H China

China losing its manufacturing luster

Oct. 6, 2022
Global supply chain managers are looking at their China operations and asking: Should I diversify to mitigate the risk?

By Michael Lev for MxD

In the 1980s, American manufacturing—and economic self-confidence—were in decline. Japan Inc. made better quality cars and TVs, seeming proof of its superior competitiveness. Book titles told the story: “Japan As Number One,” “Trading Places,” “Blindside: Why Japan Is Still on Track to Overtake the US by the Year 2000.”

No, Japan didn’t overtake the US, but then China was on track to become the world’s largest economy by the end of this decade, according to one prediction. Or by 2033, according to another. Or maybe—stop me if you’ve heard this before—China fails to displace the US, just as Japan and the Soviet Union fell short. “I think there is a real pos­si­bil­ity that some­thing sim­i­lar would hap­pen with re­spect to China,” former US Treasury Secretary Lawrence Sum­mers told The Wall Street Journal.

This is shaping up to be a bad year for China, prompting global companies to look elsewhere in Asia for manufacturing to lessen their reliance on Chinese factories. 

China’s growth and reputation have been undermined by a chaotic string of factors, including reckless decisions by its authoritarian government. A partial list includes: unnerving threats against Taiwan; aggressive anti-COVID policies that have disrupted exports; factory shutdowns due to energy shortages from heat waves; increasing labor costs; a real-estate recession. Summers told the Journal that China’s aging population and Beijing’s increasing tendency to intervene in corporate affairs led him to substantially lower his expectations for Chinese growth.

Global supply chain managers are looking at their China operations and asking: Should I diversify to mitigate the risk?  “The empire of manufacturing in China is being shaken,” Lior Susan, an investor in hardware and manufacturing startups, told The New York Times. “More and more capital is going to pull manufacturing out of China and find an alternative.” 

Two potential alternatives to China are Vietnam and India, which offer more cooperative governments, large domestic markets, inexpensive labor pools, and expanding tech capability. They can’t replace China’s size and sophistication yet, but perhaps someday. 

Apple has been making earbuds in Vietnam and is now ready to move up the chain to produce the Apple Watch and MacBook there, along with some iPads, according to reports. A small number of iPhones will be produced in India, while Google will make its newest Pixel phone in Vietnam. Samsung will begin making semiconductor parts in Vietnam next year. 

Boeing wants to include Vietnamese companies in its supply chain, but the company thinks it will take years for local firms to gain sophistication to produce quality parts on time. “We really want to directly work with Vietnamese companies, but domestic businesses need to learn to walk before they can run,” Michael Nguyen, general director of Boeing Vietnam, said at an industry event. 

Baby steps are also the way forward for Apple in India. Apple will make some iPhones for the first time in India, but it’s relying on the local operations of suppliers from Taiwan and China to do much of the work.

So don’t expect an overnight reordering of global manufacturing. That lesson goes back to Japan in the 1980s. Japan is not No. 1, but it’s still a powerhouse. China is still factory to the world, but unlikely to displace the United States. America remains the largest economy. 

No one country will dominate, and that’s for the best. Competition raises everyone’s game, and reduces overall risk.

This piece first ran in MxD's ChainMail newsletter. Read the complete issue here.