Who Replaces China as a Center of Low-Cost Manufacturing?
China’s 35 years of rapid economic growth and development were driven largely by its ability to become the world’s center of low-cost, labor-intensive manufacturing. In fact, China’s rise from abject poverty in the 1970s to become the unchallenged center of global manufacturing today has produced some staggering data. For example, just a couple of years ago, China accounted for more than 50% of global steel production (up from less than 10% just two decades earlier). Another telling example is the fact that China produces twice as many motor vehicles as the second-leading country (the United States), with motor vehicle production in China rising by a factor of 50 over the past 25 years. Altogether, China’s success in developing a low-cost manufacturing base was the key reason why the Chinese economy managed to record an average economic growth rate of 10% in the 30 years before the country’s current economic slowdown. However, China is now becoming a middle-income economy, and, with its shrinking labor force, production costs are rising across China, costing the country much of its competitiveness as a center for low-cost manufacturing.
As manufacturing in China becomes more expense, companies in search of low-cost manufacturing locations are beginning to look outside of China for potential locations for manufacturing operations. A number of factors are key in attracting this type of investment. First, labor costs must be low, even as automation and increasing productivity levels reduce the human element in many manufacturing processes. Second, the country or region seeking the investment needs to have an infrastructure that facilitates bringing manufactured goods from the production location to the port, and these ports need to be equipped to have these products shipped abroad as quickly and as cheaply as possible. Third, the country in question needs to have access to key export markets, which include East Asia, North America and West Europe. Finally, a competitive low-cost manufacturing center will provide a stable and secure location, largely free from both political uncertainty and labor unrest. Each of these four criteria were met by China as it underwent its manufacturing expansion over the past 35 years. However, few other markets today can meet all four of these expectations, making it difficult for manufacturers to replace China as a center of low-cost manufacturing.
Without a doubt, Asian emerging markets are best-placed to attract much of the low-cost manufacturing investment that had previously been going to China. Already, a number of Asian countries have experienced rapid growth in their manufacturing sectors as Chinese manufacturing loses some of its export competitiveness. One obvious contender is India, thanks to its low labor costs and its huge potential domestic market. However, India does not enjoy the political or labor stability that China did during its manufacturing boom and its infrastructure is in need of massive expansion and modernization. Southeast Asia is home to a number of countries with low labor costs, improving infrastructures and access to key export markets. These countries include Vietnam (the most successful of these economies in attracting low-cost manufacturing so far), the Philippines (growing in services, but not manufacturing) and Indonesia (the largest potential market, but with a poor infrastructure). While none of these countries will realize the scale of the manufacturing explosion that took place in China, each of them has the potential to significantly boost their economic growth rates through low-cost manufactured exports in the years ahead.
Outside of Asia, most emerging markets have struggled to develop large-scale low-cost manufacturing industries, due in large part to their distance from the fast-growing markets of Asia. Mexico, with its access to the giant North American market, may be better placed than any other non-Asian emerging market to develop a larger low-cost manufacturing sector, but rising wage levels and high levels of crime have prevented investment from reaching the levels that had been expected when the NAFTA free trade deal was signed. Elsewhere in Latin America, corruption and poor levels of export competitiveness are hindering the development of low-cost manufacturing sectors, particularly in Brazil, where the manufacturing sector has stagnated in recent years. Central and East Europe benefits from many favorable factors such as a solid infrastructure and relative stability, but its main export market, West Europe, is recording little growth, thus hindering manufacturing investment in this region. Finally, Africa may one day hold the key to growth for the future of the low-cost manufacturing sector, but that day is far away due to that region’s instability, poor infrastructure and lack of access to key export markets.
It is clear that China will gradually lose many of the low-cost manufacturing operations in place there today as costs rise and as the Chinese manufacturing sector moves up-market. Moreover, there is little doubt that other Asian emerging markets are best placed to attract much of the investment that had gone to China in these sectors. Meanwhile, emerging markets are moving rapidly to improve their chances at attracting more manufacturing investment by investing heavily in their export-focused infrastructures and improving their access to key export markets. However, political and labor stability are needed to establish large-scale manufacturing sectors and few emerging markets can offer this stability at present.
As population growth slows throughout much of the world, export competitiveness will increasingly determine the economic success of most emerging markets, so there is no time to waste for these countries to put themselves in a position to emulate China’s manufacturing successes of the past 35 years. Those that succeed have the potential to record strong growth and major advances in living standards in the years ahead, but those that don’t face an uncertain economic future.