Is This The End Of China's Dominance In Global Manufacturing?
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In this video, I want to explore the topic of whether China, as a country, is losing its competitive advantage as the world’s manufacturing hub and its implication to us as investors.
Let’s talk about it.
China – The worlds manufacturing hub
The rise of China as the global manufacturing hub can be attributed to attractive low costs for labor, the country's enormous scale of operations, and raw materials ecosystem.
That said as China progresses from a developing to a developed country it is to no one’s surprise that as a country, China is slowly losing its competitive edge which primarily revolves around cost.
A quick look at the GDP per capita within SEA would highlight the fact that China as country is no longer cost-competitive as compared to other emerging countries within Asia itself.
Couple that with global macro events that are disruptive against China’s favor mainly the deteriorating relationship between China and the US as well as the impacts of the pandemic, most businesses would think twice before setting their manufacturing operations in China.
As a result, more and more concerns are surfacing with a common theme of questioning whether or not China is still the main factory in the world.
This rising cost of manufacturing in China and the increase in uncertainty and political risk had severely impacted China’s attractiveness as a manufacturing hub.
The future of China‘s Manufacturing Industry
That said, does that mean that it is game over for China’s manufacturing?
The answer is no. Just as what the US and Europe had experienced in the past, China’s natural progression would mean that its manufacturing would slowly move up on the manufacturing value chain that is more profitable and less labour intensive.
Also, even though China had lost its competitive advantage in the area of cost, it is actually still quite difficult for businesses to completely move away from China given its one-stop shop capabilities which is something that is still quite irreplaceable at the current stage.
What I think is going to happen to China’s manufacturing industry is that it is definitely going to shrink in terms of the sheer volume of production but the value of the production itself will increase as China moves up the manufacturing value chain.
I think covid had accelerated this progress as it had pushed businesses who are looking for low-cost and high labour-intensive manufacturing away from China given the rising cost and higher political risk (as we’ve seen from the US-China trade war and Covid zero policies)
At the same time, it may have attracted businesses who are looking for higher-end manufacturing which often relies more heavily on automation. A good example of a business that established its manufacturing in China for this very purpose is Tesla.
Implications to us as investors
As investors, China’s progression presents a unique opportunity for its surrounding countries as the labour-intensive and low-cost manufacturing, will probably flow to neighbouring countries like Vietnam, Thailand, Myanmar, etc. which was already an ongoing trend prior to Covid.
Countries who are attempting to avoid setting up operations in China due to the political risk will also be more likely to set up their operation near China due to the one-stop-shop capabilities that China has to offer.
This is because by setting their operation near China, they are mitigating risks such as tariffs and embargos that is targeted at China while being able to tap into China’s one-stop shop capabilities to help accelerate their manufacturing lead time.
Now if you are invested in China, you might want to be careful as to how this transition might implicate your investments in the short-run however if you are invested in the Asia region this move alone might not be all too bad as it distributes the pie more equally across to other developing countries which will accelerate the region's growth.
Personally, I do not have a direct investment position in China as my investment hypothesis revolves around Asia regional growth – which is one that is broadly diversified and has a higher probability of materializing - as compared to individual country or sectoral bets.
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Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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