Is China’s reign as the “factory of the world” finally starting to waver? China has been the go-to destination for global manufacturing for decades. It offered low labor costs, vast infrastructure, and efficient supply chains.
However, we simply cannot overlook the recent developments. Rising wages, supply chain vulnerabilities, trade tensions, and the growth of competing manufacturing hubs – they’re all prompting businesses to rethink their reliance on China.
Automation and government incentives are starting to reshape global production, and the question remains: can China maintain its dominance, or is the world shifting toward a more diversified manufacturing future?
Rising Labor Costs in China
China’s labor costs have risen significantly in recent years. This naturally made it less competitive as a low-cost “factory of the world” manufacturing hub. The average annual wage in China’s public manufacturing sector reached RMB 103,932 (a bit less than $15k) in 2023, while private sector wages were RMB 71,762 (around $10k).
Both figures reflect a 6.5-6.6% increase from the previous year. This steady increase has led companies to consider lower-cost alternatives like Vietnam, where wages are substantially lower.
As a result, global companies are shifting production elsewhere to maintain cost efficiency. For example, Apple began relocating parts of its production to Vietnam in 2021. China still offers unmatched infrastructure and scale, but the rising wages are making it less viable for labor-intensive industries, in turn allowing Southeast Asian countries to start gaining ground.
Global Supply Chain Disruptions
The COVID-19 pandemic clearly showed everyone some significant vulnerabilities in global supply chains, particularly those heavily reliant on China. As China imposed strict lockdowns to control the virus, manufacturing output dropped sharply.
The country’s manufacturing Purchasing Managers’ Index (PMI) fell to 35.7 in February 2020, its lowest point on record. You may remember that these disruptions caused significant delays and shortages, and that prompted businesses to reconsider their dependence on Chinese manufacturing.
It’s no surprise then that companies have increasingly diversified their supply chains in response. A 2021 McKinsey survey found that 92% of global companies had taken steps to make their supply chains more resilient, with 44% planning to relocate some operations closer to home or to different regions.
This shift is known as “nearshoring” (we’ll explore it in a future post in more detail), and is encouraging companies to explore alternatives in Southeast Asia, Mexico, and Eastern Europe.
China’s Shift from “The Factory of the World” to High-Tech Manufacturing
There’s no doubt that China is transitioning from a low-cost manufacturing “factory of the world” base to a leader in high-tech industries. We need look no further than the “Made in China 2025” initiative, that aims to dominate sectors like robotics, aerospace, and AI.
China’s industrial output grew by 7% (a figure from the start of 2024), far outpacing traditional labor-intensive industries. And of course we cannot forget China’s efforts to become a global leader in electric vehicle production, with companies like BYD and NIO slowly gaining international recognition.
All of this aims to shift China toward high-tech industries, potentially reducing its reliance on low-cost, labor-intensive production and positions the country as a key player in emerging industries. We can also look at renewables, where China produced 70% of the world’s solar panels in 2021. It also continues to dominate markets like 5G equipment, although with some criticism and blowbacks.
Other Manufacturing Hubs are Becoming Increasingly Popular
As China’s manufacturing costs rise and global supply chains become more complex, countries like Vietnam, India, and Mexico are starting to look like strong alternatives.
Vietnam’s manufacturing sector grew by 11.6% in 2021, largely fueled by foreign investment from companies like Samsung and Intel. Mexico is maybe the most interesting example, as it directly benefits from its geographic proximity to the U.S. – it saw U.S. imports rise by 27% in 2021 as companies sought to reduce reliance on China.
India, with its “Make in India” initiative, is also trying hard to position itself as a key manufacturing hub, seeing a 15% increase in manufacturing exports in 2022. These nations offer competitive labor costs and robust infrastructure, making them attractive alternatives to China for global manufacturers.
US-China Trade Tensions and Their Impact
The US-China trade war began in 2018, and has significantly impacted China’s manufacturing sector. U.S. tariffs on over $350 billion worth of Chinese goods have pushed companies to relocate production to countries like Vietnam, India, and Mexico. Between 2018 and 2019, U.S. imports from China dropped by 16%, as businesses predictably sought to avoid higher costs.
It comes as no surprise that 25% of U.S. companies operating in China were either considering or had already shifted production to other countries. There’s no question that China still remains a critical player, but these trade tensions are accelerating the diversification of global supply chains.
The Belt and Road Initiative and Its Potential Global Influence
China’s controversial Belt and Road Initiative tries to enhance global trade by building infrastructure across Asia, Europe, and Africa. Over 140 countries had signed onto BRI projects by 2021, with investments exceeding $1 trillion. The initiative is designed to strengthen China’s role in global supply chains by improving trade routes and logistics, akin to the Silk Road from old times.
However, it hasn’t been all smooth sailing for the project. The Belt and Road has faced significant criticism for creating debt burdens on participating countries, raising concerns about “debt-trap diplomacy.” But despite these challenges, the BRI has solidified China’s economic influence, particularly in developing nations, and helped maintain its manufacturing relevance.
Technology Transfer and Intellectual Property Concerns
Foreign companies operating in China often face risks related to forced technology transfer and intellectual property (IP) theft. It’s no secret that a large number of companies were compelled to transfer technology as a condition for market access. It’s been estimated that IP theft by Chinese entities costs the U.S. economy between $225 billion and $600 billion annually.
While China has somewhat strengthened its IP laws, these concerns still persist. This has led some companies to relocate production to countries with stronger legal protections. This trend could weaken China’s attractiveness as a manufacturing hub for high-tech industries.
Automation and the Future of Manufacturing
We’re witnessing automation transforming manufacturing globally every day. It’s reducing the need for large, low-cost labor forces significantly. Countries like the U.S., Japan, and Germany are increasingly using robotics and AI to boost manufacturing efficiency.
Global industrial robot installations hit a record high of 517,000 units in 2021, with China accounting for nearly 45% of these installations. However, automation in other regions could erode China’s cost advantage in labor-intensive industries.
One study found that 62% of manufacturers are exploring automation to enhance supply chain resilience, encouraging companies to bring production closer to home. So as we can see, this shift toward automation is leveling the global manufacturing playing field, and this is further challenging China’s dominance.
Government Incentives for Domestic Manufacturing
Governments worldwide have started offering some incentives to reduce reliance on China and strengthen domestic production. So, in the U.S. we have the CHIPS and Science Act of 2022 that allocated $52 billion to support domestic semiconductor manufacturing. Japan and the European Union are also offering subsidies and tax breaks to encourage local manufacturing, particularly in high-tech and green energy sectors.
Japan announced a $2.2 billion fund in 2020 to help companies move production out of China, while the EU has launched initiatives to strengthen domestic manufacturing capacity. There’s no doubt that these incentives will somewhat accelerate the shift away from China as the world’s manufacturing hub.
Wrapping Up
So, the question remains – is China’s position as the “factory of the world” still secure? While it’s obvious that the country continues to lead in manufacturing scale and infrastructure, rising labor costs, global supply chain disruptions, and geopolitical tensions are driving companies to diversify their production.
The rising popularity of other manufacturing hubs, advancements in automation, and government incentives for domestic production are all further challenging China’s dominance.
Although China is trying to pivot toward high-tech industries and initiatives like the Belt and Road Initiative to maintain its influence, global manufacturing is becoming increasingly decentralized, suggesting that China’s once unshakable role may be shifting.