among them, the dependence on China as a "world factory" and a major global supplier should be considered. Will there be industrial relocation after the pandemic?
On many occasions China has been called "the world's factory". All this was due to the wide presence of their products throughout the world and in many aspects of our daily lives. Clothing, computers, cell phones, and toys are just a few examples.
Why did China become the "factory of the world"?
For a long time, China has been an attractive destination for many companies. Low labor and production costs, as well as the development of transport and, consequently, globalization, encouraged many companies to install their production centers in China. This process began in the 80s, having its peak in the 90s and the 2000s.
A decisive factor in making the decision to move production to China was wages. With much cheaper labor than in Western countries and with fewer labor rights, low wages in China made it possible to offset the costs of transporting goods. However, this well-known advantage has been called into question as a result of the spread of the Coronavirus.
The problems of relying on a single supplier
Dependence on a single large supplier such as China has caused problems in the supply of medical supplies (tests, masks, protective equipment and respirators, among others). In the economies of developed countries, the tertiary sector or services sector had more and more weight, while industry was losing weight in the economy. However, the rapid spread of a virus like COVID-19 has caused many countries to rethink their economic model. And it is that, a strong industry is essential to be able to have the necessary material to face a pandemic of this magnitude.
For this reason, it is considered relocating production, diversifying it or making it return to the countries of origin. Does this mean that we are attending the last chapters of the famous "made in China"?
The relocation of production is not a phenomenon that began with the outbreak of the COVID-19 pandemic. The trade war between the United States and China, with an increase in tariff barriers, was leading many companies to return to their countries of origin or to relocate to developing countries. At the same time, producing in China was no longer so cheap, as Chinese workers' wages were growing.
The idea that producing in China was cheap seemed to fade. Proof of this is that China was relocating its own production. This means that only a small part of the products sold by China were made on Chinese soil.
Quality versus price
With this scenario, which seeks to reduce dependence on a single supplier, companies are already planning movements to other geographic areas. The options are to move the production centers to nearby countries with lower labor costs or to return the production to the country of origin.
It is true that China is capable of producing in large volumes and at high speed. However, production in European countries tends to be of higher quality despite higher labor costs. On the other hand, these labor costs would only increase in companies that require extensive use of labor. Thus, if we find companies in which technology is the key factor in production, the problem of labor costs would be solved.
The final decision when buying domestic or Chinese products would be left to consumers. It would be up to them to choose between quality and more environmentally friendly products or products at more affordable prices, as China will try to maintain its production with low wage costs.
One factor to take into account is the time it takes to relocate an industry. Opening a factory is a long-term investment that must be profitable. Therefore, if the production centers were relocated, there would not be a rapid dismantling of the factories located in China.
There is no doubt that, given the size of its population and its industrial and commercial power, China will continue to be a great economic power. However, the COVID-19 pandemic and increased protectionism could end up taking a toll on its economy.
It is more than likely that many governments, in the face of the economic crisis and unemployment caused by the pandemic, will encourage companies to return their production to national territory in order to strengthen the national industry that allows them to reduce dependence on China.
Finally, another drawback that threatens China is the need for close production. If the factories do not return to the country of origin, they could be located in nearby countries. And it is that, the consumers every time demand products with greater rapidity. This is a major handicap for distant factories located in China. For this reason, despite the great development of logistics worldwide, it is convenient to have nearby factories, which allow products to be made available to the market with great speed.