Owen Harris, the first editor, together with Robert Tucker, of The National Interest, once reminded me that experts—economists, strategists, business leaders and academics alike—tend to be relentless followers of intellectual fashion, and the learned, as Harold Rosenberg famously put it, a “herd of independent minds.” Nowhere is this observation more apparent than in the prediction that we are already into the second decade of what will inevitably be an “Asian Century”—a widely held but rarely examined view that Asia’s continued economic rise will decisively shift global power from the Atlantic to the western Pacific Ocean.
No doubt the numbers appear quite compelling. In 1960, East Asia accounted for a mere 14 percent of global GDP; today that figure is about 27 percent. If linear trends continue, the region could account for about 36 percent of global GDP by 2030 and over half of all output by the middle of the century. As if symbolic of a handover of economic preeminence, China, which only accounted for about 5 percent of global GDP in 1960, will likely surpass the United States as the largest economy in the world over the next decade. If past record is an indicator of future performance, then the “Asian Century” prediction is close to a sure thing.
Since the Second World War, rapidly developing East Asian economies—Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand and, most recently, China—have all relied upon a remarkably similar export-manufacturing model. They seek to grow by making exported products for consumers in advanced economies cheaper, faster and more reliably than can be done in other countries or regions. Those predicting the “Asian Century” assume that what worked in the past will continue to work for populous countries such as China, Indonesia, Vietnam and Burma—economies that still have low to middling incomes and seek to replicate what their fully industrialized neighbors have done.
The implications of the region’s reliance on American and European markets are severely underappreciated. Unfortunately for East Asia, there could soon be too much production in that region and not enough consumers in rich economies. It is also certain that nothing stands still for long and the nature of manufacturing is undergoing a quiet but genuine technological revolution. Authentically disruptive technologies, such as automation and 3-D printing, are gradually wreaking what the economist Joseph Schumpeter called “creative destruction.” As these and other technologies take hold, they will not only change the way products are made but also dramatically alter how value is added and profit is earned.
If these and other manufacturing revolutions come to pass, firms in advanced economies may adjust their production networks at the expense of Asia’s low- and middle-income countries. If so, these countries—many of them with tens or hundreds of millions of workers needing employment—will have to find new ways of stimulating rapid growth and reducing reliance on imported innovation and know-how. The much-touted “Asian Century” assumes that the successes of a small number of fully industrialized countries in the region, such as Japan, South Korea and Taiwan, can be replicated by other countries, and in similar ways. But for these vast but fragile economies and societies, the next few decades will certainly not be as easy, and may not be as promising, as the previous five.
AT THE heart of the so-called East Asian model of rapid economic development and industrialization is the emphasis on developing a strong export-manufacturing domestic sector that is bolted onto a highly protected domestic consumption market. In addition to the natural advantage of being able to offer a cheap and plentiful supply of low-cost labor, state interventionist policies were implemented to attract foreign firms and capital into the export-manufacturing sectors. These include tax concessions and subsidies given to domestic and foreign firms to locate manufacturing plants in various East Asian countries. Export-enhancing policies also include currency regimes that artificially suppress the value of the domestic currency relative to Western currencies, making it cheaper for Western firms to inject capital and for Western consumers to purchase the exported goods. The export-oriented model has also been aided by advances in logistics and transportation that allow transport of goods to become ever more economical. For example, transportation networks are now so efficient that, if carried on the largest modern cargo ships, it now costs about two and a half cents to ship a T-shirt from Asia to America.
Export manufacturing is at the heart of East Asia’s rise. The East Asian manufacturing trade as a proportion of the global manufacturing trade has increased from about 12 percent in 1970 to 26 percent in 1990 to over 35 percent today. The Association of Southeast Asian Nations (ASEAN)’s share of global export manufacturing increased from a miniscule 0.3 percent in 1970 to about 6 percent currently. In 1990, at the peak of Japan’s economic rise, its share of global export manufacturing exceeded 12 percent. Now China is the outstanding individual performer, increasing its share of global export manufacturing from 0.5 percent in 1970 to over 15 percent currently.
In East Asia, more than two-thirds of all manufacturing is for the export sector. For highly export-dependent countries such as Malaysia and Singapore, the figure is over 85 percent, while for China it is about 60 percent. Although the rise of East Asia as the central hub of global export manufacturing has been the driving force behind the impressive growth in the region, the economic gains in Asia are often treated as if they have occurred independently of the West. In reality, advanced Western economies, and America in particular, have been and remain essential to the growth story of East Asia for two important reasons.
