Manufacturing hubs challenging China’s dominance
Look at the label on many of the items in your home or office, and you won’t be surprised to see the words “made in China”. The Asian state’s position as the “global factory” has long been embedded in international supply lines, offering China both economic and geopolitical influence.
But the Covid-19 pandemic, subsequent recession, and the war in Ukraine have thrown global trade lines and relationships into disarray, causing delays and shortages. For tech, there has been a massive shortage in semiconductors which has slowed sales.
In the face of a slowing supply chain and growing frustration from customers, manufacturing hubs have been established in India, Indonesia, Vietnam, amongst others, in order to offer more capacity to a strained system.
These hubs are also gaining traction. India increased its output of electrical machinery and equipment by 40% between 2020 and 2021 according to the Global Trade Atlas. Vietnam has drawn a $20 billion research and development investment from Samsung. And the move to focus on manufacturing in Indonesia has paved the way for the country to become the 10th largest manufacturer in the world.
China, however, still holds the key to great swathes of the manufacturing sector, accounting for 28.7% of global output, according to the most recent data from the UN; despite a bit of a torrid time over the last 10 years or so.
Challenging number one
China is not only the largest manufacturing country in the world, it is also still growing.
The value of manufacturing output between 2020 and 2021 equated to €4.86 trillion, a 26% increase on the previous period, or three trillion dollars to the layman.
Despite this consistent growth, indicators like the Caixin China General Manufacturers Purchasing Managers’ Index has suggested that Chinese manufacturers are stalling in the face of a zero-Covid-19 policy, and ever-increasing geopolitical tensions.
“The Covid-19 pandemic and China’s debilitating zero-tolerance Covid-19 policies have severely affected global supply chains and tested the country’s manufacturing supremacy,” says Kinh Nguyen, managing director of global automotive & manufacturing solutions group, FPT Software. “Decisions from Western-based businesses whether to build new factories in China or to relocate their production facilities elsewhere have also been influenced by the ongoing trade conflict between China and the US.
“As a result, China may no longer be the manufacturer of the world with industrial centres developing at pace in countries like Bangladesh, India, and Vietnam. Global manufacturers are being drawn in by the reduced labour costs, favourable policies, and enhanced infrastructure.”
It isn’t just the trade war between the west and China, nor the impact of the pandemic that is shifting the manufacturing map – cost is also playing a role, with China’s challengers also making a play for contracts by appealing on costing and process grounds, Nguyen adds.
Rewind the clock a couple of decades and China rose to prominence in the manufacturing world with similar initiatives, as brands took advantage of the global labour market. This is a trend that is starting to reverse, according to Christina Rebel, co-founder and chief growth officer, Wikifactory.
“Manufacturing ‘hubs’ will become more localised as businesses and product designers turn to local manufacturers and circular supply chains, which is why countries like Denmark are becoming more appealing.
“Businesses are beginning to challenge a globalised production model where China is the main factory house, in favour of more sustainable innovation, collaboration and localised production capabilities.
“Although Shenzhen is often considered the Silicon Valley of hardware, as a need for collaboration and innovation grows ever more important, there is a need for a global silicon valley-esque community online, with a distributed network of manufacturers.”
Keeping a hand in
Such a prediction will be music to the ears of Bangladeshi, Indian, and Vietnamese governments, however Rebel also adds that “China will remain a part of that network, and will not be siloed”.
According to the National Bureau of Statistics (NBS), the value of high-tech manufacturing went up by 7.4% year-on-year and equipment manufacturing up 5.6% year-on-year. On top of this, the manufacturing Purchasing Managers’ Index (PMI) shot up to 52.6 from 50.1 in January, exceeding analyst’s forecast of 50.5.
These figures demonstrate the fact that, according to Daniel Kollar, head of Automotive & Mobility at Intralink, rival manufacturing hubs will struggle to completely pull clients away from China.
“Covid aside, China has proven to be the world’s premier value-add manufacturing capital, which required years of massive capital investment and herculean feats of workforce mobilisation.
“To attract a significant swathe of manufacturers to their shores, other Asian markets would have to invest significantly and decisively in their workforce, infrastructure and policy toolkit to attract sufficient capital investment in their homegrown manufacturing platforms, all while ensuring they don’t use up their political and diplomatic capital and avoid excessive rent-seeking behaviour.
“Even if one of these countries were able to pull it off, its manufacturing capacity would remain a fraction of China’s,” Kollar concludes.
Shifting supply chain
Big brands however, are beginning to pay attention to these challenger manufacturing hubs. The likes of Nike, Adidas, Apple and Samsung are all manufacturing products outside of China, but the process of shifting to new hubs is not as simple as closing one site and opening another. Supply chain efficiency will always be a key factor in deciding whether to invest in alternative manufacturing hubs, according to Nguyen and Koller.
“Rising labour costs, geopolitical unrest, supply chain hiccups, and the emergence of new manufacturing hubs outside of China would all be necessary to shift global production away from the nation,” says Nguyen.
“To be viable, countries must significantly increase their manufacturing capacities so businesses have access to the labour, logistics, and infrastructure they need.”
“Businesses just want to make good business decisions,” adds Koller, “and the cheap labour, helpful local governments and increasing level of human capital means that it makes a lot of sense to set up operations in China.
“Despite the bad press China has had recently, when push comes to shove, the country can turn on the charm and implement pro-business policies at least to mitigate, if not reverse, the trend of China offshoring.
“On top of this, in areas where other countries can undercut China on labour costs, China is investing heavily in cost-effective automation that can pick up the slack.
“Asian markets have a good chance of syphoning some market share away from China, but it’s unlikely these countries could replace China as the one-stop-shop manufacturing hub it has become, considering the scope and quality of its manufacturing platform, the concentration of key suppliers that manufacture in-country and the policy levers the government has at its disposal.”
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