Let’s start with the story of China’s emergence as the “World’s Factory” as many call it.
China is today the world’s sole manufacturing superpower. Its production exceeds that of the nine next largest manufacturers combined. But a brief look at the history of Chinese manufacturing shows that this wasn’t always the case. Before 1980, China was a relatively minor player in the global manufacturing industry. In the 1970s, China’s manufacturing output was approximately on par with Italy’s.
That began changing in 1980. China slowly started to overtake the industrial powers, one by one. By 2010, they had even overtaken the United States. Prior to 2010, this was unthinkable, as the U.S. was the world’s largest manufacturing superpower. In 1995, China had just 3% of world manufacturing exports, By 2020, its share had risen to 20%.
China’s rise in the share of global manufacturing output was even more dramatic as it grew from 5% in 1995 to around 35% in 2020.
What happened? How did China go from being a largely agrarian society to the manufacturing superpower of product assembly services in China and OEM manufacturers in China we know today, when the US is more dependent on Chinese inputs than vice versa?
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The Lean Years
Until the late ’80s, China lagged in technological development. However, significant advances were made in overall technology, enabling them to keep pace with the rest of the world. The ’80s marked the emergence of nuclear power, satellites, and widespread computing.
However, when it came to manufacturing, China had a significant gap to bridge. Much of their industrial technology was outdated, with a large portion still from the 1950s.
This discrepancy was partly due to a disconnect between research and development and the industrial sector. This period saw China emerging as an innovator. From 1979 to 1984, the number of major Chinese scientific discoveries surged from 2,790 to 10,000. Similarly, government-approved inventions increased from 42 to 264.
Several factors contributed to these disparities. One was the lack of intellectual institutions, and another was that factory managers prioritized meeting quotas over focusing on R&D.
During this time, knowledge was pursued for its own sake, with little thought given to industrial applications. Consequently, research wasn’t taken seriously.
The inflection point in China’s industrial journey
The turning point came in 1985 when the CPC published the “Resolution on the Reform of the Science and Technology Management System.” This resolution emphasized the importance of science and technology in economic progress.
This was under the leadership of Deng Xiaoping, who led China through a series of far-reaching market-economy reforms earning him the reputation as the “Architect of Modern China”. This change led to increased collaboration between factories, research centers, and universities.
From 1992 to 2002, China implemented a series of VERY attractive incentives to attract foreign companies to China’s growing manufacturing sector, such as:
- Tax Exemptions
- Pre-Built Industrial Zones with No Regulations
After foreign companies moved into these zones, they were allowed to operate with virtually no regulation. This meant foreign companies could ignore regulations on worker wages and working hours. Since the competition between other industrial zones was fierce, it was easy to find a zone that would give foreign companies everything they wanted. There was also no regulation on the type of manufacturing that came into the industrial zones. As a result, low-value-added, low- tech, and high-employment manufacturing dominated.
By the early 2000’s, China outpaced the United States in factory output.
However, in 2005, China began gradually dismantling the system that originally brought them so much foreign business and investment. Today, China is high-tax, expensive, and heavily regulated. They have also shifted to prioritize high-value-added and high-tech manufacturing. As a result, China was no longer an attractive place to many manufacturing operations even before the trade conflict with the US started in 2017.
With several other countries in SouthEast Asia (India, Vietnam, Bangladesh, etc.) offering manufacturing incentives similar to those offered by China in the 90s, lots of companies are pulling out of China in pursuit of better destinations. India has emerged as one of the top destinations.
The Indian Elephant Awakens
Historically, India has not been recognized as a manufacturing powerhouse. India’s manufacturing sector has lagged behind that of neighboring China, struggling to rise above 13-17% of gross domestic product (GDP) over the past few decades. While India’s manufacturing sector has shown steady growth, Chinese industrial might has consistently been 10X that of India’s.
Manufacturing, today, contributes to about 17% of the GDP and is expected to touch 21% in the next 6 years. India ranks fifth in the global manufacturing table with a 3.3% contribution, and China is at 28.4%.
India’s silver lining
But India is quickly emerging as a future export manufacturing powerhouse. It offers competitive cost structures, deep pools of labor, and growing scale and capabilities across diverse industries. India has the additional benefit of possessing a potentially enormous domestic market.
