‘Made in China’ may be under threat as China loses its manufacturing superpower status

For decades, the ‘Made in China’ label has been hard to ignore whether it’s on your favourite smartphone or your branded shoes. The availability of cheap labour has made it possible for China to produce and export at an incredibly low cost. However, in recent years, China is losing its control over manufacturing due to rising labour costs and a shift towards more high-tech production.

Why is China losing its manufacturing superpower?

• Rising labour costs: As China’s economy has become more prosperous, wages have risen for many workers. Wages have risen by almost 20% to about $6.50/hour as compared to previous years. This has eroded China’s traditional cost advantage in low-cost manufacturing. 
• Shrinking workforce: China has one of the fastest-growing ageing populations in the world, which implies its working-age population is declining. This has created labour shortages in some industries, particularly those that require skilled workers. 
• Geopolitical tensions: The geopolitical tension between the US and China has led to higher import tariffs and other trade barriers, making it expensive for companies to do business in China. 
• COVID-19 disruption: As factories were forced to close or operate at reduced capacity during COVID-19, global supply chains were left devastated. The pandemic highlighted the need for greater resilience in global supply chains, prompting some companies to rethink their dependence on China. 

The fuel behind China Plus One Strategy

China Plus One strategy refers to a business strategy in which companies diversify manufacturing to reduce their dependence on China. Although the term has been around since 2013, it gained steam again when COVID-19 caused a major blow to manufacturers worldwide. Many major technology, apparel, and electronics companies have already either completely moved out of China or are looking to set up manufacturing in other countries. 

Which countries can be the ‘Plus One’ in China Plus One?

Many Southeast Asian countries are emerging as an alternative to China.

• Vietnam: Vietnam has gone from being one of the world’s poorest nations to a middle-income economy in one generation, as per World Bank. Its low labour cost and favourable economic policies have attracted foreign investments, particularly in the electronics and textiles industries. 

• Thailand: Thanks to China Plus One, Thailand’s FDI (Foreign Direct Investment) rose three times between 2020 and 2021. Thailand has a strong manufacturing base, particularly in the automotive and electronics industries.

• India: India has the largest youth population in the world and a growing consumer market. The government is also promoting domestic production and drawing foreign investment with its ‘Production-Linked Scheme’ and ‘Make In India’ campaigns. 

• Malaysia: For years, Malaysia has been positioning itself as a competitor to China on the back of its well-developed infrastructure, strategic location, and business-friendly environment. Malaysia’s FDI inflow reached a five-year peak of $48.1 billion in 2021, with the primary contributors being electronics and vehicle manufacturing.

Apart from Asian economies, companies are also looking at Mexico and Brazil as suitable alternatives to China. The wages in Mexico have remained the same at about $2.50/hour, unlike in China.

Which Indian industries are benefiting from China Plus One?

To boost domestic manufacturing, the government has introduced Production-Linked Incentive (PLI) Schemes. The total budgeted outlay for PLIs is Rs. 1.97 Lakh Crs in 14 key sectors including electronics, pharmaceuticals, & textiles. Under this scheme, benefits will be provided to manufacturers in the form of tax rebates, import tax concessions, and more. 

1. Speciality Chemicals: China’s chemical industry has been declining due to strict environmental regulations. Meanwhile, the global demand for speciality chemicals has led to a surge in India’s chemical industry, supported by the growth of domestic end-user industries. This trend reflects a shift in the competitive landscape of the global chemical industry.

2. Pharmaceuticals – The COVID-19 pandemic disrupted the global supply of bulk drugs, in which China is a dominant supplier. As a result, India is emerging as an alternative source for bulk drugs, leveraging its leading position in finished formulations. This shift in the global pharmaceutical supply chain highlights the growing importance of India in the sector.

3. Electronics – Global electronic manufacturers are looking to reduce their reliance on China and diversify their supply chains. India’s favourable government policies are attracting companies like Apple and Samsung to set up manufacturing in the country, positioning India as a key player in the global electronics industry.

China Plus One strategy will continue to gain momentum as businesses seek to mitigate risks and reduce dependence on China. India, with its favourable business environment and growing consumer market, is emerging as a leading alternative destination for businesses looking to diversify their supply chains.

Check out the Speciality Chemicals smallcase by Windmill Capital which includes companies benefitting from China+1 and PLI incentives

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Windmill Capital Team

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