China's Downturn: What it Could Mean for U.S. Manufacturing

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On Thursday, global stock markets plunged for the sixth time in as many days amid continued and growing concerns about the languishing Chinese economy. 

As of 3 p.m. EST, the Dow Jones Industrial Average had dipped by 336 points, while futures in both the S&P 500 and Nasdaq 100 slumped by 39 and 116 points, respectively. 

Following a meteoric rise in the early months of 2015, the Chinese economy began floundering midway through last year. Some economists attributed a strong U.S. dollar and falling oil prices as two of many factors negatively affecting Chinese economic growth in the latter part of the year. 

What's more, industrial investment from companies overseas, as well as production in the Chinese manufacturing sector, has dwindled considerably since Januray 2015, when the Chinese economy saw such dramatic gains. In concert, these factors have drastically contributed to China's recently sluggish GDP growth.

On January 4, China's Caixin report showed the country's manufacturing sector was contracting -- still. As overcapacity, weak demand, and diminished exports to countries such as the United States continue to define the woes faced by many Chinese manufacturers, December marked the 10th consecutive month China's Purchasing Managers' Index read below 50, coming in at 48.2. 

Small and medium-sized companies are under growing pressure. Toward the end of the year, some decided to close down because they're not making any money -- BBVA Research economist Xia Le

Is The China Economic Downturn All Part of a Global Economic Slowdown?

Coupled with an over abundance of products and parts and a decline in the commodity market, the Chinese slowdown is rippling through the global economy. 

As evidenced in the December ISM Report, exports from China have drastically declined over the last several months, signaling decreased demand for Chinese manufacturing. Theoretically, such would be good news for manufacturers in the U.S. -- won't more buyers begin to source domestically moving into 2016? 

Yes ... and no. 

Since 2010, the US Economy has never contracted faster than it did in December. As orders and production shrank, and manufacturing employment decreased at the end of 2015, many U.S. companies found themselves struggling to find answers moving into a new year. 

Global GDP Growth Estimates Through 2020

As China's economic growth continues to slow, specifically with declines in the highly relied upon manufacturting sector, overseas markets will ultimately suffer in the very near term.

Already, decreased Chinese spending has led to reduced export sales and overseas profits for U.S. manufacturers selling goods and services in China in several sectors.

And with global markets shuddering, economies from the South America to the Eurozone are suffering, too.

In 2015, emerging markets saw minimal to negative growth. From declines in commodities prices to weak global productivity -- exacerbated by the global dependency on Chinese imports -- global growth slowed by about 1% last year.

This week exemplified that trend. European stock markets were hit hard. The Euro Stoxx 50 dropped by 2.8%, while Germany's Dax nosedived by more than 3%. Even amid signs of accelerated growth from the Eurozone's various manufacturing indices, export outlooks have been tempered by a strong Euro and global economic uncertainties. 

What Could  the Chinese Downturn Mean For U.S. Buyers and Suppliers of Custom Manufactured Parts?

Despite the apparent gloom, domestic manufacturers are potentially in a good place. In recent months, sentiment in domestic sourcing has regained considerable ground amid reshoring initiatives. And industries such as energy are quickly growing in emerging markets. Domestic manufacturers, both large and small, can possibly discover new business opportunities at every turn early in 2016.

Consider the energy sector. In November, China's demand for fuel-oil declined, coming in at it's lowest point in 10 months. And in recent years, China's demand for coal and natural gas has slowed, leading to increased demand for wind and solar products.

Anders Runevad, chief executive of Vestas Wind Systems, the world’s biggest producer of wind turbines, said his company is "seeing very good momentum across the board globally." And in Q1 of 2015 alone, Chinese investment in renewable energy sources, such as wind and solar, accounted for 1/4 of the global total investments

This contagious quality of renewable energy could very well spell success for U.S.-based manufacturers in 2016. As demand in China and emerging markets grows, those manufacturers in and supporting the energy sector could see an uptick in orders in the coming months. 

For U.S. buyers, it means that competition is waning across the board.

2016 is going to be a good time to benchmark your current suppliers and diversify your supply chain, sourcing new suppliers to gain competitive pricing.

As more manufacturers look for business in new places, getting ahead of the curve and sourcing domestically will become more and more viable in the coming months. 

Ultimately, it remains to be seen how the current China scenario will eventually play out. In the near-term, the downturn will likely weigh heavy on the purchasing and import descisions of Chinese executives. In the long-term, it could reinvigorate manufacturing sectors across the globe, leading to more diversified supply chains across economies. 

In the U.S., it could very well be the catalyst needed to truly jumpstart the manufacturing sector in 2016. 

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