The end of ASEAN’s reliance on low-cost Chinese manufacturing

Photo: Gunawan Kartapranata/CC BY-SA 3.0

There are problems in the Chinese manufacturing industry. Is it time for a new low-cost manufacturing hub in Asia?

By Oliver Ward

In early February, Philippines Senate President Aquilino Pimentel III lambasted a Chinese light-rail train maker. CRRC Dalian Co. Ltd. had provided 48 trains for the Metro Rail Transit (MRT) system in Manila. However, the 48 trains were above the specified weight and were unsuitable for the MRT. The President of the Senate demanded a full refund of US$74 million from the manufacturer.

The case is indicative of wider problems within the Chinese manufacturing industry. It is a sign that China is becoming unable to provide ASEAN’s manufacturing solutions. ASEAN now has the conditions that created China’s manufacturing boom. It will not be long before ASEAN can provide its own manufacturing solutions.

The conditions that made China a manufacturing hub are under threat

China emerged as a global manufacturing hub because it had four key elements. It had low salaries and well-developed infrastructure. It also had access to raw materials and a worker pool with engineering and technical skills.

Now China faces challenges. These conditions are under threat. The appreciation of the renminbi is causing salaries to rise. Multinationals in several industries are already looking elsewhere for low-cost labour.

China has an issue with quality

As the Chinese population becomes more affluent, domestic demand is shifting. By 2020, more than half of urban households will become “upper middle class”. These consumers want high-end quality products. Many Chinese manufacturers cannot meet these high standards of product quality. They are losing their domestic market.

Source: McKinsey

Many inexperienced workers are in highly-skilled roles. The rapid expansion of the manufacturing sector forced inexperienced managers to step up. This lack of experience has had a detrimental impact on the quality of Chinese goods.

The working culture of the Chinese manufacturing industry is also to blame. Managers react to problems rather than pre-empt them. In one car assembly plant, managers said they spent around 5% of their time problem-solving. Good practice is for managers to spend 30% of their time identifying and solving problems.

What does this mean for ASEAN?

ASEAN still relies on Chinese manufacturing. Singapore was the only country to post a trade surplus with China in 2017. But ASEAN has an opportunity to challenge China’s manufacturing dominance.

Sources: Malay Mail Online, VN Express, WTEx (I), (II), Bloomberg, Jakarta Post

ASEAN has many of the same conditions today that China had in the early 2000s. Vietnam, in particular, is securing new factory investments due to its low-cost labour.

ASEAN has plenty of raw materials and access to talented engineering graduates. The region is also pouring investment into infrastructure projects.

Sources: Build.gov.ph, Bloomberg (I), (II), the Malaysian Reserve, Logistics Insight Asia

ASEAN will be able to challenge China as the manufacturing hub in the region

It is not unrealistic to expect ASEAN to take the mantel as the low-cost manufacturing hub in Asia. Places like Vietnam can already compete with China on low-cost labour. Many of the infrastructure projects are due for completion by 2022. Once they are done, ASEAN will be able to challenge China there too.

An ageing Chinese population will also become a problem in the coming years. The working-age population in China peaked in 2011 at 925 million people. It has been steadily declining since. Many ASEAN countries have young populations. For example, 74% of the Vietnamese workforce is under 50 years old. This will also feature prominently in companies plans when selecting factory locations.

Sources: Trading Economics (I), (II)

ASEAN is in an even better position than China was before its boom. The ASEAN workforce is better educated. Singaporean universities occupy the first and second positions in the QS Asia University Rankings. Determined to avoid China’s quality issues, companies are educating their employees abroad. Intel sent 73 of its Vietnamese workers to study in the US for two years.

The shift is already happening

Several high-profile companies are already shifting manufacturing operations to ASEAN. In 2013, Walmart opened its representative office in Ho Chi Minh City. IKEA also opened a factory in Vietnam in 2008. Both Nike and Adidas also have factories in Vietnam.

Toyota invested 20 billion baht (US$640 million) in hybrid car production in Thailand. Indonesia is emerging as a new textile manufacturing destination. Fashion giants Calvin Klein and Tommy Hilfiger produce garments there.

The shift has already begun. China’s days as the go-to manufacturing destination in Asia are numbered. Its breakneck expansion took its toll on quality. Its own economic successes pushed up the renminbi’s value. These have left holes in China’s manufacturing prowess that ASEAN nations can plug.

The Philippines may have difficulty securing a refund for the overweight trains. But it can rest easy that it will not have to deal with Chinese manufacturers forever. There are some new players in the manufacturing sector. They are younger, better educated and cheaper than their Chinese counterparts. Prepare for the next phase, the manufacturing exodus from China.