13 September 2018

The Impact of Manufacturing’s Move to Emerging Markets

One of the greatest changes to take place for the global economy in recent decades has been the shift in manufacturing away from developed economies in favor of emerging markets.  This shift has transformed manufacturing from a sector of the economy that was concentrated in a small number of wealthy economies to one that has spread its footprint to most corners of the world.  Due to this change, economic power has also been spread to more areas of the world, sometimes at the expense of the world’s traditional manufacturing centers.  Furthermore, manufacturing jobs have flowed to emerging markets at an even faster pace, due to the fact that most of the initial investments in manufacturing operations in emerging markets were focused on low-cost, labor-intensive industries.  This dramatic transformation of global manufacturing has had a major impact on the economies of both developed and emerging markets, as well as on the political situation in both types of countries, an impact that continues to influence major economic and political changes today.

Impact on Developed Economies: Until the 1980s and 1990s, global manufacturing was concentrated in wealthier countries in North America, West Europe and the Asia-Pacific region.  However, the integration of emerging markets in Asia, Central Europe, Latin America and elsewhere into the global economy during that period resulted in manufacturing investment being increasingly focused outside of the world’s wealthier economies.  Until the financial crisis that began ten years ago, manufacturing output in developed economies remained steady, despite the surge in investment in emerging market production locations.  However, the financial crisis that began in 2008 forced manufacturers around the world to downsize, and it was developed economies that bore the brunt of this downsizing.  In North America, manufacturing locations in many areas of the United States and Canada were closed in favor of production facilities in Mexico or Asia.  In Europe, less competitive developed economies such as Italy and France recorded sharp declines in manufacturing output, while manufacturing output in lower-cost Central European countries soared.  High-cost manufacturing locations in places such as Japan and Australia also suffered major losses during this period.  In recent years, manufacturing output has rebounded, to a degree, in most developed economies, but thanks to automation and higher levels of productivity, most of those manufacturing jobs in developed economies that were lost during the crisis are now gone for good.

Impact on Emerging Markets: The integration of emerging markets into the global economy in the 1980s and 1990s opened the possibility that manufacturing operations based in these low-cost locations could be developed to supply manufactured goods to consumers and businesses around the world.  While manufacturing output in emerging markets was slow to get off the ground, over the past 15 years it has soared to overtake the total output of developed economies.  Of course, nowhere is this more evident than in China, a country which now accounts for 20% of all global manufacturing output and has become the dominant location for the production of motor vehicles, steel and a host of other manufactured products.  In fact, Asia as a whole is now the unquestioned center of global manufacturing, a development that was initially driven by low production costs and high levels of productivity, but now one that is also driven by the soaring demand for manufacturing products in Asia.  Another region that has seen rapid growth in recent decades in Central Europe, as that region’s integration into the wider European economy has led to it becoming a leading manufacturing center in Europe.  Mexico is another example, as it is the only Latin American manufacturing center that has recorded significant growth in recent years, thanks to its access to the US and Canadian markets.  Outside of these regions, manufacturing has struggled to take hold, but many countries in Africa, the Middle East and Central Asia are hopeful that they can one day emulate the success of their counterparts elsewhere in terms of using manufactured exports to boost economic growth and improve living standards. 

Future Manufacturing Centers: For now, the shift in manufacturing towards emerging markets will continue.  One reason for this is the soaring level of demand for manufactured goods in many of these emerging markets.  Another is that, despite their recent run of strong economic growth, there are still many cost advantages of establishing manufacturing operations in emerging markets.  Nevertheless, emerging markets face some significant challenges when it comes to of attracting manufacturing investments at the same level as in recent years.  For one, the rising level of protectionist sentiment in many areas of the world threatens to usher in a trade war that would have a massive impact on these emerging markets, as they could lose access to many of their key export markets.  Demographics pose another challenge, as shrinking working-age populations in places such as China and Central Europe threaten to drive up labor costs and lead to severe shortages of labor.  At the same time, the cost advantages that attracted so much investment to emerging markets in the first place are being eroded.  This is leading to a shift in investment to new emerging markets such as Vietnam, which is now a major center of low-cost manufacturing much as China was 20 years ago.  Finally, automation could lead to manufacturing operations returning to developed economies, as labor costs become a smaller component in the overall cost of manufacturing.  Despite these challenges, countries will continue to fight for investment in manufacturing operations, as it remains a tried and tested way for a country to boost economic growth and raise living standards.