26 June 2017

The Indian Ocean as the Next Great Manufacturing Center

The world is heading for another shift in manufacturing, one that will likely alter the current economic balance of power just as the previous shifts in manufacturing did over the past 250 years.  The first such shift was the Industrial Revolution and the centralization of manufacturing operations in the world’s developed economies.  In the decades after the Second World War, the next shift occurred as the focus of many manufacturing industries turned to Asia, led by Japan, which for a while became the world’s economic powerhouse.  Later, China’s integration into the world economy in the 1990s and the 2000s led to an unprecedented shift in manufacturing operations to the China, result in that country becoming the world’s unquestioned manufacturing center. 

Now, the beginnings of a new shift can be detected, one that has the potential to change the fortunes of a wide range of economies.  This shift is being driven by rising costs in China and other emerging market manufacturing centers, as well as major investments in infrastructure in countries that have yet to develop major manufacturing centers.  Of all of the regions that have ambitions to become great manufacturing centers in the future, it is clear that it is the Indian Ocean region that has the highest potential to become the world’s next great manufacturing center.

The search for lower-cost manufacturing centers has been steadily ongoing in the wake of the globalization of manufacturing in recent decades.  Asia’s manufacturing boom, beginning with Japan, was driven by the initially low labor and shipping costs that countries such as Japan, South Korea and China could provide manufacturers, which is why each country started on the low-end of the manufacturing scale before working their way upwards until they were manufacturing world-beating goods. 

Now, Asia’s leading manufacturing centers are becoming more and more expensive, as labor costs rise and the number of potential workers declines in that region.  The same holds true for other emerging market manufacturing centers.  For example, Central Europe is experiencing similar cost increases and shrinking labor forces.  Meanwhile, Latin American transport costs are simply too high to allow that region to develop competitive manufacturing centers.  As such, manufacturers are expanding their search for new production locations that meet the four criteria that need to be met in order for a country to successfully develop manufacturing industries that can compete on a global basis.  These four criteria are:

- low manufacturing costs

- access to export markets

- an infrastructure that facilitates exports

- stability and security

It is clear that Asia’s successful manufacturing countries (Japan, South Korea, China, etc.) met these criteria.  However, it is not so clear that many other countries are able to do the same. 

The region that appears to be next in line to receive major investment in its manufacturing industries is South Asia.  In particular, thanks to its giant domestic market and its low labor costs, India is viewed by many as the next in line to become a world-leading manufacturing center, replacing China as the center of low-cost manufacturing.  However, India faces a number of challenges that have thus far prevented the country from achieving the levels of manufacturing growth that China reached in previous decades.  For example, India’s infrastructure is very poor, and while the Indian government has pledged to spend vast amounts to improve the country’s infrastructure, the fact remains that it is currently very time-consumer and expensive to produce goods for export in India.  Likewise, the level of stability in India is much lower than that of China, while there are many legislative issues to overcome in India that were not in place in China when it was developing its manufacturing industries. 

Outside of India, other South Asian countries such as Pakistan, Bangladesh, Myanmar and Sri Lanka all have ambitions to develop export-oriented manufacturing industries.  At present, they are largely limited to Pakistan’s and Bangladesh’s textile industries, and the instability in each of these countries has thus far discouraged investment in most other sectors of these countries’ economies.

Over the longer-term, another region that has the potential to develop significant manufacturing centers is East Africa.  Obviously, this must be viewed from a long-term perspective, as at present, no country in East Africa has a significant manufacturing industry.  This is due to the many challenges facing that region.  One such challenge is the high level of political instability and the widespread threats to security that continue to plague most East African countries.  A second challenge is the almost total lack of the type of infrastructure that is needed to develop manufacturing sectors aimed at exporting around the world. 

Despite these vast challenges, there are many long-term reasons to be optimistic about the prospects for the development of manufacturing industries in East Africa.  First, the region is making strides with regards to the integration of the economies of most of the countries in the region, while reducing internal barriers to trade and investment.  Second, while working-age populations are stagnating or declining in many of the world’s leading manufacturing centers, East Africa’s working-age population is soaring and is forecast to continue to grow over the longer-term.  Moreover, nearly all countries in East Africa are recording relatively high rates of economic growth, and the much-needed investment in the region’s infrastructure is finally beginning to arrive.  As a result, the potential for the littoral countries of the Indian Ocean to become the world’s next great manufacturing center is real, even if it may take decades for this ambition to be realized.