Vol 4 No.

14 June 17, 2013

developments that matter in financial markets

The Rise of Asian Manufacturing

Factory Asia catapulted Asia back on the world map with its share of global output quickly rising. Several recent studies proclaim the Asian Century is upon us, but only if the region can sustain its growth momentum and structural economic transformation continues. Bindu N Lohani, Vice President, Asian Development Bank

A Significant Shift

The rise of Asian manufacturing is evident in the increased share of value added in global manufacturing. The most spectacular rise has been in China, which overtook Germany, Japan, and then the US to top the list. Other Asian countries have also been grabbing a larger share of the global manufacturing pie. The shift towards Asia is reflected in the role of manufacturing as the engine of growth and the relocation of industries from developed economies to Asia. While many developed economies have seen their manufacturing sectors shrink, most economies in Asia continue to industrialize. The region has rapidly become a manufacturing base for many global firms in search of lower production costs. Asian manufacturing firms have also become more competitive, even in technologically advanced industries. Many Asian brands such as Acer, Lenovo, Huawei, Hyundai, Infosys, Samsung, Tata and scores of others are now well-known global firms and are challenging the dominance of previously well-entrenched companies from the US, Europe, and Japan. The increasing importance of Asian manufacturing can also be seen in the rankings of the top manufacturing exporters. In 2011, China edged out both the US and Germany to become top global manufacturing exporter. Similarly, South Korea has moved from outside the top 10 to rank fifth. Hong Kong, China, and Singapore are also among the top 15 manufacturing exporters. These countries are also major shipping hubs as they handle large amounts of trade for their neighbours.

This Weeks Graph

% 45 40 35 30 25 20 15 10 5 0

Manufacturing Value Added Share of GDP for Select Economies

China

South Korea 1970

US

Japan 2011

Germany

Source: ADB calculations using data from UN National Accounts Main Aggregate Database.

Driving Forces

The one attribute that is associated with Asia is its diversity. Despite the intra-regional diversity, Asia has proved its mettle by demonstrating its manufacturing prowess and is supposedly on its way towards making the 21st Century as the Asian Century. The pace and scale of Asias rise in manufacturing have been phenomenal. This has been led by China in the past decade because of its inexpensive labour. The world now looks at Asia for two main reasons: to manufacture products at a lower cost and/or to sell in the Asian market. Given its current growth trajectory, by 2050 Asia can expect to attain living standards comparable to that of Europe today. Events at FTKMC Furthermore, its share of the global economy could swell to more than half. The rise of China and South Korea was aided by the growing importance of production networks. The same applies to Indonesia as well to a considerable extent. India has shown impressive gains in manufacturing by focusing more on serving its relatively large domestic markets.

Growing Challenges

Dr Bandi Ram Prasad, Dr Jinesh Panchali and a few other team members of FTKMC with senior officials of Capital Market Authority at Riyadh, Kingdom of Saudi Arabia. FTKMC has designed, developed, and deployed a Knowledge Management project for Capital Market Authority in Riyadh, and the two-year project was successfully completed recently. FTKMC provides consultancy services in knowledge management and in domain areas of various asset classes.

The estimates about Asias growth are not sacrosanct. These estimates need to be altered with the changes in the macro environment. The pace of recovery of advanced economies after the global crisis in 2007-08 has been bleak. One needs to revisit and revise their figures in the light of the sluggish US recovery and the fiscal restructuring in the euro zone. Asias continued ascent is not preordained, noted the Asian Development Bank in its report, Asia 2050, published in 2011. Indeed, Asia must grapple with many issues, which are not regional and global economic crises alone. While Asia has shown its resilience, and its share of the global economy and wealth continues to rise, it may be time for the region to enter a new development phase. Also, Asian economies face rising labour and infrastructure costs, which gradually erode their price advantage. New technologies and processes could Upcoming Programme:
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This Weeks Table Top 10 Country Rankings by Manufacturing Nominal Gross Value Added Rank 1980 1990 2000 2011 1 United States United States United States China 2 Japan Japan Japan United States 3 Germany Germany China Japan 4 China Italy Germany Germany 5 France France United Italy Kingdom 6 Italy United Italy South Kingdom Korea 7 United Kingdom China France Brazil 8 Brazil Russian South Korea Russian Federation Federation 9 Spain Spain Mexico France 10 Mexico Brazil Canada India
Source: UN National Accounts Main Aggregate Database

potentially transform manufacturing and leave developing countries at a disadvantage. However, as external demand and traditional advantages in labour and energy resources are not perennial in nature, Asia should foster new growth strengths in developing the manufacturing sector.

Emerging Trends

With continued resilience, Asia stands a fair chance to pull through the obstacles and emerge a winner. While changing global trends will have an impact on Asia, it can sustain its position as a manufacturing powerhouse if it adapts to the trends and transforms itself. Many countries in the region remain outside the mainstream and are untapped. These countries could also benefit from joining the growth bandwagon. However, the global conditions do make it a wait and watch game. Contributed by Anisha Brahmbhatt
June 21, 2013 MUMBAI

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Disclaimer: This Newsletter is prepared to enhance awareness and for information only. The information is taken from sources believed to be reliable but is not guaranteed by FTKMC as to its accuracy. FTKMC will not be responsible for any strategic or investment decisions based on this content.