x Abu Dhabi, UAEFriday 28 July 2017

Asian neighbours assemble challenge to Chinese clout

Emerging cheap-labour countries could give China a run for its money.

Now that many Chinese factory workers are getting double-digit wage increases following unprecedented strike activity, where is the poor foreign investor in search of cheap wages going to go? In the short term there are no real alternatives that will threaten the supremacy of China as the "workshop of the world". But there are plenty of alternative cheap-labour countries that are emerging over the medium to long term that will give China a run for the money.

China did not reach its current position without help from others, nor did it happen overnight. The outsourcing of manufacturing by the US companies in the 1970s first went to countries such as Taiwan, South Korea, Singapore and Malaysia, which at that time had cheap labour and docile workforces. Japan joined the outsourcing bandwagon in a big way in the 1980s and brought in the rest of the South East Asian countries such as Thailand to perform the Asian economic miracle before labour costs in all these countries rose substantially.

Fortunately for the foreign investors in perpetual search of cheap labour, China opened up in a big way after the Asian financial crisis in 1997 and also built impressive infrastructure. The Taiwanese and Koreans, already part of the global supply chain spanning the Pacific Ocean, moved aggressively into southern China to start the latest chapter of the Asian miracle. So the China story was an evolution rather than a revolution. And it will be hard to replicate it in the remaining parts of the cheap labour reservoir such as India, which has a different political system and culture.

Taiwan, Korea and Singapore not only have close economic and political ties with the US, but they also have conscription for all adult males. This means that Korea and Taiwan produce droves of middle managers with military training. Such managers put in charge of a large supply of Chinese farmers coming to work for the first time in factories, and a Chinese political system that does not allow for independent trade unions, produced fabulous productivity growth and cheap goods. But that trend has now reached a plateau and is going into reverse. So what will be the next chapter?

There are about a half a dozen major countries in the world that have cheaper labour than China, including Bangladesh, India, Indonesia and Vietnam. Vietnam, which also has middle managers with military training and a communist regime that does not allow free trade unions, is already a beneficiary and will be among the largest destinations for industry in search of cheap labour moving out of China.

Vietnam, unlike its neighbours, also has plenty of good engineers and a long coastline on the Pacific for seaborne trade. Indonesia, with poorer technical skills but a larger population of more than 200 million compared with Vietnam's 85 million, may prove to be a medium-term beneficiary. The island nation of the Philippines is handicapped by its topography and poor infrastructure, but with its good English language skills and full participation by the female workforce, it is already doing well in business process outsourcing.

What about the South Asian reservoirs of cheap labour such as Bangladesh and India? Bangladesh is already benefiting from rising costs, not just in China but also in India. It already exports as many garments as India, some of them from Indian-owned and operated factories. A few factors hold back the large scale migration of contract manufacturing to India from east Asia. India's poor infrastructure is infamous and the attempts to rectify it are progressing at a south Asian, rather than east Asian, pace. So it will be a few years before India has adequate infrastructure and then the next chapter in search for cheap labour can begin in earnest. The Japanese are now financing a "dedicated freight corridor" in northern India that will have factories, towns and power stations. But it will be a decade before it becomes fully operational.