If China not needs to be the world’s manufacturing unit, who will take its place? – Thebritishjournal

China’s transformation into the world’s manufacturing powerhouse has been remarkable. When it joined the World Trade Organization (WTO) in 2001, it was a minor player on the global manufacturing stage. But after years of reforming its economy around producing goods for export, its formal entrance to the WTO helped its output soar. In the years since, it has offered itself up as the world’s low-cost factory, making labor-intensive products such as textiles, toys, clothes, footwear, and furniture for companies, and ultimately consumers, around the globe.

These industries were a springboard, allowing China to develop economically and move into more advanced production of items such as electronics, as they were for economies such as Hong Kong and South Korea before. With education and wages on the rise, shrinking its cost advantage, China now wants to focus on higher-end manufacturing, lean on domestic consumption to fuel its economy, and leave the work of cranking out cheap, labor-intensive goods to others.

But if its plan works, who will step in to take China’s place as the world’s workshop?

It’s a question Gordon Hanson, a professor of economics at the Harvard Kennedy School, tackled in a recent working paper for the National Bureau of Economic Research. Right now, there’s no clear answer. After reviewing the candidates best-positioned to take China’s place, and examining whether China itself might keep the role—albeit with some important changes—he reaffirms just how confounding a question it is. “Who will fill China’s shoes remains something of a puzzle,” he admits.

The most likely candidates

China looks to have already peaked as a maker of labor-intensive goods. Hanson focuses his analysis on 10 products, including textiles, clothing, footwear, sporting goods, scooters, toys, and fixtures and fittings used in sectors such as sanitation, heating, and lighting. He finds China’s share of world exports for these items reached their height in 2013 at 39.3% and declined to 31.6% by 2018. This form of manufacturing isn’t likely to pick up again either, he notes, given factors such as the slowing growth of China’s labor force and climbing rates of college education.

Perhaps the most obvious contenders to fill the opening are emerging export economies in Asia, namely India, Bangladesh, Cambodia, Indonesia, Myanmar, Pakistan, Sri Lanka, and Vietnam. But only Bangladesh, Cambodia, and Vietnam have seen significant growth in their global share of labor-intensive exports in the past two decades. Bangladesh, for one, has grown into the world’s second-largest clothing exporter because of its low costs, while Vietnam has become a favorite alternative to China for producing sneakers and textiles.

“Bangladesh and Vietnam have seen the most rapid growth,” Hanson says. “If you had to say who’s the next China, it’s them. The problem is they’re just not nearly big enough to fully take over production in the way that China did from East Asia in the 1990s.” Their combined populations total about 260 million—less than 20% of China’s 1.4 billion—and when factoring in economic productivity, they shrink beside China even further. With Cambodia, they make up less than 8% of labor-intensive exports globally, according to Hanson’s analysis.

The case isn’t any more compelling for candidates in Europe, North Africa, and the Middle East, such as Romania, Poland, Morocco, Tunisia, and Turkey. The largest exporter of the group, Turkey, hasn’t notably increased its share of labor-intensive exports for years.

China itself as the “next China”

It’s possible labor-intensive manufacturing could remain in China but undergo great changes. Technology, and automation in particular, offers the promise of robots doing the laborious work while humans concentrate on more skilled pursuits. China, in fact, is one of the global leaders in using industrial robots. But its adoption of them has primarily been in sectors such as cars and electronics. It hasn’t shown much motivation in using this technology for low-cost goods, perhaps because of its still quite large supply of cheap labor.

There are also limits on the technology itself. Soft, pliable materials such as fabric can be difficult for robots to handle, making jobs such as putting laces into sneakers exceedingly difficult to automate. While some companies are making progress on this front, automation isn’t imminently poised to revolutionize how many labor-intensive goods are made.

There is another possibility Hanson considers. China is unevenly developed, with most of its labor-intensive manufacturing concentrated in big cities. That industry could fan out to other parts of the country. “In such an event, China would end up replacing itself,” Hanson writes. A similar development occurred in the US after World War II, when manufacturing migrated from the more traditional urban hubs to smaller cities around the country, enabled by the spread of interstate highways.

In China, however, firms haven’t been eager to move en masse from their coastal hubs to interior cities, where the scarcity of industrial infrastructure could potentially curb their productivity. Efforts by China’s government to encourage manufacturers to move to these areas have had limited success. “One can make an economic case that China may be on the brink of major changes in its spatial distribution of manufacturing,” Hanson writes, but evidence of it actually taking place is “hard to find.”

What no “next China” means for industry

Despite supply chain leaders actively working to expand their sourcing beyond China and companies in industries such as fashion exploring the possibility of producing items closer to their end consumers in Europe and the US, many still find it difficult and prohibitively expensive to abandon China. The manufacturing infrastructure remains unmatched and quality for the price competitive. It has given rise to the “China Plus One” strategy, where companies keep the bulk of their manufacturing in China but diversify some share to a country such as Vietnam.

But if costs keep rising in China and companies don’t leave, what will happen?

Hanson’s paper doesn’t go into the consequences, but he says one effect might be higher costs for products such as clothing and footwear—for companies and, by extension, consumers. “We’ve gotten used to very low prices in these goods, and I don’t know if we fully appreciate how much the price of these goods relative to other goods has declined over the past 20 years,” he says. “Fast fashion is a consequence of China’s rise.”

Companies will probably continue to experiment with their sourcing too. “We think about innovation as being about creating new products or new ways of producing goods, but changing the location where you produce something is another form of innovation,” Hanson says. “It’s new. It’s risky. You’re unsure how all the pieces will fit together. That experimentation process of figuring things out can take a while.”

While it generally takes time for a new paradigm to become clear, once it does, it’s often quick to take over. It’s the typical S-curve pattern used to describe how innovation spreads. It may not be evident at present who or where the next China is, but that doesn’t mean the answer won’t ever emerge. When it does, industries will react. That, after all, is how China went from a minor manufacturer to the world’s factory in so short a time.

If China no longer wants to be the world’s factory, who will take its place? The British Journal Editors and Wire Services/ Quartz.

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