Weekend Reading / Global

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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Flash Report / India

Digital food delivery is an early casualty of India-China tensions

  • Indian food delivery players face funding constraints at precisely the wrong moment
  • The growth drivers in India such as higher smartphone penetration are present in other large emerging markets
  • The cash-rich Western and Chinese players may turn their attention to other emerging markets
Nirgunan Tiruchelvam @
Tellimer Research
6 July 2020

The fallout of the deadly clashes between India and China in the Himalayas has had repercussions for the Indian food delivery business. The Indian food delivery start-up Zomato (valued at US$3 billion) has been prevented from drawing down from its US150mn of fresh funding from Ant Financial. Ant Financial is a US$150bn Chinese digital payments company and an affiliate of Alibaba. Ant Financial has invested US$560mn for a 25% stake in Zomato.

Many Indian tech startups have raised funding from Chinese giants such as Tencent and Alibaba, but in April India announced that it would block "opportunistic takeovers" by neighbouring countries.

Zomato's main competitor Swiggy is also backed by Chinese investors. Swiggy's include Tencent and Meituan-Dianping. Meituan-Dianping is the world's largest digital food delivery company with 25mn meals delivered per day.

The implications of this development are as follows:

(1) Indian food delivery players will face funding constraints at precisely the wrong moment. Business has suffered due to the Covid-19 pandemic, with both Zomato and Meituan-Dianping laying off workers.

(2) The growth drivers of digital food delivery in India – such as higher smartphone penetration – are also apparent in other large emerging markets such as Nigeria, Indonesia, Kenya, Vietnam and Pakistan. They could attract more attention from the hungry market leaders such as UberEats and Meituan-Dianping. For instance, Nigeria's food delivery business has tripled in the last three years to US$465mn.

(3) Across Developed and Emerging Markets, massive cash burn is common in the industry. However, the market leaders in the West and China have the cash for acquisitions in the fledgling markets. We think investors would be better served to pursue food delivery in other emerging markets such as Nigeria, Indonesia, Kenya, Vietnam and Pakistan, as opposed to India.

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Macro Analysis / Global

Mitigating the impacts of COVID-19 on the delivery of education programs in India

11 June 2020

Last month, the Center for Universal Education (CUE) at Brookings, in collaboration with British Asian Trust (BAT), brought together global education experts experienced in reaching the most marginalized with education service providers in India attempting to mitigate the impacts of the COVID-19 pandemic in a webinar. As the knowledge partner for the Quality Education India Development Impact Bond (QEI DIB), the financing structure under which these service providers are operating, we welcomed the opportunity to both provide a learning opportunity for all and enrich our research through the discussion.

Impacts of COVID-19 on learners in India

The webinar revealed how the pandemic and the stay-at-home policies, including school closures, have severely impacted around 320 million students in India. Though lockdown in India occurred at the end of the school year, education service providers in the QEI DIB have had to identify alternatives to in-school learning that meet the needs of the populations being served. However, in contrast to high-income countries, transitioning to distance learning in India is complicated given that only about 24 percent of Indian households can access the internet and only around 15 percent of households with internet access are in rural communities. Hence, these disruptions will disproportionately affect rural and migrant children in the program who have less access to technology and will likely take longer to resettle once schools reopen. Girls are also more likely to be impacted as they face the risk of early marriage and/or pregnancy. Furthermore, the service providers in the webinar noted that in addition to learning losses, the pandemic is leading to socio-emotional stresses on beneficiary communities and families due to income loss, difficult living conditions, and constrained mobility, as well as public health concerns.

Learning from past emergencies

Education in emergencies involves ensuring people affected by crisis continue to have access to safe, relevant, and quality education. Senior Fellow and Co-Director of CUE Rebecca Winthrop explained in the webinar that there must be a substantial focus on the cycle of prevention of and preparedness for emergencies, as well as the response to and recovery from emergencies. She also highlighted four lessons from previous emergencies:

  1. Health first. Mobilize education networks to share lifesaving public health messages.
  2. Long haul. Plan for extensive long-term school closures.
  3. Do no harm. Consider unintended consequences and possible responses to mitigate them.
  4. Build schools back better. Use the post-crisis context as an opportunity to strengthen school systems and develop more resilient institutions.

Alternative models of service provision

Heather Simpson from Room to Read and Lydia Wilbard from CAMFED Tanzania shared examples of effective strategies of education provision for hard-to-reach and out-of-school populations.

