Index > ANBOUND Geopolitical Review (AGR)
Tuesday, February 28, 2023
The Weakening Comprehensive Advantages of China's Manufacturing Industry
Kung Chan

During the era when globalization progressed smoothly, China actively participated in the world market, with its comparative advantages. Especially after joining the WTO in 2001, it established its position as the "world's factory" in global manufacturing. However, approximately twenty years later, the international and domestic environment for China's manufacturing industry has undergone significant changes, and future development is facing systemic and trend-based challenges.

Although many, especially those in China, see the Chinese manufacturing industry as currently merely facing minor hiccups, ANBOUND’s founder Chan Kung believes that these hiccups may become increasingly serious issues. In Chan's view, China's previous advantages in the global manufacturing industry were comprehensive, compared with manufacturing industries in various countries. This is reflected in multiple aspects, such as low labor costs, hardworking labor forces willing to work long hours diligently, good infrastructure, continuously improving efficiency in transportation and logistics, low environmental and energy costs over a long period, and the overall ability of government departments in China to provide many services and policy conveniences. These advantages and development potential have attracted capital from all over the world to invest in it.

China's manufacturing industry was able to achieve the status of "world's factory" precisely because of these comprehensive advantages, contributing to the country becoming a major economic power with the huge GDP that we see today.

Without such comprehensive advantages, China would not have achieved the results it has today. Yet, with the change in the world situation and the transformation of the global manufacturing industry, the advantages that China's manufacturing industry has long possessed are not static and not unique to it alone. Indeed, different regions of countries around the world have unique advantages that can be utilized for the development of the manufacturing industry. Although these unique advantages may appear more singular than comprehensive advantages, as in China in the past, in the case of mature geopolitical conditions, some countries may make use of them to win crucial opportunities, thus promoting the reshaping of the global manufacturing industry.

As it stands, the restructuring of global manufacturing is not a future event but is currently taking place. Several countries are experiencing significant growth in global manufacturing right now, such as Mexico, which is geographically close to the U.S. market and has the advantage of lower logistics costs in the manufacturing industry. Mexico has gradually become the manufacturing center of Latin America, with proximity to the huge North American market. Vietnam in Southeast Asia is another emerging manufacturing country. With a population of 97.3386 million (as of 2022) and a young workforce (with an average age of around 32 years old), the wage level in Vietnam is relatively low (in 2022, the average income of Vietnamese workers was VND 6.6 million per person per month). Similar to China 20 years ago, Vietnam has unique advantages in developing its manufacturing industry thanks to its low cost. Additionally, the Vietnamese economic environment is relatively stable, with less government intervention and policy changes.

In present-day China, the relationship between the government and the economic environment remains highly sensitive. Both the central and local governments frequently propose new development directions and provide new industry positioning, making new requirements and directions every year. This has formed a strong intervention in the economic environment, causing instability in the market environment and disorder in the industrial sector. Such problems ultimately become the operating cost of enterprises and the development cost of society. In contrast, this situation is relatively rare in Vietnam. Due to Vietnam's low-cost advantages, many multinational companies have transferred their capital and enterprises from China to Vietnam and established new factories and production lines there. In recent years, Vietnam's economy has developed vigorously and its exports have been outstanding, all these are a result of such changes.

For many years, ANBOUND has conducted extensive analysis of these changes, and various viewpoints and judgments have been continuously disseminated in our research briefings. The possibilities that we pointed out have now become a living reality. Chan pointed out that Vietnam and Mexico are typical examples of developing opportunities based on unique advantages in a certain field or aspect. Other than these two countries, India has been a global focus as well. Like China, India has a huge population and will surpass China to become the largest population country. This means that India's potential market size is immense, making it highly attractive to multinational companies and the global industrial sector. Hence, many multinational companies, including Chinese companies, are investing in India.

What happens in China is different, in that its comprehensive advantages are gradually weakening, without developing new unique advantages, leading to a gradual decline. In the future, Mexico, Vietnam, India, and certain Southeast Asian countries may replace China in the manufacturing industry, as their advantages in a specific area will become driving factors for industrial sector growth and economic takeoff. It should be emphasized that this transformation from comprehensive to specific, from common to unique, forms industrial advantages that can further attract capital investment. This transformation is a characteristic of the current world industrial sector. As a matter of fact, multinational manufacturing has been observing and hesitant about the Chinese market for some time, and their attitude towards China has become uncertain. That being said, China's overall policies in various areas, including the industry sector and foreign investment, have ignored the trends and changes, resulting in a clear policy gap concerning the issue of manufacturing transfer. This has created an irreversible trend.

During the three years of the COVID-19 pandemic, multinational manufacturing was already hesitant about China, and with the neglect of industrial trends and transformations in policies, the situation has resulted in a wave of manufacturing relocating out of the country. The booming scenes of China's manufacturing industry which were jointly built by domestic and foreign investments are now history, a regrettable outcome worth serious consideration and research by global public policy research institutions and scholars.

Final analysis conclusion:

As the global manufacturing industry is undergoing restructuring, the comprehensive advantages of China are weakening, while some countries and regions with unique upper hands are rising and playing a role in partially replacing China's manufacturing. For China, it needs to pay close attention to this irreversible trend and take active measures to adapt and respond.

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