Will India, Indonesia and Vietnam replace China as the West's Workshop of the World?
 Experts on the status quo are often the first to defend it from the challenge of change whether undeniable, self-evident tectonic shifts beneath their feet or rule changes that alter the fundamentals of their way of doing business.
Most often these experts cling to power, arguing they are the best at running the world, forgetting that the world they ran was the world of yesterday and not the one that has been transformed, if not transmogrified, today.
Take China and its accustommed role as West's workshop of the world that is now being challenged. One speaks of China and its relations with the West, noting that India, Indonesia and Vietnam, are replacing Chinese suppliers, a trend of recent years, but recently accelerated as country risk factors loom larger in global supply chains. And with the advent of "near shoring", even Mexico is eroding Chinese markets in America.
Of less notice to workaday shippers who typically look no further than the next quarter, is country risk factors which is rising as the US, in a surprisingly bipartisan manner, turns against what is being increasingly being thought of as a resurgent "Red China".
Bloomberg News, being experts in the way things are, tends to dismiss the challenge from China's neighbours, whose goods are more welcome on American shores than Chinese products. Bloomberg Economics relies on the overwhelming force of current data to bolster its case, rather than looking at admittedly murky though gloomier future prospects.
With US access now under threat in the trade war, Bloomberg Economics considered six metrics, from labour to business regulations, across 10 Asian economies, to identify developing economies that could get a greater share of Asia’s manufacturing pie.
“No single economy has the wherewithal to step into China’s shoes,” wrote Chang Shu and Justin Jimenez in the report. “Many have a low-cost advantage. With the exception of India, all lack China’s scale. And all face challenges on other aspects of competitiveness.”
India tops the export-potential ranking thanks to its vast population, even though it still falls notably below Guangdong - the proxy used for China in the analysis. Second up is Indonesia, followed by much-touted Vietnam.
Part of the problem, says Bloomberg, is reproducing the kind of supply chains, marketing access and existing contacts that have been built up by small and medium-sized manufacturers in China’s industrial cities.
Take Quanzhou Kuisheng Craft Co, for example. The maker of garden and home decorations in Fujian province saw US sales slump 30 per cent after Trump’s tariffs, but not enough to consider shifting production abroad. Instead, the company has managed to maintain its total exports by pursuing other strategies such as applying for patents in Europe to expand sales there, said sales manager Will Huang.
“Labour is cheaper in Vietnam, but the working culture is very different,” Mr Huang said at a booth in the Canton Fair, the world’s largest trade exposition. Chinese workers, he said, are more skilled and willing to work overtime to finish orders on schedule. “In Vietnam, people won’t do that.”
Over the years, Mr Huang said he has only heard of two small rival manufacturers in Quanzhou that moved production to Vietnam.
China retains other advantages too, including strong, stable leadership, a large domestic market and relatively good access to capital. Its factories have also spent decades competing against each other, trimming costs, streamlining production and honing transport efficiency.
Chinese manufacturing prices have been declining since July, helped by cheaper energy costs, making it harder still for overseas factories to compete. And stuttering progress toward a trade truce between the US and China may help relieve some of the pressure on Chinese producers.
“Even in a trade war," said Joao Barbosa, a business development manager at V-Trust Inspection Service, a Guangzhou-based quality inspection company that also has offices in India and Vietnam. "China is still the dominant player, because there is a huge gap between China’s level and other countries.”
The Bloomberg report continues in this vein as if the way things are will continue to be. If you read the article below, it describes how the Port of Savannah, having gone through 15 years court battles and environmental assessments, thought it was safe from rivals. If it took them that long to become shovel-ready, it would take Charleston and Virginia Ports as least that long as they had not even started on that long arduous road.
But the reverse was true. Savannah's experience, and more to the point world's experience with Savannah, had shown eco-litigators and the courts that they could not argue that fish and muskrat would be happier without dredging. Been there, done that, said courts and the previously bending over backwards US Army Corps of Engineers. Because of Savannah's experience, the road to infrastructure upgrades were paved for rivals throughout the United States. So what took Savannah 15 years to achieve shovel-readiness was done in two or three years by rivals.
In like manner, obstacles Bloomberg Economics see as crucial, those that will preserve Chinese dominance in trade are likely to be removed in India, Indonesia and Vietnam - as indeed they were in Mexico. In the early '90s, when NAFTA was new, a Canadian toymaker headed to Mexico, to check out the cheap labour scene, finding wages and taxes too high in Canada. But he retreated with his tail between his legs, saying one had to "marry" one's workers. Mexico has since fixed that. Happily for Canada, the government lessened the tax burden on the manufacturer's sector to encourage exports.
The point is, that things change in the face of change. One can hardly credibly say that one can't set up manufacturing in southern United States because of the traditionally laid-back Southern Way of Life, however credible such a statement would have been in the 1960s.
But this is precisely the sentiment expressed by Bloomberg, albeit up in the mouths of self-serving Chinese mainland manufacturers.
Part of the problem, says Bloomberg is reproducing the kind of supply chains, marketing access and existing contacts that have been built up by small and medium-sized manufacturers in China’s industrial cities.
Take the Quanzhou Kuisheng Craft Company, for example. It saw American sales slump 30 per cent after Trump’s tariffs, but not enough to consider shifting production abroad, says Bloomberg. Instead, the company intended to maintain its total exports by applying for patents in Europe to expand sales there.
Let us de-construct. This is the laid-back Southern Way of Life argument. What may have been true in President Lyndon Johnson's War on Poverty era in the early 1960s, is hardly credible today as the Old South is a collection of right-to-work states with more industrial output than the union feather-bedded hidebound northern states.
The aggressive growth of the ports of the US east coast vis-a-vis the union encrusted left-leaning US west coast from where Asian cargo has been massively diverted over the last 10 years, can be expected to be mirrored by growth in India, Indonesia and Vietnam.
As sentiment becomes more hostile in the US towards China, undoubtedly becoming the same in Europe post Brexit, the Quanzhou Kuisheng Craft Co, cited above, will not be nearly so sanguine about the loss of 30 per cent of its US markets as it appears to be in the Bloomberg account, nor nearly as confident that all can be offset by European sales.
In the meantime, India, Indonesia and Vietnam, is likely to improve its manufacturing and logistics infrastructure, while the prospects of the China trade are likely to get worse, whatever the comparitive price difference are today because the democratic West does not want tyrannies to prosper. |
