From The Diplomat:
Which Asian Country Will Replace China as the 'World's Factory'?
Analzying the “Mighty Five,” countries set to replace China as the workshops of the world.
Low-cost manufacturing played a huge role in making China the second largest economy in the world by 2010, compared to the ninth largest in 1980. Now China is rapidly moving into medium to high-tech manufacturing as its labor costs have risen.
“A decade ago, China wasn’t even on the map. Now they have the fastest computer in the world, even beating U.S. national labs,” says Michelle Drew Rodriguez, co-author of Deloitte’s 2016 Global Manufacturing Competitiveness Index.
China’s transition is opening space for other countries to move into low-cost manufacturing, where China until recently dominated. Deloitte predicts that the economies of Malaysia, India, Thailand, Indonesia, and Vietnam, the “Mighty Five” or MITI-V, will inherit China’s crown for such products. The consensus among industry and regional experts interviewed for this article is that India in particular will be the next top hub for low-cost manufacturing.
Manufacturing is central to a country’s economic development. According to a McKinsey report on the future of manufacturing, it “contributes disproportionately to exports, innovation, and productivity growth.”
China, the United States, and Germany are currently among the most 15 globally competitive manufacturing countries in the world. But in the next five years, according to a survey of industry CEOs carried out by Deloitte, the MITI-V of Malaysia, India, Thailand, Indonesia, and Vietnam are set to enter the top 15 most competitive manufacturing countries. They are the “new China,” the top economies for low-cost manufacturing (i.e., labor intensive commodity type products like apparel, toys, textiles and basic consumer electronics).
China Gets a Pay Raise
Manufacturing goods in China is now only 4 percent cheaper than in the United States, in large part because yearly average manufacturing wages in China have increased by 80 percent since 2010. It is in response to this that China, backed by billions of dollars in investment from its government, has vigorously moved into higher value manufacturing.
Dr. Jing Bing Zhang, research director of IDC Worldwide Robotics, agrees with Drew Rodriguez on China’s prowess in advanced manufacturing. “China is very competitive in this area. They are able to produce very complex products. They are able to skill up handsomely and maintain good quality. Smartphones, semi-conductors, robots, advanced manufacturing equipment… they’re even moving into airplanes,” says Zhang. As Chinese manufacturing becomes more high value, and workers’ wages are rising, low-cost manufacturing is moving out.
“This has been happening for a number of years – it’s nothing new. Especially shoe-making [and] apparel are already moving out to Vietnam, Indonesia, and even Bangladesh. China is really focusing on upgrading industry into medium to high tech,” Zhang says.
The “MITI-V” – Which Is the Mightiest?
Manufacturing experts see a varieity of areas as important for low-cost manufacturing competitiveness: young populations, low labor costs, a supportive policy environment, good quality infrastructure, availability of engineers, a minimum level of education for all workers, economic growth and a large internal consumer market.
The different economies all have their distinct advantages and disadvantages but China’s equally giant neighbor to the west stands out from the crowd. “My opinion is that India has the potential to be the next hub for low-cost manufacturing,” says Zhang. He sees India as being the next center for electronics assembly. He points to Chinese consumer appliances giant Huawei, which in September announced that it would manufacture three million smartphones a year in India, and Foxconn, the Apple supplier, which is opening a $10 billion iPhone manufacturing plant in India.
In particular, India’s strengths are its mixture of high- and low-skilled labor and the potential to sell to its huge market of 1.2 billion consumers. Although much of the population is poor, their incomes are rising. “India has a large base of university graduates. This is very important. You still require manufacturing engineers; you also need design engineers. You need supervisors. And India has a large base of well-educated graduates. They compare very nicely to other countries in the MITI-V,” says Zhang.
India’s policy environment is also becoming much more supportive of manufacturing. The Indian government launched the “Make in India” campaign in 2014, which aims to increase the level of manufacturing in the country. The government has achieved some success – India overtook China in 2015 as the country receiving the most foreign direct investment globally and companies have reported improving administrative efficiency at the federal level.
Despite all these positives, India has many challenges. In order to have a flourishing manufacturing base, workers need to be able to at least read and write to operate machinery. India scores low on general skills attainment, ranking 105th in the world according to the UN’s Human Capital Index 2016, lower than any other MITI-V nation. India’s infrastructure is woeful, in particular transport and energy supply, where it ranks lower than most other emerging economies. Government inefficiency is also a major stumbling block – delays in land acquisition and environmental clearances have stalled more than 270 projects across the country.
Nevertheless, India’s huge market, low costs, and positive noises from the government make it unavoidable for any manufacturer looking to produce bulk commodity products. According to Drew Rodriguez, there are major signals, such as “graduation rates, government and regulatory nods,” that may cement India’s position as the next low-cost manufacturing hub.
A senior engineer at BSH Hausgeräte GmbH, the largest home appliances manufacturer in Europe and a major investor across Asia, who works closely with low-cost Chinese manufacturers, also agrees: “India is the future. Infrastructure is not so good but they have so many people,” he says. However, he has also seen Chinese companies moving into Vietnam due to its very stable political environment. Indeed, Malaysia, Indonesia, Thailand, and Vietnam all have their own benefits and some similarities with India.
“The fundamental risks of the global south are not there,” says Dr. Carlo Bonura, region head of Southeast Asia at political risk consultancy Oxford Analytica, referring to the Southeast Asian nations of the MITI-V. There are few risks of expropriation of assets or labor risks, for example. According to Bonura, “This is a region where all the major regimes, regardless if they’re democracies or autocratic, they recognize [the] importance of sequestering political instability from economic stability.” This contrasts with India, which before current Prime Minister Narendra Modi was well known among international investors for being unwelcoming to foreign businesses....MORE
