Four of the top five countries in terms of total manufacturing production are developed economies, with the exception of China whose impressive manufacturing might was built upon a pool of low-cost labour. Altogether the top five countries accounted for 66.0% of global manufacturing output in 2013. Despite their dominance, each of the top five powerhouses is facing a set of unique challenges that could change the future global manufacturing landscape. Understanding the challenges facing these top manufacturing economies can help businesses plan strategically as well as identifying long-term opportunities.
Top 5 Countries in Total Manufacturing Production: 2013
Source: Euromonitor International from national statistics/UN/OECD
1. China: Labour-intensive manufacturing growth to slow in the long term
China overtook the USA in 2007 to become the world’s leader in total manufacturing production. In 2013, China’s total manufacturing production reached an impressive US$17.8 trillion, accounting for 38.1% of the global total. Over the 2008-2013 period, China’s manufacturing production expanded at the fastest rate globally, at 84.6% in real terms.
Increasingly, however, China is losing its competitive advantage as a low-cost environment for labour due to rising wages and labour shortage (a result of the one-child policy and rapid population ageing). Meanwhile, it is facing other challenges such as relatively low productivity, an appreciating renminbi, increasing transportation costs due to relatively high oil prices, and falling global demand for Chinese exports (especially since the 2008-2009 global economic downturn). As China’s competitive advantage as a low-cost production hub erodes, we expect the country’s manufacturing growth will slow in the long term. In addition, government policies aiming at shifting the country’s economic structure towards domestic consumption will also lead to a lesser reliance on labour-intensive manufactured exports as a growth engine for the economy.
2. USA: Relatively few ‘reshorings’ actually go ahead
Rising production costs in China and increasing productivity in the USA (thanks to advances in automation and digitalisation) have led to a rising number of US companies announcing plans to either ‘reshore’ their production bases to the USA or ‘nearshore’ to a closer location such as Mexico. Nevertheless, a September 2014 study by the Massachusetts Institute of Technology (MIT) of 50 US companies including Apple, General Electric and Caterpillar, which had announced reshoring plans, found that to date few of the announced reshoring projects actually went ahead. Even in cases where companies have brought back to the USA some of their production destined for the US market, the amount of work that they are still sending abroad outweighs the amount that they are reshoring.
Reshoring projects typically require the rebuilding of supply chains and the recruitment of people with the right skills to handle sophisticated automated operations. US tax policy makes firms reluctant to repatriate profits earned elsewhere, which in turn makes it difficult for them find the resources to invest in US-based manufacturing operations. In other words, the country’s business environment is not conducive enough for companies to move back.
3. Japan: Ageing population and stiff competition from overseas
It is no new knowledge that the key challenges facing Japan’s manufacturing are labour shortages (a result of rapid population ageing), high labour cost as well as high costs for materials due to a lack of natural resources. In addition, Japanese manufacturers face increasingly fierce competition not only from low-cost producers in China and other ASEAN countries, but also from technological powerhouses in South Korea, the USA and Europe.
Over the 2008-2013 period, total production fell by 6.7% in real terms and the role of manufacturing in the Japanese economy has been declining. While many Japanese companies have steadily moved abroad either to take advantage of cheaper production costs or to be nearer to their consumers, Japan is expected to retain its competitive edge through advanced research and development (R&D) activities and manufacturing capabilities. In addition, the Japanese government is proactive in keeping high-tech manufacturing in Japan as well as incentivising companies to locate facilities in the country.
4. Germany: Retaining long-term competitive advantage is a key challenge
In terms of production, Germany is well-known for its manufacturing excellence, dominance in “mechatronics” (a multidisciplinary field of science and engineering that merges mechanics, electronics, control theory and computer science to improve and optimise product design and manufacturing) as well as luxury automotive brands (with the country being the world’s largest exporter of automobiles). Yet, quite similar to the case of Japan, challenges in sustaining Germany’s manufacturing prowess include labour shortage (owing to an ageing and shrinking population), high labour cost and rising prices for energy and raw materials. These could undermine the country’s competitive advantage in the long term. In addition, as a major global exporter of high-tech manufactured goods, Germany’s manufacturing sector can be vulnerable to external shocks such as falling demand from Europe and emerging Asia.
5. South Korea: National branding is still a weakness
Of all the top five global manufacturers, South Korea has the highest share of manufacturing in total GDP, at 31.5% in 2013, which underlines the reliance of the South Korean economy on manufacturing. South Korea enjoys the advantages of competitive production costs, educated and hard-working workforce and strong innovation. The country’s sector is export-led, and is thus vulnerable to fluctuations in global demand for its exports whilst a strong currency is also a challenge. In addition, consumers’ negative perception about the quality of South Korean-made products (for example, cars made in South Korea are perceived to be of poorer quality than cars made in Japan) is also obstacle for the country’s consumer goods producers.
For more information about China and the US, read China Overtakes US as World’s Largest Economy.