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Asia manufacturing outlook: China’s manufacturing capacity undergoing a transition

21.06.2018
What are the key dynamics of the current manufacturing sectors in China and how does it differ to other rising manufacturing countries in APAC, such as Vietnam and the Philippines? Has Trump’s call to relocate manufacturing triggered any actions? Are foreign investments in manufacturing sector in target countries growing or declining? What to look for and expect in the near future? How is the supply chain evolving and what are the expected key issues? How will robotics, automatization, and AI shape manufacturing in the area and what does it mean to foreign manufacturing companies (especially European SMEs) in China? These are the questions studied in a Future Watch report 2018 Asia: Manufacturing outlook with focus on China, Vietnam and the Philippines.

Key findings

China's manufacturing capacity is undergoing a transition, not declining

    • The manufacturing and FDI statistics indicates that China's manufacturing is not suffering a precipitous decline in capacity, but is undergoing a transition from manufacturing low-value products toward high value / quality products
    • Reshoring of US manufacturing is no doubt happening in some sectors by a few companies, but it is only of limited scale and will not have much of an impact on China's manufacturing levels due to its huge domestic demand
    • China's government continues to implement "supply-side structure reforms", promoting the upgrade of traditional manufacturing and development of high-tech manufacturing sectors
    • Increasing automation in the manufacturing industry will be the key to productivity enhancement and to remain competitive. The positive trend will be driven by both government and private sectors
    • The transition towards high-tech manufacturing will generate new opportunities for Finnish companies to enter into the new growing sectors in China and to gain first-mover advantage

Despite of all the challenges, China is still the preferred country for manufacturing, because of the following reasons:

    • While neighboring Asian countries can match China's costs, they won't be able to match China's comprehensive capabilities, know-how and infrastructure
    • Increasing levels of automation and accumulated management techniques will help to counter rising manufacturing costs in China
    • China have a huge domestic market with growing middle class population
       

Should new foreign manufacturers consider other neighboring markets? 

Start-ups, small and medium-sized businesses

  • China will be one of the key manufacturing destination, at least in near future, driven by huge domestic demand, supporting infrastructure, trained workforce, established suppliers, and design & engineering capability.
  • ASEAN countries such as Vietnam & Philippines can also be an attractive destination for the South East Asia market due to attractive growth and Free Trade Agreement within ASEAN. Vietnam is one of the fastest growing country in South East Asia, and can offer much lower cost manufacturing compared to China.

Larger-sized businesses

  • Diversifying manufacturing operations by adding another location in Asia would be an option. ASEAN, particularly Vietnam, is a location which could help lower costs, reduce impact of supply chain disruption and access new markets. Besides low costs, ASEAN features the followings:
    • Ideally positioned to integrate into a China-based supply chain
    • Trade openness and more welcoming policies towards FDI with investment incentives
    • Growing local consumer markets

 

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