The Consequences of Chinese Manufacturing Migration

Chinese manufacturing has been moving south east to Asian countries like Vietnam. This process is predicted to create major changes to the economies of South East Asia’s countries.

China has been the one of the world leaders in manufacturing, managing to outpace countries like the United States, Germany and Japan since 2009.

Outsourcing Western manufacturing to China was, and still is, a valuable addition to the Chinese economy. However, it seems as if the reverse of these 20th century trends could happen to China in the 21st century.

An ageing population and a short supply of increasingly needed qualified workers could be one of the reasons for this. Manufacturing in China tends to attract the younger members of the labour force. An ageing population means that the supply of workers in factories could decrease. This could cause the companies to hire foreign workers, or to move to countries with younger populations.

The movement of cheap manufacturing seems to always follow the cheapest labour force, even if most manufacturing is automated. In the case of China, manufacturing companies once sprung up because of cheap labour there. After years of wage rises, and talks about how manufacturing isn’t cheap any more in China, the trend has once again repeated itself.

This movement of cheapest manufacturing to the cheapest labour force shows that automation is not always a concern. For goods oriented towards low-income consumers, and requiring little technical knowledge, human-intensive labour demand doesn’t seem to be diminishing. Clothing items are a common example.

It could lead to a situation where only highly specialized and technical (similar to German Mittelstand) manufacturing will continue to operate.

One interesting fact about the movement of Chinese manufacturing? It could be related to decreasing Chinese investments in USA. After the hiked tariffs on some Chinese goods, and the Huawei controversy, Chinese investments are decreasing. There even seems to be a movement to other low-cost manufacturing countries outside of Asia (e.g. Mexico). This supports the theory that Chinese manufacturing is moving because of rising production costs, and that cheaper labour is essential for the competitiveness of many Chinese and foreign companies.

If the migration of factories from China will take off, more Chinese people will have to be trained in service jobs. Speeding up the ongoing movement from a manufacturing to services economy, the migration of factories will create a need for re-qualification. Focusing on supporting jobs requiring know how, rather than assembly of parts or technical skills, will be the goal for the government. University intake is likely to increase, necessitated by the demand for service jobs, and job creation.

If the Chinese economy will follow the path of other countries which experienced the migration of factories (USA, UK), a startup boom could happen. China is already one of the world’s leaders in startups. However, a void left by the movement of the strongest potential competitors could encourage new players to enter the market. A capital-heavy industry with relatively high barriers to entry (heavy regulations and limitations), could become more attractive with the departure of the strongest competitors.

A higher focus on agriculture programmes which “take back” arable land could be one of the economic consequences of this movement of factories from China. Chinese programmes for taking back the land in deserts took off in 2017. With support from the government, one programme has attempted to increase arable land by 200 hectares. If the migration of factories will not create a boom of new factories, it’s very likely that more workers will have to move away into agricultural jobs. The reclamation of land, and the jobs it will create, could create an increase in the amount of workers in the primary sector.

The geopolitical impacts of this tendency depend on the capital origin countries of the factories. The impact of Chinese capital moving away from China will be entirely different to foreign capital leaving China.

If more Chinese-owned companies will be leaving China to South East Asian countries, then there is a strong possibility of warming relations between these neighbours. Current Chinese and ASEAN relations are good, but territorial disputes are a serious hindrance on them.

Moving for profit maximization won’t decrease the importance of these manufacturing companies to the PRC and its economy. The one quality that has permeated all Chinese economic policies is pragmatism. Despite, or in spite, of underlying feelings or relations to other countries, pragmatical approach is favoured by PRC, with income maximization as a goal. And the most straightforward strategy of maximizing incomes for Chinese manufacturing companies moving away to neighbouring countries is warming foreign relations.

If the majority of manufacturing moving away from China will continue to be non-Chinese companies, then the geopolitical impacts will be far less beneficial to China.

A movement to a harder stance on the South China Sea islands dispute, from the side opposing Chinese claims, should occur over time. The countries that dispute Chinese territorial claims are the countries where most manufacturing is moving to from China. This movement will cause stronger ties with non-Chinese capital and countries. Stronger relationships, and the interests of foreign companies and countries, could lead to the side opposing China having more power in foreign relations.

Brain drain is a severe issue in Thailand, the Philippines, and other countries where manufacturing is moving to. Movement of factories because of cheaper labour costs is unlikely to make a large impact on the migration of top professionals from these countries. The average Chinese persons’s yearly salary was 10,739 euros in 2018. Compared to Vietnam’s average of 1616 euros, the almost 10 times difference in wages is very large. Even if foreign factories were to pay 20%-30% above the average salaries, it wouldn’t keep the top professionals in the country.

However, for all other tiers of professionals, the proposition of a better salary and the possibility to stay in their home country could be a strong reason to re-consider migration. The retention of an important share of qualified professionals should help countries like Vietnam and Thailand combat brain drain.

More qualified workers staying in their home country has shown to help build a stronger society and economy. These factors should strengthen the geopolitical power of the countries where Chinese manufacturing is moving to.

The (arguably) most powerful economy in the world and its manufacturing not only affects the investors and local citizens, but also millions of consumers.

Investors into manufacturing companies can expect bigger dividends from dividend paying companies. Share price increases are also a possibility. Although the costs of relocating jobs may be steep in the beginning, they will seem small in comparison to the benefits of cheap labour and a larger supply of the labour force. As previously mentioned, manufacturing and work in factories tends to attract younger workers. Operating in countries with a younger population than China, like the Philippine’s 24.1 median age (China’s is 36.7 years), could mean an easier time attracting new workers.

Smaller spending on the wages of labourers, and less effort spent on attracting workers, could mean a better bottom line for the Chinese companies. Bigger dividends and share price increases could then become a real possibility for investors.

The creation of new jobs is the main benefit for the local residents of the countries where Chinese manufacturing is moving to.

The movement of manufacturing companies won’t solve the existing uncertainty related to jobs. Since the companies have overwhelmingly moved because of cheap labour, they will move away when the wages will increase. This has been the case observed both in developing, and developed countries.

The movement of foreign companies can mean that vulnerable local businesses will be priced out. Foreign companies, in a bid to attract the local work force, often offer better work conditions and salaries. With very large differences between the wages of China and countries like Vietnam and Thailand, the companies can offer to pay larger salaries to their workers. This places the foreign factories in a winning position: the factories can both pay larger wages than local firms, and to save money on the already cheap labour costs.

This condition presents a serious challenge to SMEs (small and medium enterprises). SMEs will now have to compete with even more manufacturing firms. Wage increases tend to hit SMEs the hardest. If foreign-capital factories will start attracting local workers with larger salaries, SMEs could lose workers and be forced to pay higher salaries.

Consumers of the goods made from the Chinese factories will still be able to buy cheap products. The world’s reliance on cheap products will still continue. This demand for cheap goods by consumers is critiqued by many, but from another perspective, it acts as a strong push for higher wages. Everywhere where foreign manufacturing has moved to, wage increases have followed. The increasing demand for labour, coupled with local companies having to compete with foreign ones for labour, gives the local labour force more bargaining power and higher salary expectations.

The recent tax cuts by the Chinese government ($191 billion), and higher quantity of payment transfers made to local governments, look to be spurred at least partially by the departure of manufacturing companies. Future tax cuts for small businesses could be a bid to soften the impact of this process. A lot of effort will have to be put in to reverse any possible damages to the economy caused by the migration of manufacturing from China.

On the bright side, this movement could be spark that will start a faster transition to services economy and a boom of new local businesses. In South East Asian countries, the process will benefit workers more than businesses.