Ranking Emerging Markets as Manufacturing Locations
As the past few decades have shown, the ability to export manufactured goods to the world’s leading economies is the key to an emerging market’s economic success and its ability to pull itself out of low-income status. For example, countries such as South Korea and China, as well as a host of Central European economies, have been able to achieve major gains in economic growth and living standards thanks to their success in becoming manufacturing centers for goods destined for wealthier markets. Today, many of the world’s most successful emerging markets are now themselves become middle- and high-income countries, turning them from centers of lower-cost manufacturing to wealthy markets for exporters from even lower-income economies.
In their place, a host of other emerging markets are competing to attract investment in their manufacturing sectors in order to emulate the success of countries such as South Korea and China. For manufacturing companies around the world, the challenge is to find a way to rank the countries in this next wave of emerging markets in terms of their ability to provide locations for lower-cost manufacturing operations.
In order to rank emerging markets as a potential location for lower-cost manufacturing, we have developed four criteria that can be used to come up with a ranking for all emerging markets around the world. The first is cost, and this includes factors such as labor costs, productivity, transport costs, energy costs and a host of other related factors that combine to provide an overall cost of manufacturing in an individual country. The second of these criteria is infrastructure and this primarily relates to the infrastructure in and around manufacturing locations, as well as the infrastructure between these manufacturing locations and the export markets where these goods will be sold, most notably port facilities and their transport connections. The third criteria is stability, and this includes political stability and labor force stability, two factors that bedevil many emerging markets’ ability to attract foreign investment. Finally, a country’s access to leading export markets, either through location or through trade deals, is a key factor in its ability to attract investment in its manufacturing sector. Altogether, these four criteria can be used to compile an attractiveness ranking for emerging markets as manufacturing locations.
Among emerging markets, there is a clear divide between those located in Asia and those elsewhere. As Asia has developed into the unquestioned center of global manufacturing in recent decades, investment in manufacturing has largely focused on China and other emerging markets in that region. As you can see from the chart showing our rankings of Asian emerging markets as manufacturing locations, China remains at the top. However, China’s lead is shrinking as other emerging markets have eaten into China’s lead in terms of labor costs, infrastructure and other key factors in attracting manufacturing investment. In fact, the gap between China and countries such as Vietnam, Malaysia and the Philippines has shrunken significantly in recent years. However, the emerging market many investors hope will be the next China, India, has a long way to go in order to become a center of global manufacturing due to its poor infrastructure and high levels of political and labor instability.
Outside of Asia, investment in manufacturing operations in emerging markets has been much more spotty and many emerging markets have lost significant ground in their battle to attract manufacturing investment to their Asian rivals. The most successful emerging markets in this regard have been found in Central Europe, where countries such as Poland, Romania, Slovakia and the Czech Republic have benefitted from their access to West European markets and their significant competitive advantages over the higher-cost manufacturing centers of West Europe. Mexico too has had success in attracting manufacturing investment for exports destined for the United States and Canada, but not to the level that had been expected when Mexico joined NAFTA in 1994, due in part to the instability found in Mexico.
Outside of Central Europe and Mexico, manufacturing investment has been limited by factors such as the distance to key export markets, high levels of political and labor instability, and a lack of investment in infrastructure. Altogether, most non-Asian emerging markets are finding it difficult to attract significant investment in their manufacturing sectors and will continue to do so over the near-term, with a few notable exceptions.
Overall, these rankings provide us with a number of interesting results that indicate the direction that investment in manufacturing operations will follow in the coming years. Clearly, those Asian emerging markets that do the most to meet the four criteria for developing lower-cost manufacturing sectors will be able to attract the most investment and emulate the previous success of countries such as South Korea and China. Moreover, as Asia’s market growth begins to exceed its manufacturing growth, those lower-cost manufacturing centers located near to these fast-growing Asian markets will be best-placed to attract investment.
Outside of Asia, developing large-scale manufacturing centers will prove more difficult, although those emerging markets with access to the North American or European markets and who are able to meet the four criteria to attract manufacturing investment will be in a position to also achieve growth in the manufacturing sector in the years ahead. In short, as the global economy grows at a slower pace in the years ahead, those emerging markets that can improve their competitiveness, particularly in the manufacturing sector, will be the big winners in terms of economic growth and higher living standards. However, those that fail to meet these criteria face a difficult challenge to boost growth rates and living standards.