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The Decline of China

And Who Is Poised to Benefit


The Decline of China

And Who Is Poised to Benefit

In this Deep Dive, we look into the details of Chinas decline and the
migration of manufacturing to other countries. We analyze several
reasons that Chinas economy has slowed and the dynamics of the
countries that will step in as manufacturing leaders.

Here is a summary of some of our key predictions for the countries

that are poised to benefit from this major change.

To read the complete special report, please become a subscriber.

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The Decline of China

And Who Is Poised to Benefit

In July 2013, while I was chairman of Stratfor, I does not mean that the rotation isnt there. It does
oversaw a project called the Post China 16 (PC16). mean that the rotation is quite slow.
It identified the 16 countries that were likely to
succeed China as the high-growth, low-wage This is not a forecast. This project looks at what is,
countries. Three years later, it is time to review and not what we expect to be. The study is based on a
adjust that list. simple method. First, identify how prior countries
emerged. Then, identify the products or equiva-
The decline of China as an economic power has lents that could be useful tools for introducing
been precipitous. So, the question of who will disciplined industrialization to a society. Last,
succeed China has become more urgent. Geopo- search for the places where this process is already
litical Futures has focused on this question and underway. Having seen what is in place, we can
narrowed the list of potential successors to 13, designate a country as a potential successor.
with some important shifts among the remaining
countries. We do not expect this list to be definitive in all
respects, but are confident it will be in most re-
The international system has usually had low- spects.
wage, high-growth countries producing basic and
inexpensive manufactured goods. More advanced We welcome your comments and questions.
countries took advantage of their production, while
successful developing countries used exports to George Friedman
vault into the first tier of economies. Chairman
Geopolitical Futures
Before China, there was Japan. Before Japan were
South Korea and Germany. All had been shattered
by World War II. In the 1870s, the United States Summary
was in this role. You might think of the countries
we have identified as preposterous. We ask you to China can no longer sustain its role as the worlds
consider the condition before their rise to global leading producer of low-cost, basic manufac-
prominence of China and these other countries, tured goods given higher wages and lower global
including the United States, which was fresh from demand in recent years. It was a matter of time
the Civil War. All were preposterous in their time. before China would outgrow this role. Production
This is a difficult time for new economic powers to of labor-intensive, basic manufactured goods has
emerge. China emerged in the 1980s and 1990s, historically rotated through developing economies.
a period where the global economy was robust
and demand for cheap manufactured goods was The purpose of this report is to identify where this
surging. The 2010s are a very different world. That production has been migrating as it leaves China

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and, therefore, which developing economies will Identifying Chinas Successors

attract more investment in the future.
Financial markets and media outlets have become
Countries emerging as successors to China were obsessed in recent months with the deceleration
identified based on three criteria. The country must of the Chinese economy. With every release of new
be producing and exporting basic manufactured trade, production and other economic data, there
goods textiles, footwear, basic electronics, etc. is renewed commentary on how the Chinese econ-
Production of these goods has, in the past, led to omy keeps going from bad to worse. Its no secret
more complex industrialization. The country must that Chinas economic boom has passed. Rather
also have a pool of cheap labor to carry out these than focus on what has been, this Deep Dive focus-
manufacturing activities. Lastly, the country must es on the new centers of low-wage manufacturing
have enjoyed high GDP growth rates in this de- activity, which once drove the Chinese economy.
Until recently, China served as the primary mo-
Our key findings include: tor for the worlds production of basic consum-
er goods. At its peak in early 2015, the country
No one country can replace Chinas labor force produced nearly half the worlds shoes, clothes,
and manufactured output. However, these pro- electronic devices, furniture, utensils and other
duction levels can be achieved by a combina- similar products. High growth rates and abundant
tion of countries. They are: Bangladesh, Cam- exports had been commonplace in the country for
bodia, Ethiopia, India, Indonesia, Kenya, Mexico, the last 30 years when its economic boom began.
Mozambique, Myanmar, Nicaragua, Paraguay, However, years of high growth do not mean unend-
Peru and Vietnam. ing growth.

