The US-China trade war reignited the debate over which developing countries in Asia could take over the mantle of the world's workshop. The front-runners? India and Indonesia.
A report published Tuesday by Bloomberg Economics shows that no one nation is able to reproduce the kind of success China enjoyed in transforming its economy. Instead, a series of mini Chinas are set to develop, with each trying to leverage advantages but hampered by structural problems such as inadequate infrastructure or political instability.
China's intricate networks of factories, suppliers, logistics services and transportation infrastructure grew up in a different era, underpinned by money and technology from Japan, Taiwan and Hong Kong at a time of scant regard for the environment, workers' rights or the few government regulations that were enforced. It had a vast, cheap, literate workforce and gained almost unfettered access to global markets for three decades.
With that access now under threat after more than a year of trade friction with the US, Bloomberg Economics considered six metrics, from labor to business regulations, across 10 Asian economies, to identify developing economies that could get a greater share of Asia's manufacturing pie.
"No single economy has the wherewithal to step into China's shoes," wrote Chang Shu and Justin Jimenez in the report. "Many have a low-cost advantage. With the exception of India, all lack China's scale. And all face challenges on other aspects of competitiveness."
India tops the export-potential ranking thanks to its vast population, even though it still falls notably below Guangdong -- the proxy used for China in the analysis. Second up is Indonesia, followed by much-touted Vietnam.
Part of the problem is reproducing the kind of supply chains, marketing access and existing contacts that have been built up by small and medium-sized manufacturers in China's industrial cities.
Take Quanzhou Kuisheng Craft Co. for example. The maker of garden and home decorations in Quanzhou, Fujian province, saw US sales slump 30% after Trump's tariffs, but not enough to consider shifting production abroad. Instead, the company has managed to maintain its total exports by pursuing other strategies such as applying for patents in Europe to expand sales there, said Sales Manager Will Huang.
"Labor is cheaper in Vietnam, but the working culture is very different," Huang said at a booth in the Canton Fair, the world's largest trade exposition, held last month in Guangzhou. He said Chinese workers are more skilled and are willing to work overtime to finish orders on schedule. "In Vietnam, people won't do that."
Over the years, Huang said he has only heard of two small rival manufacturers in Quanzhou that moved production to Vietnam.
China retains other advantages too, including strong, stable leadership, a large domestic market and relatively good access to capital. Its factories have also spent decades competing against each other, trimming costs, streamlining production and honing the efficiency of transportation.
Chinese manufacturing prices have been declining since July, helped by cheaper energy costs, making it harder still for overseas factories to compete. And stuttering progress toward a trade truce between the US and China may help relieve some of the pressure on Chinese producers.
"Even if the trade war continues, China is still the dominant player, because there is a huge gap between China's level and other countries," said Joao Barbosa, a business development manager at V-Trust Inspection Service Co., a Guangzhou-based quality inspection company that also has offices in India and Vietnam. He said lots of manufacturers in China today don't need third-party quality inspection. "But for the exact same product in Vietnam, they need it."
India's efforts to chase China's production capability began in earnest five years ago with Prime Minister Narendra Modi's "Make in India" initiative that offered incentives to foreign companies to open factories.
India is close to overtaking China as the world's most populous country and its working age population is projected to top 1 billion by 2050. But the advantage of a large supply of cheap labor has been offset by other factors, such as inadequate infrastructure, outdated land and labor regulations, and bureaucratic lethargy.
The South Asian nation has made progress, rising 37 spots since 2017 in the World Bank's ranking for ease of doing business, but it still comes in at 63rd, trailing not only China, but also Rwanda and Kosovo.
"India has poor infrastructure, high transaction cost and old labor laws making it tough for industrialists to set up large factories for mass production of basic textiles such as five-pocket jeans and shirts," said Premal H Udani, managing director at Kaytee Corp., a 75-year-old company that supplies apparel to customers in the US and Europe from its factory in the southern Indian state of Tamil Nadu. "Local taxes also haunt them," he said, with refunds getting stuck in a bureaucratic tangle between government ministries.
It's a similar tale for Indonesia, which came in second in Bloomberg Economics' analysis, beating India on macroeconomic stability, but dragged down by poor infrastructure. Indonesian President Joko Widodo said in September that his country has failed to lure factories from China because investors remain wary of cumbersome local rules.
When Sharp Corp. sought to relocate production of washing machines to Indonesia from Thailand, it took the Japanese company two years to set up the factory, find local component suppliers, conduct production tests and solve all the administrative issues, said Andry Adi Utomo, a senior general manager of national sales at PT Sharp Electronics Indonesia.
Indonesia last year launched its Online Single Submission system in a bid to make it easier to obtain a business license. It didn't help much because separate permits are still required from local government, Utomo said in a phone interview. "The same thing exists for taxation," he said.
Vietnam, often cited as a potential winner from the trade war, shows that even that advantage may be short-lived. The Trump administration slapped tariffs of more than 400% on steel imports from Vietnam and added the country to a watchlist of possible currency manipulators in May.
The Southeast Asian nation came in third in Bloomberg Economics' rankings, again hobbled by infrastructure. Indeed, money flowing into new plants in Vietnam is straining the country's roads and docks, with complaints rising about port congestion.
China has seven of the world's 10 busiest container ports -- including Shanghai at No. 1. Vietnam's two biggest ports, Ho Chi Minh Seaport and Cai Mep, rank No. 26 and No. 50, according to Bloomberg Intelligence.
But developing economies aren't the only ones in Asia gaining from the shift in trading patterns. US firms diverted about $21 billion of imports away from China in the first half of 2019, according to the United Nations Conference on Trade and Development.
Taiwan was the biggest beneficiary, getting a $4.2 billion boost in exports to the US during the period, mostly for office machinery and communication equipment. Mexico was second with a $3.5 billion gain, followed by the European Union at $2.7 billion just ahead of Vietnam at $2.6 billion, the UNCTD reported.
More-advanced, higher-cost nations were excluded from the Bloomberg Economics report.
And even as Asia's developing nations compete to copy China's manufacturing ascent, new technologies are changing the nature of global production and supply, making it even harder to reproduce China's success. As the cost of automation falls, robots are allowing consumer-focused industries such as apparel makers to move production closer to their markets to speed up supply times.
"Other countries all have constraints in different ways," said Barbosa from V-Trust. "There will be many mini-Chinas."