Strategy Note /

Wages in emerging markets: Competing with China's costs if not its scale

  • China tariffs, Covid, geopolitical de-coupling all drive low-cost manufacturing opportunity for EMs without China scale

  • We chart manufacturing wages across EM using manufacturing wage and minimum wage data from ILO

  • Bangladesh, Morocco, Mexico, Vietnam potential known; Colombia, Indonesia, Pakistan, Philippines, East Africa less so

Wages in emerging markets: Competing with China's costs if not its scale
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
2 May 2022
Published byTellimer Research

On the occasion of Labour Day we look at the wage curve in global emerging markets, using both manufacturing and minimum wage data from the ILO (International Labour Organisation).

China tariffs, zero-Covid lockdowns, and geopolitical de-coupling all drive low-cost manufacturing opportunity for EMs without China's scale.

Manufacturing growth and potential are well known in Bangladesh (garments), Morocco (autos), Mexico (autos, electronics), and Vietnam (garments, electronics).

Competitive wages in the following EMs could garner interest as the world's manufacturing becomes less China-centric.

  • Asia — Indonesia, Myanmar, Pakistan, Philippines.

  • Africa — Ethiopia, Tanzania, Uganda in East Africa, Nigeria in West Africa, Egypt in North Africa.

  • LatAm — Colombia (although Mexico remains very competitive, regionally).

Global wage curve: Manufacturing wages

Note that we have charted data and estimates for wages in current US Dollars as opposed to PPP (purchasing power parity). This is because we are analysing wages from the perspective of an investor in competitive manufacturing capacity, not from the perspective of worker purchasing power.

The ILO data for manufacturing wages is not available for all countries, eg Colombia. Therefore, we also chart minimum wage data, where available, noting that this does not always have a bearing on absolute average manufacturing wages, eg Georgia.

Global wage curve: Minimum wages

Life left in the traditional, low-cost manufacturing-led EM development model

There should be an opportunity, for longer than expected, for old-fashioned low-cost manufacturing in the emerging markets, driven by three factors: 

  1. Integrated global supply chains are slowly pulling apart. 

  2. The developed market importers’ reliance on Chinese manufactured goods is eroding.

  3. The era of universal automation and 3D-printing, which enables a wholesale re-shoring of manufacturing back to current developed market importers, is still some way off.

Given that: 1) no country can match the scale of China; and 2) over-reliance on China has been exposed during the US-China trade war, Covid disruption, and geopolitical divergence of the US and Europe from China, then a low-cost base with proximity to developed market consumers may be sufficient for low-income emerging markets to compete in manufacturing in a manner not possible when scale drove an overwhelming part of the manufacturing location decision. 

Of course, the other factors we have explored in our previously published analysis of manufacturing potential in Asia and Africa – such as tariffs, currency, transport infrastructure, skills base and ease of doing business – all remain relevant. But scale may not be nearly as as critical as before.

Cost competitiveness relative to rival exporters nearest the large regional developed market importer may be sufficient, rather than cost competitiveness on a global scale. What is lost on wages is made up for in proximity to the end market (lower transport costs and, potentially, lower tariffs if part of a common trade area, or less risk of geopolitical disruption (eg via trade barriers, tariffs, or full-blown sanctions).

The manufacturing growth and remaining long-term potential in EMs such as Bangladesh and Vietnam in Asia or Mexico in LatAm are well understood, but probably under-appreciated in EMs such as Indonesia, Pakistan, Philippines in Asia, Colombia in LatAm, or Tanzania in East Africa. 

Note that manufacturing potential, represented by wages and skills, is one of the components in the Tellimer EM Country Index, which looks at the investability of about 50 EMs using a customisable weighted index of about 30 factors.

Related reading

China manufacturing is irreplaceable but India and other Asians can win share, June 2020

Sub Sahara Africa manufacturing potential: Ethiopia tops our regional scorecard, September 2020

US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War, March 2022

Shanghai lockdown impact: China stimulus, Xi's third term, global supply chain, April 2022