Three states with diverse internal economies The 2008 financial crisis marked the beginning of
India, Indonesia and Mexico appear on the the end for the Chinese export-dependent econ-
list. While there are developed areas within omy. Consumption began to fall in developed
these large countries, there are also specific countries, which were major markets for Chinese
regions that meet the conditions to support goods. The government was able delay the impact
low-wage, basic manufacturing. of declining exports by pumping money into the
economy, but this could not go on forever.
The emerging, underdeveloped nature of these
countries is what makes them attractive loca- An even more critical factor that slowed global
tions for producing basic manufactured goods. consumption is Chinas transition out of its most
Therefore, infrastructure, security and political recent phase of economic development. Chinas
scenes will appear questionable and inade- days as a low-wage, high-growth economy that
quate compared to developed economies. But produces basic manufactured goods are coming
these conditions do not necessarily preclude to an end, as its economy starts to produce more
industrialization or development. high-value goods and services.

The current exporter crisis means that moving This was possible due to the capital generated
production from China to these other countries from low-priced exports. These exports boosted
will be a slow process. The countries on our list growth, which in turn brought more wealth and
will assume their roles as successor producers investment into the country. More money enter-
gradually, rather than emulate the boom seen ing the country meant that standards of living,
in China. including wages, increased. Lower global demand
coupled with higher wages have negatively impact-

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ed profit margins, leading companies to look for The combination of these two conditions begs
cheaper workforces. the question: Who will produce cheap consumer
goods in lieu of China? Who are Chinas succes-
When considering the impact of Chinas decline, sors? The short answer is the 13 countries high-
keep in mind two critical issues. First, even though lighted on the map below.
China is transitioning out of its basic manufac-
turing phase, the world still needs cheap, basic The countries that appear on this list may surprise
consumer goods. The worlds most advanced some given their lack of development and wealth.
economies are focused on producing high-cost But no one imagined in 1978 that China would de-
products and services efficiently made by an ex- velop into the global leader of basic manufactured
pertise-oriented workforce. These economies have goods and then transition into more advanced
a competitive advantage in this market. But they economic activities. The countries with the most
also have a demand for cheap consumer goods potential for future growth and development will be
that cannot be fulfilled by domestic production. those with large, relatively unskilled and low-paid
Second, the economic transformation underway
in China is by no means exceptional. Rather, it Many of these countries on our list may also be
marks the end of an economic development cycle. unexpected areas of growth because they are
Manufacturers of cheap consumer goods occu- known for political instability and high crime, as
py a niche in the global economy and different well as susceptibility to corruption in the public
countries have rotated through this spot since the and private sectors. But these conditions are com-
Industrial Revolution. Examples include the United mon in countries with large informal economies
States at the end of the 19th century and Japan in and labor markets. Basic manufacturing industries
the 1980s. often initially develop in this informal sector, which
is therefore a key part of economic development in
Economies that fill this niche start with a large, these countries.
cheap, unsophisticated labor force that develops
over time. Eventually, these countries transform The countries on our list have a number of shared
into more complex and advanced economies. characteristics. They all show signs of growing

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activity in at least two of the three key industries Two fundamental weaknesses of Europe (and
(textiles, footwear, cellphone assembly). Addition- what this means for the future of the Conti-
ally, they all have high growth rates in recent years nent)
well above the global average and unsophisticated
workforces that will work for low wages. Russias most prominent problem (and whether
the Russians will correct it)
The long-term impact of low oil prices (and
While it does not need to be robustly developed, at which countries will be most affected)
least basic infrastructure is also necessary to sup-
port small production centers of a couple dozen Which county will lose its status as a consol-
people and ensure the export of goods. The pres- idated world power (and the reasons for its
ence of major companies that establish large-scale inevitable decline)
factories (a couple hundred workers) and invest in
major infrastructure projects is an indicator that The dominant power in East Asia by 2040 (and
this process is well under way. Unique character- the events leading up to its rise)
istics and specific attributes for each country are
further discussed in our full report, Chinas Succes- Who will be forced to confront the Islamic
sors: The Manufacturing Migration available only State (and whether they will be successful)
to premium subscribers.
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With these 13 countries poised to reap the benefits our thousands of informed premium readers. And
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13 countries stands to benefit the most. And, as a and business decisions with Geopolitical Fu-
reader of this special report, you will not only get tures, an exclusive publication from intelligence
the full version of Chinas Successors: The Manu- and geopolitics expert George Friedman, New York
facturing Migration, you will also receive our exclu- Times best-selling author of The Next 100 Years
sive forecast The Road to 2040. and The Next Decade and former chairman and
CEO of Stratfor.
In The Road to 2040, you will learn
George Friedman combines decades of experience
Which country will emerge as a new major in geopolitics, sharply honed research and analyt-
player in Europe (its not who youd expect) ical skills, and information gleaned from his inter-
national network to deliver this essential tool that
will enable you to navigate the future.

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2016 Geopolitical Futures