The Next China

In 1980, when it first began to liberalize and open up to the world, China was already the ninth largest economy (albeit due mostly to its sheer size). The embrace of low-cost manufacturing, wherein China in essence became the  world’s factory, played a key role in propelling it towards becoming the second largest economy just thirty year later; by some metrics, it has already surprised the United States as the single largest economy.

Now that China is transitioning rapidly towards medium and high-tech industry (akin to developed countries), it is leaving room for another Asian powerhouse to takes its place. According to an article in The Diplomat, the five likeliest contenders are Malaysia, India, Thailand, Indonesia, and Vietnam — the MITI-V, or more colorfully, the”Mighty Five”.

Within the next five years, these nations will rise to be among the world’s fifteen most globally competitive manufacturing countries. This is a critical stage in the advancement  of a society’s wealth and prosperity: according to a report from consultancy McKinsey & Company, industrial development “contributes disproportionately to exports, innovation, and productivity growth”.

Nearly all of the world’s richest countries went through series of economic stages beginning with agriculture and ending in high-end manufacturing and services. Low-cost manufacturing is something of a middle ground, describing “labor intensive commodity type products like apparel, toys, textiles and basic consumer electronics”– in short, the sort things we’re all accustomed to seeing “Made in China” written on.

But not for long, according to The Diplomat piece:

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.

China’s rising wages and advancing economy may not propel it to developed status just yet, but considering how rapidly it has made these gains — lifting over 400 million citizens out of poverty in the span of just three decades — it may not be much longer.

The aforementioned countries likely to take China’s place all have in common several industry-favoring factors, including large and youthful populations, low labor costs, relatively good governance, and decent infrastructure. The one that fits the bill closest to China is fellow Asian giant 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.

Granted, while not as large or globally influential as India, the other four members of the Might Five aren’t slouches either:

“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.

Both Bonura and Zhang see Thailand and Malaysia as more focused on high- and medium-tech manufacturing rather than being the next centers of low-cost manufacturing. Thailand has strong automotive, electronics, food, and chemicals industries, while Malaysia has strong chemicals, machinery, and rubber processing industries. This is borne out in the relative prosperity of the MITI-V countries as Malaysia and Thailand are by far the richest of the group.

That leaves Indonesia and Vietnam. “I hear from a lot of companies that they are moving to Vietnam…wages are half that of China,” says the senior engineer at BSH Hausgeräte GmbH, who also thinks that Vietnam’s very stable political environment is advantageous. Vietnam also has better infrastructure than Indonesia and the advantage of being close to China.

“The problem for Indonesia is the state’s capacity to implement industrial strategy; the state is highly decentralized and there are huge infrastructure issues. You don’t have these challenges in Vietnam; Vietnam is also a smaller country,” says Bonura. Yet Vietnam’s population of 95 million is smaller than Indonesia’s population of over 255 million and therefore represents a smaller potential consumer market — and neither country compares to India’s huge population.

I imagine all five countries will to some degree or another become the next factories for the world. But that’s assuming automation doesn’t undercut them first:

Yet for all the talk of the MITI-V countries taking over China as workshops of the world, a nagging fear will stalk policymakers in India and other MITI-V countries. With robots becoming ever more sophisticated, analysts are predicting manufacturing will employ far less people in the future. Martin Ford’s bestselling 2016 book The Rise of the Robots: Technology and the Threat of Mass Unemployment paints a bleak picture of whole swathes of professional sector jobs, let alone low-cost manufacturing, being automated. Commentators and policymakers in India in particular seem downbeat on India conjuring up a jobs boom like China experienced during its rapid growth.

Should they be so worried? Zhang and Drew Rodriguez do not think so. “The MITI-V are still going to be very competitive for the next decade plus,” says Drew Rodriguez. Zhang is not pessimistic either: “I am the opposite. There are different schools of thought…  From my research, I don’t see it. Maybe we will be less dependent on human labor. But there is no way this will eliminate the need for people in the next 15-20 years. We are entering high speed growth for robotics but in 2014 global density for robotics was still very low at 66 per 10,000 employees, 36 in China, 57 in Thailand, and close to none in India.”

Ultimately, what matters most for me is whether these countries manage to lift millions of their citizens out of poverty in the process, as China managed to do during its rapid industrialization. Thankfully, the precedence established by China, Japan, South Korea, and other nations that embarked upon this path is encouraging. But what of the impact on the environment or human rights? Will Chinese-style growth be sustainable in the coming years, or will these nations manage to leapfrog into developed status without such growing pains?

What are your thoughts?


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