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China's Shrinking Manufacturing Activity Sending Shudders Through Southeast Asia

Last year Chinese real estate collapsed. Will Chinese manufacturing do the same this year? For the fourth consecutive month manufacturing activity has contracted in China leading some pundits to answer that question in the affirmative. Southeast Asia's rise is inextricably linked to China's dominion of the world's supply chains for virtually everything. The correlation between Chinese labor cost increases and the rise of Southeast Asian manufacturing is clear. As costs have gone up, the escape valve has been to tap into the industrious and affordable labor pools of Southeast Asia. Can this continue and what about the tumult in shipping lanes, growing geopolitical tensions, and increased costs of labor everywhere?



For a fourth straight month, Chinese manufacturing activity has contracted. This is a troubling trend for the second largest economy which is almost fully reliant on exports to stay afloat. Making matters worse, China is suffering from a real estate crisis, collapsed demographics, and poor relations with most other nations except those it plows money into on a regular basis.


According to data from the CCP-controlled National Bureau of Statistics, the contractions are modest and partially offset by gains in the services industry. In the latest data new orders marginally decreased with production increasing slightly by 1.1 percent. Employment worsened for both manufacturing and non-manufacturing sectors.



As China grew to dominate the world's supply chain for virtually everything, it was faced with the major problem of increasing labor rates in its home market. The one-child policy exacerbated the problem and left the CCP with few options but to tap into other pools of low-cost labor.


Southeast Asia solves China's labor cost challenges better than any other region. Geographically, the region acts as a near-neighbor, facilitating efficient transportation and shorter lead times translating to reduced logistics costs and timelines. Labor costs are low in Southeast Asia and the workers are industrious and have already crammed themselves into crowded urban cores making it easier to mobilize and utilize them at scale. They prefer urban living over the alternative of farming in hot, wet, insect- and snake-laden tropical jungles.


The nations of Southeast Asia have responded and been an accommodating partner for China. Particularly Vietnam, Indonesia, Malaysia and Thailand. Laos and Cambodia are making moves towards China, so much so that the relationships are beginning to resemble the colonial relationships of old. Many have developed specialized manufacturing capabilities complementing China's expertise in areas like textiles and footwear.


Groupe SEB is a French manufacturer of small domestic appliances with a longstanding operation in China where it manufactures most of its products. In 2020 it invested $50 million in Vietnam to open a significantly smaller factory focusing on the assembly of simpler appliances such as kettles and rice cookers. The Chinese company provides direct management and oversight. Is the Vietnamese FDI in this case best labeled Chinese or French?


You could answer that question both ways and not be wrong. In any case, as decoupling with China intensifies, these types of investments will inevitably diminish. The attractiveness of Southeast Asia manufacturing falls precipitously when the Chinese hub is removed from the equation. What happens when we factor in increased and more complicated long-haul sea shipments, heightened geopolitical tensions, and rising labor costs across the board?

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