China manufacturing is irreplaceable but India and other Asians can win share
- Among large manufacturers, India alone can match China’s scale while Japan and Korea offer more on technology and ethics
- In the smaller manufacturers, Indonesia, Malaysia, Singapore, Vietnam look more attractive than Philippines and Thailand
- Automation and new low wage competitors challenge the rest but Pakistan may gain ground lost to Bangladesh
China's manufacturing base is simply too big to replace but the catalysts of US-China friction and Covid-19 provide an opportunity for India, in particular, and others in Asia to erode China' share.
In this report, we explain why Asia is full of more likely competitors than other regions and try to determine a ranking within Asia.
The metrics we use appeal to the varying priorities of investors in manufacturing capacity: large scale and low cost, higher technology, and governance (more stringent ethical standards).
Our manufacturing competitiveness scorecard for the region weights 10 of these metrics and is summarised in the chart immediately below (for details of the inputs into the scorecard, subscribe to Tellimer Insights Pro).
China’s manufacturing is too large to be replaced
China is dominant in manufacturing, with almost 30% global share, which is roughly:
Equal to the next three in the world combined (US, Japan, Germany);
Double the size of the next three in Asia combined (Japan, Korea, India);
Ten-fold bigger than India; and
50% bigger than all other 15 Asian countries considered in this report.
Given its sheer scale in manufacturing, talk of individual countries, even of the potential manufacturing size of India, replacing China is fanciful.
This is even before one considers China's ability to flex its currency via devaluation or its geopolitical muscle and its defence against domestic wage inflation via increased installation of automation (industrial robots).
Nevertheless, its manufacturing market share can be chipped away, particularly given the increased US-China friction and the disruption from Covid-19.
India alone comes close to China’s scale
India has low manufacturing contribution to GDP and high unemployment. But it is finally industrialising, evidenced by rising FDI and robot installation. Although there is hype around government initiatives, eg “Make in India” and “Invest India”, the improving ease of doing business, increasingly accessible consumer base and closer geopolitical alignment with the US are enabling factors.
It is perhaps no accident that India and China are increasingly butting heads on their shared Himalayan border and that China remains fully committed to its expansion of influence in Pakistan via the CPEC branch of the Belt and Road Initiative.
The other Asian challengers
Among the other larger manufacturers, Japan and South Korea are the most attractive for those driven by advanced technology or stricter ethics.
Among the mid-sized manufacturers, Indonesia offers more attractive scale and cost than Thailand and Malaysia offers more attractive technology and ethics than the Philippines.
Among the smaller manufacturers, Singapore (for technology and ethics) and Vietnam (all round) are the most attractive.
Pakistan should be doing much better, and perhaps its improvement in governance and infrastructure will soon bear fruit. Bangladesh has perhaps done better than might have been expected but this is put at risk by business-unfriendly government policies and an overvalued currency.
To the degree that the manufacturing strategy of Bangladesh, Pakistan and Sri Lanka is heavily reliant on low wages, it is threatened by the emergence of Cambodia and Myanmar in Asia and, further afield, Ethiopia in Africa, as well as the rise of automation.
(We intend to address the risks and opportunities for emerging markets from manufacturing automation in a future report.)
US-China friction and Covid-19 opportunity
US-China friction has already driven higher tariffs on China and may lead to potential restrictions on cross-border capital flows into China. Both candidates in the US presidential election identify China as a threat (the difference is that Trump prefers unilateralism whereas Biden promises multilateralism).
Covid-19 disruption has acted as a reminder of the need for redundancy in the supply chain and less geographic concentration, particularly in China. Instead of 're-shoring' manufacturing back to expensive locations, which is not in the interest of any profit-maximising multinational unless it is offered subsidies to offset higher costs, diversifying to other competitive locations is more likely.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...