Manufactoring powers

by Simon Baptist


One of the major forces reshaping global business is that of rising wages in China. Nominal wages have been rising at over 10% a year in every year since 1997: Chinese workers are still much cheaper than those in, say, the United States, but the gap is closing rapidly. China has managed to create such a dominant position in global manufacturing supply chains, despite rapidly increasing wages, partly because of its infrastructure, but also because productivity growth has been unusually rapid.

Over the next five years we think that Chinese wages will continue to rise fast. Productivity will rise as well, but this is going to change the type of activity in which Chinese workers are competitive. Countries all around the world, such as Bangladesh, Peru and Nigeria, are hoping to get a slice of labour-intensive manufacturing supply chains as Chinese factories focus on a different stage of production. Which countries are best placed to move into this gap? One country stands out as having a lot of potential: India. It has low wages and business inputs are low, and it has the scale to attract big firms that many countries in, say, Africa lack. India’s business environment is very difficult, however, and its infrastructure is poor. But if India can get the building blocks right, then China’s rising wages create an opportunity it is uniquely placed to capture.

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