  1. Interactive Radio Instruction (IRI). Where technology is limited, IRI, which has been used for more than 40 years, can be effective at low cost and at scale for learners of all ages. This model combines radio broadcasts with active learning to improve educational quality and teaching practices building on local resources and knowledge. In Rwanda, for example, Room to Read is supporting the Rwanda Ministry of Education with staff recording literacy instruction lessons on their phones at home for radio broadcasts. Staff are also calling 40 families a day to remind them to tune in to the radio instruction and giving parents tips on how to support their children’s learning at home.
  2. Mobile mentoring. In-person mentoring programs can be shifted to mobile phones. Currently, in the face of COVID-19, Room to Read social mobilizers are using mobile technology to provide individual mentoring to girls. Social mobilizers provide crucial emotional support to girls through these difficult times, encourage continuing academic study at home, and ensure girls have access to information on staying safe. They have adapted risk and response protocols to support mobile outreach and help identify girls at risk of not returning to school.
  3. Online and mobile learning. Online learning platforms can include read-alouds, digital books, and other forms of online instruction. These can be used independently of government schools or in close conjunction, such as in a platform developed by Room to Read with the Uttarakhand, India government. Parents can engage via text messages that include instructional videos and can share progress with teachers.

Despite the barrier of not attending classes in person, there are many creative ways that organizations and governments are taking action to reduce learning losses among students of all ages. The discussion highlighted that engaging community leaders is critical to tackling both supply-side and demand-side constraints. Furthermore, identifying the needs of each community, household, and learner is critical to ensure inclusion across socioeconomic strata with a lens on gender issues. The service providers in the QEI DIB are likely to face considerable challenges in the coming months and perhaps even years, but it was clear that with creative problem-solving and the help of other organizations, alternative approaches exist.

Expert panel

  1. Dhun Davar, Head, Social Finance, UBS Optimus Foundation
  2. Emily Gustafsson-Wright, Fellow, CUE, Brookings Institution
  3. Heather Simpson, Chief Program Officer, Room to Read
  4. Rebecca Winthrop, Co-director and Senior Fellow, CUE, Brookings Institution
  5. Lydia Wilbard, National Director, CAMFED Tanzania

Participating service providers

  1. Gyan Shala provides direct management and delivery of education services in affordable community learning centers to children from the slums in Ahmedabad and Surat.
  2. Educational Initiatives / Pratham Infotech Foundation provides children from poor families in Lucknow access to a computer-based adaptive learning platform and provides support for teachers on data literacy and assessments.
  3. Kaivalya Education Foundation (KEF) provides principal and teacher training to improve the quality of school leadership and holistic school development, supporting daily wage workers and migrants.
  4. Society for All Around Development (SARD) provides remedial classes to children performing below grade level and teacher training to improve capacity of teachers, working directly with children from families of daily wage workers, construction workers, drivers, and migrants.

The Center for Universal Education receives funding for its work on innovative financing from British Asian Trust and the UBS Optimus Foundation. The views expressed in this blog are solely those of the author.


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Macro Analysis / Global

Covid-19: Accelerating manufacturing diversification away from China to SE Asia

  • Multi-nationals have been shifting manufacturing out of China for the past decade - Covid-19 will accelerate this trend
  • Vietnam has been the largest beneficiary of this shift, and will continue to benefit
  • Relocating to less developed countries in SE Asia comes with its own set of risks that companies need to weigh
Matt Hays @
4 June 2020

Covid-19: Accelerating manufacturing diversification away from China to Southeast Asia comes with its own set of challenges

Prior to the US-China trade war, multi-nationals had been shifting manufacturing out of China to countries in Southeast Asia due to the high cost of labor and production as China moved up the value chain and transitioned to an upper-middle income country with a highly skilled workforce. This trend has accelerated in the past two years, as companies have sought to avoid tariffs and business disruptions over the increasingly acrimonious US-China trade war. The coronavirus pandemic, which has severely impacted global supply chains, will likely accelerate this trend, as manufacturers look to decrease their dependency on China. However, businesses looking to relocate operations will find it difficult to fully decouple from China, and a move to Southeast Asia presents other risks.

Japanese and Korean governments urge offshore companies to diversify

As a result of the virus and lockdown in China, Japanese and Korean manufacturers were severely affected particularly within the automotive industry and had to shut down facilities as their Chinese suppliers ground to a halt. As a result, Japan and Korea are hedging against the over-reliance of the Chinese market, and encouraging their companies to come home, or diversify elsewhere. As part of Japan’s economic relief package in the wake of the coronavirus, the Japanese government established an economic support fund worth $2.4 billion to help finance local businesses bringing manufacturing back to Japan from China, or to move it to other countries in Southeast Asia. Meanwhile, Korea is offering tax incentives for companies to re-shore, and encouraging Korean manufacturers to move their production sites from China.