Many firms currently sourcing in China are already looking to diversify their manufacturing portfolio by sourcing from India as part of a China-plus-one strategy. Other firms that are just now exploring low-cost country sourcing are considering India as a lucrative and in some cases superior option to China.
A growing list of factors has prompted companies to search for a backup. First, there were rising labor costs in China and pressure from the Chinese government to transfer technology to Chinese competitors.
Then there were President Donald Trump’s tariffs on Chinese imports in 2018, Covid lockdowns from 2020 through last year, and now a push by Western governments to decouple their economies from China.
Since China declared a “no limits” friendship with Russia on the eve of the invasion of Ukraine last year, the US and its allies have stepped up efforts to reduce dependence on China. Through reducing dependence on China, through “friend-shoring,” the US is “strengthening integration with our many trusted trading partners- including India,” Treasury Secretary Janet Yellen said on a visit to India in Feb’23.
As a result, US imports of mechanical machinery from China shrank by 28% from 2018 through 2022, but increased by 21% from Mexico, 61% from ASEAN, and 70% from India.
India’s manufacturing industry has been experiencing remarkable growth, double-digit growth of ~12% year on year despite a global pandemic and geopolitical issues, thanks to a series of liberalized Foreign Direct Investment (FDI) policies and simplified compliance procedures.
The Indian manufacturing industry generated 16-17% of India’s GDP pre-pandemic and is projected to be one of the fastest-growing sectors. The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025.
India offers several advantages over China when it comes to manufacturing.
India’s manufacturing potential also stems from benefits like,
- An educated English-speaking majority
- A sizable-trainable workforce;
- Digital infrastructure, facilitating efficient operations;
- Investments in logistics infrastructure;
- Proximity to different countries for supply chain diversification;
- A strategic location for accessing emerging markets, and;
- Cost advantages in low-cost and economical manufacturing, supported by a strong legal system and patent protection.
Forex benefit
India has favorable movements in the foreign exchange market. The yuan has climbed 7% against the US dollar in the past three years and 35% in the past decade, making China’s exports costlier. The rupee, meanwhile, has dropped 26% in the past three years, making exports cheaper.
Given recent world events and a multitude of government initiatives that India has committed to to strengthen its economy and infrastructure, it seems inevitable that India’s manufacturing sector will have a bright future.
Zetwerk provides you the flexibility of enjoying the advantage of India’s scale and market depth for your high-volume needs while procuring other specialized equipment in low quantities from Vietnam. Then, we can manage your inventory in our partner warehouses right here in the US, for your Just-in-Time delivery needs. As a bonus, we also have fabrication units in the US, that can add value to your materials and make them USMCA-compliant. What could be a better deal than that?
This makes your supply chain even more resilient, and immune to domestic problems of any one country, like what happened with China during the pandemic.
About Zetwerk
Zetwerk works with original equipment manufacturers in North America and worldwide, fulfilling their manufacturing requirements for customized components and assemblies. We act as a second brain to the OEMs. Our team of experts not just executes the customer’s manufacturing strategy, but adds tangible value at every step of the process, right from vetting designs to finding and managing the suppliers to quality control and logistics. Our customers regard us highly for our transparent and hands-on approach to manufacturing.
Zetwerk executes these projects through its network of partner suppliers spread across USA, India, China, Vietnam, and Mexico. These world-class facilities provide practically unlimited production processes, capacities, materials, part sizes, and weights as well as secondary operations, surface finishing, assembly, and related services. Importantly, we have our teams established in all these countries with a particularly large presence in the US.
Zetwerk recently acquired Unimacts, a US-based manufacturing services company, providing further impetus to our commitment to serve North America as a primary market. We have more than 2,000 customers across North America, Asia-Pacific and the Middle East, and a network of more than 10,000 manufacturing partners worldwide. Founded in 2018, we are backed by some of the world’s leading venture capital firms including Sequoia, Kae Capital, Accel Partners, Lightspeed, and GreenOaks. As of 2023, Zetwerk was valued at US$ 2.8 Bn.
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