The booming economies of the East have become the power houses
of worldwide manufacturing.
By Claire Oldfield
For many, the death knell for manufacturing in the Western world had already been sounded well before the onset of the current recession. And a recent league table produced by The United Nations Industrial Development Organization (UNINIDO) only served to suggest the recession is accelerating this trend.
According to its International Yearbook of Manufacturing Statistics, China and India rank first and fourth respectively in global manufacturing value added (MVA) output.
Emerging markets have doubled their output in the past 18 years, and now produce 30 percent of global manufacturing value, demonstrating the increasing shift of production and the outsourcing of services to developing countries. By comparison, the industrialized world gained 30 percent.
It is the Asian economies that are storming ahead. According to UNINIDO, some 75 percent of global MVA was accounted for in Asian developing markets, with China contributing 42 percent of this. India’s growth rate of MVA output rose from 6.9 percent to 12.3 percent from 2005 to 2007, with MVA accounting for about 15 percent of the country’s GDP. India’s fourth place ranking is after China, the USA, SA and Italy.
But experts suggest that there is a long way to go before the traditional manufacturing bases of the West decline entirely and there is an Eastern takeover. Lai Wah Co, head of economic analysis at the CBI, says it is to be expected that the emerging markets are moving up the manufacturing league table in terms of being dominant players. “It is hardly surprising because they are growing rapidly and playing catch up,” she says.
LEANER AND MEANER
The recession is undeniably changing the way manufacturers work and encouraging them to be leaner and meaner. At the same time it is accelerating a trend to manufacture for niche markets.
It is not just manufacturers in the Western world that have been hit by the economic downturn. The recession has hit manufacturers in the emerging markets as hard, if not harder, than Western nations because they are so closely aligned to the developed nations. “Manufacturing has been hit hard around the world,” Co points out. “The emerging markets in particular have been hard hit, because they are dependent on manufacturing and export markets. Emerging markets won’t see their manufacturing position improve unless demand improves in advanced economies.”
There are already suggestions that the worst may be behind for the manufacturing sectors of some Western economies. In the UK, for example, though the manufacturing sector shrank for the 13 consecutive month in April the pace of the contraction moderated more than expected according to the purchasing managers’ index for the manufacturing sector.
In Canada, manufacturing output rose in February for the first time since July 2008.
And in the US manufacturing shrank in April at the slowest pace in seven months after a collapse in inventories caused orders and production to steady. “The manufacturing cycle is turning,” said Dean Maki, co-head of US economic research at Barclays Capital in New York. “We expect it to result in positive economic growth as we move through mid year.”
Smart manufacturers in Western economies had already begun to migrate to niche markets before the recession in order to compete with the emerging markets.
Co says there was recognition among some manufacturers that they couldn’t compete on price alone with the emerging markets. “They have to focus on niche and innovative products, with a high value add,” she says.
Co sees a long-term structural trend to shift manufacturing overseas, and that this has been neither accelerated nor decelerated by the recession. “Over the past 30 years manufacturing has been shrinking in the UK economy. The recession is not making a lot of difference.”
EASTERN GROWTH
But, while Western economies seem not to be contracting any further, there are signs that Eastern economies are already growing again.
China’s manufacturing sector expanded in April for the first time in nine months, according to the CLSASA China Purchasing Managers Index, or PMIPMIPMI a leading independent index. The closely watched indicator in the world’s third-largest economy rose sharply to 50.1 in April from 44.8 the previous month. A number above 50 means manufacturing expanded.
However Co cautions that this means the Chinese manufacturing sector is about to eliminate manufacturing in the UK, US and Canada. She says that though companies are cutting back some costs and making them leaner and meaner they are not giving more business to the Far East as they would have considered in the past. “They are shrinking their capacity so they are not investing in the business and they are laying off staff,” she says. “They are shrinking and adapting to a new environment.”
Co says that UK and US economies in particular are very flexible and the chances are that they will come out of the recession in better shape and sooner than Continental Europe.
A study by PWC has concluded that the UK manufacturing industry in particular is far from doomed – findings that can be applied to other Western economies. According to PWC: “UK manufacturing is not dead, or even in terminal decline. The sector as a whole has grown despite severe recessions in the past, and it will survive the current downturn.”
The report concludes that it would be very wrong to write off the UK as a manufacturer. It points out that UK manufacturing has survived economic crises before, in 1973, 1982 and 1991 and will survive the current recession. “The question is whether it will be weaker or stronger at the end of that process,” says PWC. “It is undeniably true that in the UK, the manufacturing sector is in relative decline.” And it adds that the sector faces a number of serious challenges for the long-term, which include the threat posed by the emerging markets.
However, the report states that ‘there are solid grounds for optimism’ about the state of British manufacturing at the end of this recession. And it concludes by stating: “We are genuinely enthusiastic about the long-term prospects for manufacturing in the UK. The challenges (both short-term and longterm) are significant, but over the course of this study our discussions with business, academic and governmental leaders have given us confidence that the necessary building blocks exist to not only preserve the UK’s manufacturing sector as has been achieved through numerous past recessions, but to see it thrive once again.”