Ranking Emerging Market Manufacturing Locations

Without a doubt, the clearest path for an emerging market to achieve high rates of long-term economic growth and to reduce poverty levels is to develop a manufacturing sector that is competitive enough to export its products to wealthier markets around the world.  There are many examples of the viability of this path, most of which are found in Asia, where countries such as Japan, South Korea and now China have used the export-oriented manufacturing path to achieve remarkable levels of prolonged economic growth.  These countries benefitted from the fact that they did not face too much competition from other emerging markets during the early phases of their expansion, as well as the fact that they developed their manufacturing industries at a time when the international economy was in the process of globalizing.  The knowledge that manufacturing exports are the key to prosperity has not been lost on most emerging markets, sparking a worldwide competition among such countries to attract investment in their manufacturing industries. 

Unfortunately, the global economy of today is proving to be quite challenging for emerging markets as a number of factors make it more difficult for them to achieve the levels of growth that had been achieved in Asia in previous decades.  First, the global economy has slowed, particularly in those developed economies that provided the export markets for Asia’s manufacturing sectors in previous decades.  Second, China, despite rising labor costs, remains a formidable competitor, dominating global manufacturing like no other country in modern times.  Third, automation within many manufacturing industries is rising as a threat to the manufacturing sectors of all emerging markets, while providing a life-line for the manufacturing sectors of higher-cost developed economies.  Given these factors, it is no surprise that only those emerging markets that can establish themselves as competitive locations for manufacturing operations will succeed in attracting the investment they need to improve their economic futures.  

In order to measure the attractiveness of emerging markets as manufacturing locations, we have developed a system to rank emerging markets as potential locations for manufacturing operations.  Our ranking system consists of four criteria, each of which plays a vital role in the ability of a country to attract investment in its manufacturing industries.  First, access to key export markets is a vital factor for emerging market manufacturing locations, as these countries need to be able to export to wealthier or faster-growing markets.  This encompasses both trade deals with such markets as well as the physical ability to export goods to these markets.  Second, political and economic stability is a major advantage for any prospective manufacturing center as it builds confidence in investors about the long-term viability of these countries as manufacturing locations.  Infrastructure is the third key factor, as the ability of manufacturers to ship their products from the factory to the port, and on to the export market, is often a decisive factor in investment decisions by manufacturers.  Finally, cost levels remain a huge factor for most manufacturers, particularly those engaged in the production of lower-cost, or more labor-intensive, manufactured goods.  When you consider these four criteria, it is easy to see why Japan, South Korea and China were all able to develop world-beating manufacturing industries, and why so many other emerging markets have struggled to do so.

Asia: As Asia is home to the best examples of emerging markets that have managed to lift their economies up on the backs of export-oriented manufacturing industries, it makes sense to start our rankings there.  Thanks to the success of the aforementioned Asian economies, this region is now the unquestioned center of global manufacturing, accounting for a remarkable share of the world’s production of manufactured products such as steel, cars and electronics.  As you can see from our rankings of Asian emerging market manufacturing locations, you can see that China remains highly competitive, even as cost levels have risen sharply and the country’s working-age population begins to decline.  However, you can also see that there are many other emerging markets that have the potential to emerge as major manufacturing centers in their own right.  For example, three Southeast Asian countries (Vietnam, Malaysia and the Philippines) all rank highly, with Vietnam having the advantage of a higher degree of political stability than its most of its neighbors in that region.  In contrast, India, the country seen by many as the heir to China’s role as the global center of low-cost manufacturing, suffers from low scores in terms of stability and infrastructure, two issues that the Indian government must do more to address.  Finally, the economies of Central and South Asia score very lowly in our rankings, limiting them to all but the lowest-cost manufacturing operations.

Central and East Europe: Our next region is Central and East Europe, where a number of emerging markets have benefitted from high levels of investment in their manufacturing industries.  This has been due to the fact that they are now deeply connected with the wealthier markets of West Europe and the fact that traditional manufacturing centers in that region, most notably France and Italy, have lost a great deal of their competitiveness in recent decades.  A good example of this has been the move of many automotive manufacturing facilities from West Europe to countries such as Slovakia and the Czech Republic over the past 25 years, a move that has allowed these Central European countries to close the wealth gap with their western neighbors.  In fact, almost all Central European countries have benefitted from the rapid expansion and modernization of their manufacturing industries during this period.  In contrast, success has been more hit-or-miss in other areas of eastern and south-eastern Europe, with a few countries (most notably Romania) developing major export-oriented manufacturing industries, but with most countries in this region failing to match the success of their Central European rivals.  Looking ahead, as West Europe remains an expensive place to produce goods, Central and East Europe will remain the location of much of the growth of European manufacturing, although rising costs and shrinking labor forces are becoming a serious threat.

Latin America: The last region we will look at is Latin America, a region that has largely fallen well behind its emerging market rivals in Asia and Europe.  There are many reasons for this poor performance by Latin American manufacturing centers.  One, outside of Mexico, the region’s manufacturing sectors primarily produce goods for local markets, and growth in these markets has been relatively poor.  Two, most Latin American manufacturing sectors trail their rivals in Asia and Europe badly in terms of competiveness, particularly in terms of infrastructure, costs and access to major export markets.  Of course, Mexico’s manufacturing industries have benefitted from access to the North American market thanks to NAFTA, but this has failed to produce the levels of economic growth seen in many Asian emerging markets.  Brazil is also home to a sizeable manufacturing sector, but dreadfully low competitiveness levels there have resulted in hard times for most Brazilian manufacturers in recent years.  Outside of Mexico and Brazil, Latin American manufacturing centers are small and scattered, further hampering the ability of the region to develop large-scale manufacturing industries that can have a long-term positive impact on the region’s economic growth.