Supply chain diversification is accelerating as new manufacturing and export hubs in Asia emerge. However, these new hubs remain heavily reliant on component imports from China. To fully diversify and reduce risks, significant investments in production capacity, supporting industries and infrastructure will be required to catch up with China and close the supply and exports gap.
India and Vietnam emerge as key future manufacturing hubs in Asia
Market supply of the most critical intermediary goods remains concentrated, especially in electronic components, batteries or optical instruments industries. The production and trade of these components remains mainly located in Asian countries, with China in the lead.
However, the outbreak of the COVID-19 pandemic exposed existing vulnerabilities in the global supply chains, with additional global risks such as geopolitical tensions and higher trade tariffs impacting global supply chains over the long term. To diversify global supply chains and better manage existing risks, manufacturers are accelerating diversification efforts and establishing manufacturing facilities in alternative countries.
Asian countries such as India and Vietnam are attracting new investments into the manufacturing sector and emerge as the new export hubs. The countries benefit from large labour pools, improving productivity and relatively business-friendly operating and trade environments.
Despite the accelerated diversification efforts, new manufacturing hubs in Asia remain reliant on component imports from China. For example, Chinese goods represent 20-30% of India’s total consumption of electronic components or batteries. Similarly, Vietnam remains heavily reliant on components imports from China, especially in the hi-tech goods sector. Overall, Chinese goods represent from 30% to 80% of Vietnam’s total consumption, depending on the industry.
To achieve significant economic diversification from China and fully reduce global supply chain risks, additional investments into production capacity and supporting industries will be required
Source: Euromonitor International
The relatively small scale of production remains the key hurdle, especially in the hi-tech goods sector. For example, the forecast combined production of electronic components in Vietnam, India, Mexico and Poland in 2030 would represent only 50% of China’s exports value in 2023, indicating a still large supply gap from other countries.
A strong network of supporting industries in new manufacturing hubs will also be required to ramp up production capacity. Besides the production equipment, businesses also need a reliable network of suppliers to provide essential components and materials. Industries such as hi-tech goods, machinery, and transport equipment rely on a wide range of input materials and intermediary goods as well as efficient logistics.
Transportation and shipping infrastructure will also play a crucial role in global supply chain and production diversification efforts. Ports’ infrastructure and capacity are particularly important as they help create strong export capacity.
New emerging manufacturing hubs such as India or Vietnam have made significant progress in terms of export capacity over the last five years, yet they continue to lag behind China. For example, China remains among the global leaders in Liner Shipping Connectivity Index rankings and outperforms other manufacturing hubs.
The key challenge for new emerging hubs is the low capacity of international ports as well as low productivity. For example, China’s container throughput remains around 14 times the size of India’s, in turn limiting India’s export potential and growth of its manufacturing sector. Besides port infrastructure, new manufacturing hubs also have underdeveloped road and rail transportation networks, an area where China excels too.
New manufacturing hubs in Asia are already making the right steps and are ramping up infrastructure spending to close the gap with China. However, it will require the countries to further spend around 4% of GDP on infrastructure and will take time to physically build all the necessary infrastructure to support rising trade volume.