A decade-long shift of labor-intensive manufacturers from China to Southeast Asian countries has been accelerated by the strict lockdown measures in Chinese cities between March and May, according to evidence cited by many analysts and various news reports.
The latest manufacturers to succumb to the temptation to lower their wage and other costs by moving are primarily from the tech sector, which had not been strongly affected earlier when garment makers and other lower-end manufacturers were the ones mainly being forced out.
Chinese policymakers take some solace from figures showing that even higher-tech replacements are coming in. However, potential members of the manufacturing workforce cannot help noticing with some alarm that fresh graduates in China have started to accept minimum wages in factories due to a lack of high-paying jobs elsewhere.
Phones and tablets
After many textile and furniture manufacturers in China moved to Bangladesh and Indonesia in the past decade, the current wave of production migration involves mainly companies that produce consumer electronic products such as smartphones and tablets.
Overall, official data on foreign direct investment by Chinese manufacturers don’t show a mass exodus from China-based manufacturing.
The year-on-year growth rate of China’s foreign direct investment (FDI) slowed to about 6% in both April and May from 31.7% in the first quarter of this year, the National Bureau of Statistics (NBS) said on June 16.
Still, that averaged out to growth of 22.6% in the first five months of this year from a year previously. (China’s official data, including headline economic growth figures, is notoriously skewed in favor of Beijing’s policy objectives.)
Investment in China’s high technology sector grew 20.5% in the first five months of this year from a year earlier, compared with a 27% year-on-year growth during the first quarter, NBS data shows.
Four Asian dragons
China during its development process has experienced the usual ups and downs.
Hong Kong, Singapore, South Korea and Taiwan had once been praised as four Asian “dragons” between the 1960s and 1990s as their factories supplied the Western world with low-cost manufacturing products.
After China started opening up its economy in the 1980s, many Hong Kong manufacturers moved northward to the Pearl River Delta and the Yangtze River Delta. Hong Kong was then transformed into an Asian financial hub while mainland China became the world’s largest manufacturing hub.
In the 2000s, China started increasing its minimum wage. In Guangzhou, the monthly minimum wage almost doubled by 2008 to 860 yuan (US$128) from 450 yuan in 2001. It further increased to 1,895 yuan by 2015 and hit 2,100 yuan or US$313 last year.
Currently, the basic wage of garment workers is about $243 in Indonesia, $190 in Cambodia, $157 in Myanmar and $95 in Bangladesh, according to Statista, a consumer data provider based in Germany.
Between 2013 and 2015, several Japanese printer makers such as Fuji Xerox, Kyocera, and Canon announced their plans to move their production lines to Vietnam as labor costs in China, plus other costs, were rising rapidly.
In 2014, South Korea’s Samsung Electronics said it would shift away from China and build a new smartphone factory in Vietnam for $3 billion.
The trade war between the US and China intensified in 2018, and last year the Joe Biden administration vowed to restructure the global supply chain in response to Beijing’s state-centered and non-market trade practices.
Meanwhile, more and more production lines have moved from China to Southeast Asian countries, with Vietnam emerging as a particularly big winner.
Risks of deindustrialization
Production migration could be a good thing for China as it would strengthen the growth of regional supply chains, Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told the Caijing magazine in an interview in May.
As long as China’s manufacturers can receive more orders to make higher-value products, it is natural that lower-end product makers were moving to neighboring countries, he said. However, he also warned that a fast exodus of manufacturers could lead to deindustrialization.
“The strategic competition with the US has so far been the biggest force to push foreign companies away from China,” said Li Wei, a professor at the School of International Studies, Renmin University of China.
Li said a restructuring of global supply chains had become the most important economic and diplomatic strategy of the US since Biden took office in early 2021. Li said the strategy was aimed at accelerating the exodus of manufacturers from China so that the US could reduce its reliance on the country.
“The impact of the United States’ supply chain strategy on China could be much bigger than that of the additional tariffs imposed on Chinese goods, while its long-term effect would be irreversible,” Li said.
Li said China should form stronger ties with European countries and maintain a good relationship with Japan and South Korea, although the latter two countries were also reducing their reliance on China.
At the same time, China should develop more new products and push forward its industrial revolution, Li said.
In recent years, Chinese smartphone makers Huawei, Oppo and Xiaomi have expanded their production in Vietnam, which has the advantage of proximity to China’s southern Guangdong province.
The global market share of China’s cellphones gradually declined to 67.4% last year from 75% in 2016 while that of cellphones made in India and Vietnam was gradually increasing, according to Counterpoint, a Hong Kong-based industry analysis firm.
Last year, Hong Kong and mainland China exported cellphones worth $160 billion with a market share of about 60% while Vietnam sold cellphones worth $39 billion with a market share of about 15%, according to Gartner, a US-based consulting firm, citing different measurements.
Last month, Nikkei Asia reported that Apple Inc was moving some iPad production out of China and into Vietnam after supply chain and logistics disruptions caused by China’s Covid lockdowns.
Media reports said in April that Apple would manufacture its iPhone 13 at a Foxconn plant near Chennai in India – but the iPhone 13 Pro with a larger screen would still be made in China.
Lockdown measures have intensified the manufacturing exodus from China but it is unlikely that other Asian countries can replace China as the global manufacturing hub in the near future, experts said an article published by Caixin on June 27.