Vietnam becomes new manufacturing hub

In recent years, countries such as Vietnam have been one of the largest beneficiaries of this shift. Vietnam grew by over seven percent in 2018 and 2019, and has become a major hub for garment and low-end manufacturing companies, while at the same time attracting advanced manufacturers such as South Korean giants, LG and Samsung. As a result of the US-China trade war, imports from China into the US dropped by 16 percent in 2019, while imports from a number of Southeast Asian nations grew by double digits, including Vietnam which grew by a tremendous 38 percent.

While Vietnam and others in the region have done a skillful job deregulating their economies to attract foreign firms in the wake of the US-China trade war, these emerging market economies present their own set of challenges for investors. A recent Wall Street Journal investigation highlighted the difficulty that companies face when relocating to Vietnam, noting that Vietnam’s logistics infrastructure and supply chain networks are far less developed compared to China, causing bottlenecks in delivery schedules and rising shipping costs. With one tenth the population of China, the country is already facing labor shortages, and with rising inequality, pressure will increase for companies to pay higher wages to meet employee demands, leading to increased production costs.  

Companies and Investors weigh relocation risks of relocating to Southeast Asia

As indicated in a recent report in the Nikkei Asian Review, Google and Microsoft are looking to accelerate their production of smart phones, PC’s and smart speakers from China to Vietnam and Thailand this year, as a result of the coronavirus. While this trend will likely continue in the near term, multi-nationals need to manage their own risks of moving operations to the region as many companies will still need to remain reliant upon China for raw materials and certain parts needed for final assembly. Coupled with a less efficient workforce, weaker infrastructure, and development challenges, many investors and corporations need to fully assess the cost benefits of relocating to Southeast Asia.

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Macro Analysis / China

Emerging from the Great Lockdown in Asia and Europe

International Monetary Fund
12 May 2020

Several countries in Asia and Europe, where the COVID-19 outbreak appears to have peaked, are gradually reopening their economies. Without a vaccine or effective treatment, policymakers will be balancing the benefits of resuming economic activity against the potential cost of another increase in infection rates. They face difficult choices, in part, because the costs of erring in either direction could be very large.

The timing, sequencing, and pace of the planned exits differ across countries.

Given this, authorities are adopting a gradual and sequenced approach to reopening, along with the adoption of further prevention and containment measures. While some Asian countries have already moved down this path with some success, risks remain—and the risks for Europe may be even greater. How do unlocking strategies compare across Asia and Europe?

The COVID-19 pandemic hit Asia first. It quickly spread from China to others in the region and has yet to retreat from all those countries. To date, over 250,000 people in South and East Asia have been infected, and 9,700 have died, with China, India, Indonesia, Japan, Singapore, and South Korea accounting for over 85 percent of all infections.

Following the lockdown in China in late January, and a proactive containment effort of testing, tracking, and isolating in Korea, these two countries saw new infections peak in February, just when the pandemic began to hit Europe hard. The number of confirmed cases of COVID-19 in Europe has now reached 1.8 million, representing almost half the world’s total. The reported death toll stands close to 160,000, out of more than 280,000 worldwide.

Economic impact of lockdown measures

To slow the spread of the virus, most European and Asian countries adopted strict lockdowns, the economic impact of which has now become evident. China’s GDP dropped by 36.6 percent in the first quarter of 2020, and Korea saw an output decline of 5.5 percent (all rates are annualized and seasonally adjusted). The difference in impact reflects the fact that China faced the outbreak first and then moved to enforce strict lockdown measures, while Korea kept the economy open and followed a strategy of more targeted containment (see below).

In Europe, GDP declined by a record 21.3 percent in France, 19.2 percent in Spain, and 17.5 percent in Italy in the first quarter of 2020 (also annualized and seasonally adjusted). The second quarter is bound to be even worse.

How Asia is restarting economic activity

As containment measures proved effective in curbing the epidemic, a few Asian countries are already well down the path to reopening.

In China, the number of reported new infections has stabilized at very low levels. Since mid-February, the government has been reopening the economy in a gradual, sequenced manner. It has prioritized essential sectors, specific industries, regions, and population groups based on continuous risk assessments. Meanwhile it has also been leveraging digitalization, big data and technology to support contact tracing.

