Made in China? Not for Much Longer

Kid’s parties are always quite the event.

Having a hoard of screaming children hopped up on cake and soft drink is a dangerous mix. I certainly found that out the hard way last weekend.

My Sunday afternoon was spent surviving my nephew’s birthday. An event that I wasn’t quite prepared for to say the least. I’d forgotten just how insane a group of kids can be when high doses of sugar and excitement are involved.

Perhaps I’m just getting old and cantankerous, though.

Nevertheless, it was enjoyable seeing all the kids have a good time. I know my eight-year-old self would have been extremely jealous of the fun and games. Not to mention the presents…

For the most part, toys today seem pretty similar to what I remember playing with growing up. The garish colours and flimsy plastic is still there, but they’re a little more intricate and creative than what I recall. Again, my inner eight-year-old would have been very envious.

There was however, one major difference.

While the kids were off screaming elsewhere, I inspected one of the freshly gifted toys. A plastic rocket ship that would have been perfect for any action figure. It wasn’t the toy itself that piqued my interest though, it was the small engraving at the bottom which read: ‘Made in Vietnam’.

I turned to my 30-something cousin and jokingly said ‘that’s a surprise’. We’d both grown up in an era where almost every ‘thing’ was generally made in China. Three words that almost anyone could recognise because it was all too common. They were the manufacturing hub of the world, so naturally, they made a lot of stuff.

But for my nephew and his generation, things are different. The world and the global economy are going through change. Some of which was expected, some not so much.

The ultimate result though, is that the ubiquity of ‘Made in China’ might actually be over.

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The unravelling global supply chain

It’s no secret that manufacturing has been instrumental to China’s incredible growth. The Middle Kingdom transformed itself into the world’s factory, and they’ve reaped the reward from it.

They’ve now spent a decade sitting atop the exporting throne. Not only cementing their dominance, but also expanding it greatly. An enviable position for many economies.

I don’t want to dwell on the history too much, as there is a lot to cover. Much of which you will likely have some knowledge about already. Most people understand the importance of China in global trade, even if they don’t quite know how it actually came to be.

Instead, I want to discuss where China’s manufacturing is today. And more importantly, where it is headed…

As you are probably well aware, China is in the midst of a trade war. America, under Trump, has cranked up the hostilities and the threats. Which, as a result has led to several tariffs across a wide range of goods.

Just yesterday we saw Trump’s latest salvo of trade pressure. He has imposed a fresh 10% tariff on US$300 billion worth of Chinese imports that were previously untouched by the trade war. Now, from the 1 September, these goods will be hampered by these heavy handed measures.

So much for the free market. Trade between the two superpowers has never looked more distorted.

Now, if these were any other nations then the outcome probably wouldn’t be newsworthy. At least for the rest of the world.

But because we’re dealing with the two largest economies in the world — by a large margin, may we add — it’s going to have some flow on effects. Like it or not, Trump and Xi’s trade war has had an impact on every single one of us. Even if you can’t always see the direct connections.

More importantly though, this may just be the beginning. A new manufacturing superpower may be poised to challenge China’s supremacy.

The reality is, China’s manufacturing sector has been somewhat stagnant for a while now. Meaning it’s still played a huge role in their economic mix, but it isn’t necessarily growing. You can see this in the data below:

Money Morning

Source: Trading Economics
[Click to open new window]

You’re looking at the aggregate percentage of manufacturing production in China. A stat which peaked at 11.4% in late 2013 and has generally hovered around the 6–7% mark since 2015.

It is still an impressive result, but I doubt they will ever achieve the levels seen in 2013 again. China and the world have moved onto new trading paradigms since then. Just like other economies leveraged manufacturing booms and busts before them.

Like any market, it is cyclical in nature.

The only question was when, not if, China’s manufacturing reign would come to an end. Though for many, the answer has no doubt seemed so far off it hasn’t warranted any attention.

At least it seemed that way…until this trade war kicked off.

Now, with no end in sight, concerns over China’s manufacturing future are coming to a head.

I’m not suggesting it will all disappear overnight. Manufacturing as a whole won’t drop to zero or negative percentages in China anytime soon. But, there is an exodus underway.

International and local companies alike can no longer sustain the tariffs eating into their bottom line. Factories are either closing down or migrating to new locations. As The Wall Street Journal reports:

Companies that make Crocs shoes, Yeti beer coolers, Roomba vacuums and GoPro cameras are producing goods in other countries to avoid U.S. tariffs of as much as 25% on some $250 billion of imports from China.

The moves by U.S. companies add up to a reordering of global manufacturing supply chains as they prepare for an extended period of uneven trade relations. Executives at companies that are moving operations outside China said they expect to keep them that way because of the time and money invested in setting up new facilities and shifting shipping arrangements.

A new manufacturing Mecca

Whether by design or not, Trump’s tariffs have accelerated China’s manufacturing transition. An outcome that will force the Middle Kingdom to explore new, more advanced, avenues for economic growth.

We can already see this change underway, too. Between the government and several big businesses, China isn’t short of ambitious plans for its future. Many of which will ensure their place as a dominant trade power for years, or even decades to come.

For low-skilled and medium-tech manufacturing though, the future lies abroad.

As my nephew’s toys foreshadowed, Southeast Asia is rapidly becoming the new factory of the world. A region that is looking increasingly likely to be at the centre of world trade in the next decade and beyond.

I’m not going to speculate on how exactly it might play out in 5–10 years. There are simply far too many variables and unknowns to take into account. But, it is something that I think any investor should keep at the back of their mind; especially as it is already underway.

The x-factor though, remains this ongoing trade war. The longer it goes on, the better for Southeast Asian manufacturing. With every passing day, the grass grows greener and greener. And if it doesn’t come to an end soon, I suspect we’ll see a critical mass.

Keep an eye out for stories of more manufacturing outfits abandoning ship in China. As the number of defectors grows, the outcome will become inevitable. It is simply a matter of time.

For you though dear reader, this could be the opportunity of a lifetime.

Think about all the incredible success stories we’ve seen attributed to the rise of China. Companies that managed to leverage and gain exposure to the biggest growth story of the past 30-odd years.

Now, think about the eye-watering returns for the astute investors that got in early. Who wouldn’t want a chance to capitalise on an opportunity like that again?

That’s why Southeast Asia demands your attention.

It is the next investment destination. Manufacturing is just the beginning, where it will go from here is the real unknown.

You won’t want to miss it. Otherwise, you could end up feeling like the only person who didn’t get invited to the party. And I can assure you, this party will have a lot more to offer than just cake or soft drink…

Until next time,

Ryan Clarkson-Ledward
Editor, Money Morning

PS:Want to know some of the biggest winners from the US China trade war? Download our latest investor report: ‘The US–China Trade War And The Opportunities Behind It’.


Ryan Clarkson-Ledward is one of Money Morning’s junior analysts. Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects. Ryan’s primary focus is assisting Sam Volkering with background research and insight for readers by dissecting the latest events affecting the world. Working closely with Sam, they explore the latest in small-cap and technology stocks as well as cryptocurrency opportunities. You can find Ryan’s contributing research, developments, and supporting information across several e-letters, including:


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