The rapid industrialization and economic development of Asia presages one of the largest economic shifts in history. While the early-industrializing economies of the western world accounted for the vast majority of economic output in the 1950s, today’s growth is increasingly driven by the Asian economic engine.
Although this realignment of economic heft has been a long-term process, Asia’s importance for global growth increased by leaps and bounds following the 2008 Global Financial crisis, which for the developed West ushered in “secular stagnation” – an extended period of low growth. With Asian economies constituting ever larger shares of global GDP, the East becomes not only the key driver of global wealth creation, but the primary center of demand for top multinational brands.
However, while demand may shift east, manufacturing will likewise shift south towards emerging ASEAN economies and India as China’s labor costs skyrocket. In such an economic environment, successfully identifying the next generation of low cost manufacturing hubs will become a primary challenge for multinational investors and small-and-medium enterprises (SMEs) alike.
China’s Burgeoning Middle Class
While the reorientation of demand generation and economic clout to the East began with the export-driven success stories of Japan, South Korea, and Taiwan, it has been the unprecedented growth in China’s economy since the late 1970s and subsequent blossoming of a burgeoning consumer class which has catalyzed the shift from West to East.
With a middle class whose private consumption is projected to grow at a rate of more than 20 percent per annum over the coming decade, Chinese demand is one of the primary motors for global growth. Its young, globalized generation of urban consumers born in the late 1980s to early 1990s (dubbed G2, or Generation 2 by McKinsey) is an increasingly important market segment for global brands. Brand conscious and internet savvy, these consumers play an ever larger role in the global growth of multinational firms – a trend which we predict will only accelerate in the coming five to ten years, despite China’s relative economic slowdown.
The Rising Economies of India and ASEAN
A similar trajectory is likewise transforming India and Southeast Asia. In these economies, the same growth factors that fostered the birth of China’s middle class, such as urbanization and industrialization, can now be seen at work.
For example, consider Indonesia – a country which boasts the world’s fourth largest population and already accounts for over two fifths of ASEAN’s overall GDP. The archipelagic nation’s steady five percent growth rate in recent years and high degree of urbanization (reaching 53 percent in 2012) has allowed a 45 million member middle class to flourish; a lucrative market for global brands which is projected to exceed 135 million by 2030.
Thus, while the growth of a middle class in ASEAN member states and India has up until now played a supporting role to China in the initial eastward shift in economic clout, it is precisely their expansion in the coming years which will cement Asia as the new, long-term driver of global growth. Indeed, as the Indian manufacturing sector’s rapid 17.1 percent compound yearly growth from 2006-2011 demonstrates, the global economy is not merely witnessing a shift in demand from West to East, but also a shift in manufacturing capacity from North Asia to South.
Labor Cost Comparisons and the Manufacturing Shift South
As China moves up the manufacturing value chain, wages have risen in tandem to support a more consumption geared growth model. In the past five years, the minimum wage has increased by double digits year-on-year throughout China, and in metropolitan areas such as
Shanghai and Shenzhen now exceeds RMB 2,000/month (USD312/month).
With average monthly wages of USD107 and USD165 respectively, it is apparent why Vietnam and Indonesia are capturing much of China’s manufacturing. Investors have already witnessed the migration of industries such as footwear from Southern China to Vietnam. Given the generous tax incentives, relatively low corporate income tax (CIT), and looming demographic dividend of Vietnam, Indonesia, and several other ASEAN nations, we predict that this southward migration of manufacturing capacity will only accelerate over the coming decade.
India too, under the impetus of BJP Prime Minister Narendra Modi’s “Make in India” campaign, is poised to benefit from the shift of manufacturing out of China. The campaign, unveiled in late 2014, seeks to provide generous tax incentives and liberalize previously stringent caps on foreign ownership in sectors ranging from automobiles to tourism and hospitality in order to attract manufacturing and thereby expedite India’s industrialization. Beyond these regulatory changes, the Indian government has pledged major infrastructure investments through 2017 to decrease the added cost to supply chains of India’s previously rickety transport system.
Forecast for the Future
Assuming Prime Minister Modi continues to maintain the political will needed to see through his program of reform, India’s low labor costs, burgeoning population, and steadily growing domestic market ensure that it – much like the emerging ASEAN economies – will attract more and more of the low value added manufacturing capacity which China relied on for its own economic transformation.
Under these macro-economic conditions, we foresee the expansion of the so-called “China plus one” strategy into one in which global brands rely on multiple South and Southeast Asian economies for their manufacturing needs, while still turning to China for more advanced industrial processes.
Adil Husain, Managing Director of Emerging Strategy, comments: “Not only will states such as Vietnam, Indonesia, and India integrate themselves more closely within global supply chains to leverage their strategic location to sell to increasingly affluent Chinese consumers, but the expansion of their manufacturing sectors will spur the growth of their own demand generating middle classes. The shift of manufacturing from north to south will therefore also serve to ensure Asia is the primary engine driving global growth and consumption in the decades to come.”
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