China’s weakened global position presents a unique opportunity for countries to increase investment and strengthen their manufacturing sectors.
With China facing challenges such as rising labour costs, trade tensions, and a shifting global economic landscape, other countries can step in and fill the void.
By attracting investment and creating favourable conditions for manufacturing, these countries can capitalize on China’s decline and drive economic growth. This shift in global dynamics offers a promising chance for countries to diversify their economies, create jobs, and enhance their competitiveness on the global stage.
Ho Chi Minh city, Vietnam
China has become known as “the world’s factory” due to its significant contribution to global manufacturing output. In 2018, data from the United Nations Statistics Division revealed that China accounted for nearly 30 per cent of global manufacturing output. This is a remarkable achievement considering that in 1990, China produced less than 3 percent of global manufacturing output. It surpassed the United States, the previous manufacturing superpower, in 2010.
But the US-China trade war has prompted many companies to re-examine global supply chains. A recent study by the McKinsey Global Institute estimates that companies could shift a quarter of their global product sourcing to new countries in the next five years.
Climate risks, cyber-attacks and the ongoing pandemic are only accelerating this trend. In this uncertain trade environment, a growing number of countries are hopeful that they could replace China as the world’s next major manufacturing hub.
1 – Vietnam
Vietnam has benefited greatly from the US-China trade war, taking on much of the manufacturing capacity that China lost. The country offers cheap labour, stable politics, and increasingly liberalized trade and investment policies, making it an attractive destination for businesses seeking to diversify away from China. As a result, several major tech companies have relocated their operations to Vietnam amidst the escalating tensions between the two powers. In early May 2020, Apple announced it would produce roughly 30 percent of its AirPods for the second quarter in Vietnam instead of China.
2 – Mexico
A lesser-known beneficiary of the trade war is Mexico. In a report, the investment bank Nomura pointed out that Mexico could become a top destination for US companies, with the country having set up six new factories in a range of sectors between April 2018 and August 2019. In addition, Taiwan-based manufacturers Foxconn and Pegatron, known as contractors for Apple, are among a number of companies currently considering shifting their operations to Mexico. Mexico’s proximity to the US poses a major advantage as US companies embrace “near-shoring”. The Trump administration is exploring financial incentives to encourage firms to move production facilities from Asia to the US, Latin America and the Caribbean.
3 – India
India has made significant efforts to attract manufacturing investments, particularly through Prime Minister Narendra Modi’s “Made in India” initiative. The goal is to position India as a global manufacturing hub, replacing China. A key aspect of this plan is to encourage major smartphone brands to manufacture their products in India. To support this, the country launched a $6.6bn incentive program in June of this year, specifically targeting electronics manufacturing production.
So far, however, the country has seen only modest gains from the trade war. Analysts blame India’s stringent regulatory environment; on the Organisation for Economic Development’s FDI Regulatory Restrictiveness Index, India ranks 62nd out of 70 countries.
4 – Malaysia
Between 2018 and 2019, the Malaysian island of Penang saw a surge in foreign investment. Much of this came from the US, which spent $5.9bn in Malaysia in the first nine months of 2019, up from $889m the year before, according to the Malaysian Investment Development Authority. US chip maker Micron Technology announced it would spend RM1.5bn ($364.5m) over five years on a new drive assembly and test facility. However, the loss of trade from China has hit Malaysia hard. Many tech firms in Penang rely on China for as much as 60 percent of their components and materials.
5 – Singapore
Singapore’s manufacturing prowess has somewhat depleted in recent years. While manufacturing contributes about 30 per cent of the GDP of Taiwan and South Korea, it makes up just 19 percent of Singapore’s. However, the trade war and the coronavirus pandemic could change this. Singapore, a trade hub with liberal trade and investment policies and a history of stable economic growth, is well-positioned to boost its manufacturing capabilities and capitalize on this opportunity. However, similar to Malaysia, Singapore is also facing challenges due to decreased demand from China. The country, heavily reliant on exports, has witnessed a decline in manufacturing output as a result of the trade war. This indicates that Singapore could benefit from reducing its dependence on China and seeking greater independence.