Crucially, the effort has been complemented by large-scale testing, including the start of randomized screening in select provinces, and systematic tracking via mobile phone apps to rapidly trace the contacts of any new positive cases. This has been accompanied by restrictions on movement and other control measures on infected people and their contacts. So far, the reopening in China has unfolded without a debilitating second wave of infections, but this may yet change as activity normalizes further.

Korea also encountered the virus early in the global wave and put in place a swift and well-organized containment effort. This was based on large-scale testing, mandatory isolation of detected and at-risk cases, and widespread use of digitalization and technology for contact tracing. This effort was combined with the closure of schools and public facilities; comprehensive guidance on social distancing, and quarantine measures for travelers.

However, domestic mobility and business activity were never widely restricted in Korea. As a result, the resumption of economic activity is proceeding gradually, and more or less automatically as social distancing recedes. The authorities have transitioned to less stringent guidelines for “Daily Social Distancing,” which directs citizens to stay home when feeling ill, keep personal distance, wash hands frequently, wear face masks, and ventilate indoor spaces regularly.

Singapore also succeeded in containing the contagion early on following a strategy similar to Korea’s. But, in early April, it tightened containment measures in response to a new outbreak.

Europe’s gradual reopening

Several European countries have announced plans to gradually reopen their economies and some have already begun the process. The timing, sequencing, and pace of the planned exits differ across countries, reflecting differences in the progress of the epidemic but also national preferences (see below).

For example, Denmark and Norway have started by reopening lower schools and services, while Spain has lifted restrictions in manufacturing and construction, as well as for some small businesses, including retail, with safety measures. Germany has lifted restrictions on retail shops and is gradually re-opening schools, with the relaxation subject to a break mechanism allowing for re-tightening if needed. Italy has reopened manufacturing and construction (under strict safety rules) and select small stores. France has just allowed the reopening of primary schools, shops, and industry, on a differentiated regional basis, as of May 11.

Sweden stands out with its distinctive approach, and its decision not to fully lock down activity. It is too early to tell whether this strategy will prove more effective.

All countries envisage using health and social distancing measures to mitigate the risk of a new wave of contagion, but they vary by type and intensity.

Unlocking Asia and Europe: looking ahead

While reopening strategies differ, Europe appears to be reopening its economy earlier in the epidemic cycle than China. In addition, the capacity for large-scale testing, contact tracing, and case isolation in Europe may lag behind the best examples in Asia―partly reflecting stringent privacy rules. For instance, the European Commission recommends tracking apps, but only on a voluntary basis. Consequently, Europe appears to be more at risk than some Asian countries, including China, though no country can confidently declare victory against the virus.

In both Europe and Asia, lockdowns and other restrictions have imposed a significant economic and psychological cost on citizens, and their desire to roll back these measures and reopen economies is all too understandable. However, moving too early and before wide-reaching measures to quickly identify and contain new infections are in place would put the gains in fighting the spread of COVID-19 at stake and risks imposing new human and economic costs. In charting their path out of this unprecedented lockdown, the economies in Asia and Europe should proceed carefully and resist the urge to do too much too soon and risk a relapse.

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Macro Analysis / China

China: Covid-19 adds pressure to exports

ING Think
2 July 2020

Covid-19 creates hot and cold of the Chinese economy

The Chinese economy shows domestically-driven growth, but an external demand drag.

Domestically, the government has continued to promote more research and development on advanced technology so that it can achieve self-reliance in the most advanced semiconductor chips in the coming years. Most of the growth we see is around this sector.

Some stimulus money has flowed into the real estate market as shown by the increase in land sales fees. Though this is not ideal, it shows that there are still people in good financial shape. They are willing to invest and spend, which at least provides some short-term support for the economy. In the longer-run, this means that Covid-19 has widened the wealth gap in China. As not all the stimulus money has found its way into infrastructure projects, we see little support from infrastructure to economic growth.

The pain point of the Chinese economy are small manufacturers, and they usually produce for small exporters

Although there are still some occasional Covid-19 clusters in China, they have quickly been brought under control by semi-lockdown practices. As such, those cluster cases have not disrupted the economy. We see that recovery in consumption continues albeit slowly.

But when it comes to foreign demand-related industries, the economic picture is different. Covid-19 cases have increased overseas, and export orders continued to shrink on a monthly basis in June as shown by the PMI index. This means that China’s exports and export-related manufacturing and service activities (e.g port-services) will continue to be under pressure.

The pain point of the economy are small manufacturers, and they usually produce for small exporters. These two groups are expected to face an increased chance of a shutdown. Even though the People's Bank of China set up an innovative re-lending programme for SMEs, they might not be willing to borrow if they can’t see orders coming.

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