Opinion
Forecasts of China’s manufacturing fall are foolhardy
Summary
Simplistic claims about the 2020s being “India’s Decade” partly because of offshoring of production need to be treated with scepticism.
Tuesday’s headlines of a decline in China’s population for the first time in six decades stood like neon billboards above articles that predicted huge economic challenges ahead for the country. The government said that 9.6 million people were born in China last year while 10.4 million died. That the news coincided with Beijing confirming that GDP advanced by just 3% in 2022 seemed to underline such gloomy forecasts. Certainly, China’s inadequate health and social services spending will be under siege as its population ages; we already see a foreshadowing of this in its inexplicable inability during the pandemic to adequately vaccinate its above-60 population.
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China’s challenges in the medium term, however, are actually more about reducing its addiction to property and infrastructure-led growth and engineering a soft landing from the excessive debt build-up in the economy. Domestic private sector debt as a percentage of GDP was a staggering 183% in 2020, according to World Bank data. Even this understates the scale of the problem as local government debt is counted separately.
The leap of logic from pointing to China’s population decline and arguing that it can no longer be the factory of the world may make for catchy investment bank research reports, but does not stand up to scrutiny. As it happens, the news that China saw a drop in its population last year coincided with the publication of an in-depth study of Apple’s overwhelming dependence on China for manufacturing its range of products, from iPhones to Macs, on the very same day. According to an article in the Financial Times, Apple still depends on China for more than 95% of its output of these flagship products. Research firm Centrepoint forecast that even by 2024, China will account for about 90% of iPhone production. So much for ‘friend-shoring’ as the world deals with an aggressive Beijing.
Apple knows it has an overdependence problem and that lawmakers in Washington will not look kindly at these staggering statistics. But the world’s most complex supply chain is in effect semi-permanently embedded in China. To radically change that would be akin to asking CEO Tim Cook to swap his DNA. China accounts for 70% of smartphone production globally. The FT article used ISO 9001 certification as a proxy to gauge China’s “dominance" in global manufacturing. China has more than 426,000 enterprises with that certification or 42% of the global total. For India, the equivalent figure was 36,505. Manufacturing experts say the issue is not as simple as moving assembly plants for these products out of China. The problem is that component manufacturers and other vendors are concentrated in south China. This region—the province of Guangdong especially—also has among the most efficient ports and customs clearance, thus enabling components and products to cross borders easily to tap into supplies from South Korea or Taiwan, and makes it difficult for global multinationals to diversify.
Between 2010 and 2013, I was a reporter based in Hong Kong with access to factories run by its incredibly nimble entrepreneurs. As the Guangdong government pushed up wages by double-digit levels every year from 2010 to drive out low-value firms, Guangdong’s role as factory to the world remained resilient even as its factories became more focused on electronics. I found myself on occasion outside the factory owned by Taiwan’s Foxconn where Apple’s products are made. It resembled a township more than a manufacturing plant; it then had 250,000 workers. It was hard not to feel overawed.
Even garment and toy factories started using robots to stay in southern China despite its higher costs. A report from the International Federation of Robotics confirms that China is the only developing country among the world’s top 10 countries in terms of deploying robots in factories. South Korea leads the pack, based on 2020 data, with 932 robots installed per 10,000 employees; China is ninth with 246 robots. Even this appears to be an undercount, as Hong Kong is listed with 275 robots per 10,000 employees but the vast majority of these are almost certainly in south China.
This record of increasing automation and rising productivity well ahead of other developing countries make it delusional to write off China as a global manufacturing powerhouse just because its population is declining and its belligerence has left it with fewer friends in the world. Conversely, simplistic claims about the 2020s being “India’s Decade" partly because of offshoring of production need to be treated with scepticism.
We have heard for 20 years now that India’s demographic dividend somehow makes it inevitable that it will rival China as an offshore base. Instead, Vietnam, with less than 100 million people, is well ahead in that race. Amita Batra, a professor of economics at JNU, uses foreign value added (FVA) as a proportion of gross exports as a proxy to calculate a country’s integration with global value chains used by multinationals. Between 2010 and 2018, “Vietnam registered an annual increase of 17.3% in the FVA component of its gross exports," she wrote in Business Standard earlier this month. The equivalent figure for India and the rest of Asia was less than 5%. In addition, Vietnam grabs every chance it can of joining a major free trade agreement, while New Delhi takes years to negotiate its so-called “early harvest" or preliminary agreements with such supply-chain nonentities as the UK and Australia. It should be clear by now that manufacturing supply chains are centred in North Asia—not where India fancifully wishes them to be.
Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.
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