In the
past three decades China has revolutionised global manufacturing. In that time
500m people have moved from its fields to its cities, creating an unprecedented
mass of factory workers. China's economy is changing, however, as wages rise
and labour unrest grows. Does this mean an end to its dominance of global
manufacturing? The Economist Intelligence Unit believes that new infrastructure
and further productivity growth, allied to a continued supply of new urban
workers, will keep China competitive, despite several new trends in supply
chains.
China's huge supply of
workers—its labour force will peak this year at around 802m—has been a boon for
low-cost manufacturers, and has kept wages low. This, along with high levels of
public investment in infrastructure, a stable political environment and
respectable education, pushed China from the world's seventh-largest
manufacturer in 1980 to displace the US as the world's biggest in 2010 when
measured by the value of goods produced in US dollar terms. Inevitably, China's
rise has been destabilising for existing manufacturing hubs. Some, such as
South Korea, have been able to deftly move up the value chain, but others, such
as South Africa and several economies in Central America, have seen their bases
hollowed out.
This success has brought
increasing prosperity to China, and with it upward pressure on wages and
working conditions. Unrest at factories in China run by a Taiwan electronics
manufacturer, Foxconn, from 2010 began to erode confidence in China as the
future of global manufacturing, generating speculation that producers of
labour-intensive goods would go in search of cheaper destinations. The
Economist Intelligence Unit believes that this story is overstated. By plotting
our forecasts for labour productivity growth against nominal wage growth in a
group of emerging economies in 2013-18, we discovered that there are few
destinations that will become more cost-competitive than China, and none that
will see their workers have a larger increase in productivity than those in
China.
Lagging behind
Among Asian markets,
Bangladesh is most frequently cited as an alternative to China for low-cost
export manufacturing. Yet Bangladesh is forecast to make the least progress
closing the competitiveness gap with China, with wages rising faster than in
China but labour productivity growing only one-half as quickly. Vietnam has a
similar rate of wage growth as China, but an appreciably slower rate of
productivity growth. Indonesia is much the same, and given that it also scores
below China in our business environment rankings (which evaluate the quality of
domestic policies for potential investors), firms that move from China to
Indonesia in the next several years are likely to do so for sector-specific
reasons; for example, because they can make better use of Indonesia's
less-skilled workers than other firms.
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