COVID-19, Global Supply Chains, & Opportunity for Mexico

As the pandemic draws on, COVID-19 continues to expose holes in the way we organize our world. Among the most affected facets of business have been global supply chains.

By Dorinda Ma

“Three decades ago, U.S. producers began manufacturing and sourcing in China for one reason: costs. The trade war brought a second dimension more fully into the equation – risk – as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs. COVID-19 brings a third dimension more fully into the mix, and arguably to the fore: resilience – the ability to foresee and adapt to unforeseen systemic shocks”, states Patrick Van den Bossche, partner at management consulting firm Kearney. 

As the pandemic draws on, COVID-19 continues to expose holes in the way we organize our world. Among the most affected facets of business have been global supply chains.

According to Harvard Business Review, procurement teams across firms are trying to secure raw materials and components to protect supply chains. Lack of accessible information and coordination among global teams, however, have posed challenges. When businesses aren’t aware of the components of their supply chains, they cannot determine the origin of supply and where threats to production capacity are, and they cannot identify alternative supply sources. 

Material procurement has also been hindered by general overdependence on consolidated centers of production. When production abilities of just one country are compromised, such as China, it creates cascading effects on not just companies but countries, underlining the need for risk diversification within supply chains.  

What COVID-19 has done, says Paul Donovan, chief economist of UBS Group’s global wealth management unit, is add another cost to a long and complicated supply chain. 

Katy Huberty, head of equity research for North America Technology Hardware at Morgan Stanley, believes we won’t see much change in the short-term. Diversification will be limited as companies are currently focused on cash preservation in costs.

But in the long-term, we may see American firms moving manufacturing into Mexico. 

Since the trade war, United States companies have been in the process of withdrawing their manufacturing out of China and moving closer to home, to Mexico. This decision was further solidified by the signing of the United States-Mexico-Canada Agreement (USMCA) this January. 

While tariffs and the USMCA made China a less attractive manufacturer, COVID-19 has made it impossible to work with certain Chinese manufacturers unable to deliver materials due to quarantines and work shortages. 

The greatest advantage of relocating to Mexico is the opportunity for geographically localized manufacturing. Localizing production will allow companies easier access to inventories at a lower cost. Goods from Mexico can be imported via ground transport whereas goods from China must come by ship or air. Ground transport allows for shorter and cheaper import times and costs, as well as impose a lower environmental impact. 

Mexican manufacturing also offers more opportunities for transparency. Emerging technologies allow for companies to coordinate transportation between the U.S. and Mexico. This includes procurement of trucks on both sides of the border, customs clearance, insurance, financing, and reporting. Software allows companies to know the status of their cargo at all times. On the other hand, U.S.-China trade requires manufacturers and importers to discuss shipping logistics with multiple contacts to get products to their final destinations. 

Mexican manufacturing has been on the rise. Kearney’s Near-To-Far Trade Ratio (NTFR), calculates the ratio of annual total dollar value of Mexican manufactured goods to the U.S., to the dollar value of manufactured imports from Asian 14. In 2013, this number was around 37%; it has since increased to 42%. As COVID-19 runs its course, we can only expect to see this ratio grow.

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