China to maintain manufacturing supremacy

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.