FIRST, EXPORT-ORIENTED growth models mean that consumers in industrialized countries, especially in the West, will remain far more important to regional exporters than Asian consumers. For East Asia’s great exporters such as China, Japan, South Korea, Singapore and Malaysia, manufactured goods and parts make up well over 85 percent of all their exports. While the relatively open and accessible domestic consumption markets of the United States and the European Union are about $11.5 trillion each, the entire domestic consumption market of East Asia is under $10 trillion. China’s is about $3.4 trillion; Japan’s is roughly $3 trillion. Even then, Asian domestic markets are much more restricted than in the West, and much of the consumption in low- and middle-income countries in Asia—including China—involves nontradable, low-quality goods that are of little interest to exporters.
The importance of Western consumers to the prosperity of Asian economies is further reaffirmed by figures showing that, having averaged 6–7 percent growth per annum for a decade prior to the global financial crisis, average GDP growth in the developing countries in East Asia (excluding China) fell to 0.6 percent in 2009. Even China’s GDPgrowth plunged momentarily to almost 0 percent in 2008–2009 before Beijing responded with a four-trillion-yuan stimulus, the largest in economic history and equivalent to about 14 percent of its 2008 GDP.
Moreover, it is clear that Western markets remain the predominant driving force behind trade between East Asian countries. The majority of trade between East Asian countries consists of “processing trade” in which parts are shipped in for further assembly or modification before being shipped out again. The iconic illustration of this is Apple’s iPod, which, while designed in California, is made up of parts that could come from over twenty countries and traverses assembly lines that can encompass Thailand, Malaysia, South Korea, the Philippines, Singapore, Taiwan and China. It is estimated that around two-thirds to three-quarters of all trade within East Asia is “processing trade,” with around 70 percent of all manufactured end products destined for consumers in advanced economies.
This is evident in figures showing that while ASEAN-China trade had grown at high double-digit rates per annum for the previous ten years, trade between China and ASEAN immediately contracted by 7.8 percent with the onset of the global financial crisis. When it came to specific countries, Sino-Malaysian trade actually declined 1.7 percent in 2009 from the previous year, having grown at a remarkable 21.7 percent per annum in the ten years before. The decline of Chinese two-way trade with other neighbors in the same period was even worse. Figures for 2008–2009 show that Chinese two-way trade with Singapore, Japan and Thailand declined 15.7 percent, 21.5 percent and 9.8 percent, respectively. Remember that this all occurred despite China’s economy, the largest in Asia, growing at almost 9 percent over this period.
SECOND, IT is worth noting that the importance of export manufacturing to the region’s economic future is not just about enlarging GDP through growth in net exports; it is also the primary way significant improvements in innovation and competitiveness occur within countries. High- and middle-income countries such as Japan, South Korea, Taiwan, Singapore, Malaysia and China all began by being importers of innovation and know-how, and Beijing remains largely dependent on doing so for its continued development. This has occurred through an export-manufacturing model that encourages advanced-economy firms to establish manufacturing operations in one’s country, after which the positive flow-on effects will be passed on to the domestic economy.
Indeed, the leading sources for foreign direct investment (FDI) into China, Japan, South Korea, Singapore, Malaysia and Vietnam are all advanced-economy firms—all from the West as well as Japan and South Korea—with developing giants such as China not included in the top five source countries for FDI in any of East Asia’s export-oriented economies. Around four-fifths of all FDI into East Asia is destined for export-manufacturing sectors. And advanced-economy firms dominate the export-manufacturing sector. Firms based in advanced economies are behind roughly two-thirds of all manufactured goods for export out of East Asia, with the figure rising to above 80 percent for countries such as Malaysia.
Besides dominating regional export manufacturing, advanced-economy firms are needed to develop the domestic capabilities of East Asian economies. Manufacturing drives over three-quarters of all research and development in East Asia, most of it undertaken by foreign firms for export. In China, Japan and South Korea, export-manufacturing sectors account for the lion’s share of national research and development. Industrialization and innovation arising out of export manufacturing were the most powerful driving forces for Japan when it reached second in the global rankings for manufacturing output by value in 1990, and were the most powerful driving forces for China when it claimed the number-two position from Japan under this measurement in 2010.
EXPORT MANAFACTURING is particularly important as a development strategy, offering broad employment at good incomes while laying the foundations for further advances. In China, for example, the export-manufacturing sector directly employs up to fifty million people, offering Chinese citizens some of the best jobs in the country. The sector indirectly employs another 100–150 million people. Manufacturing (the majority of which is for export) creates an estimated $500 million in services demand. In addition to the absolute number of jobs generated by export manufacturing, the sector contributes more than twice as much to productivity growth as its employment share.
The transfer of technology and know-how accelerates when multinationals are obligated to form joint ventures with local firms. Japan and South Korea pioneered this approach during their decades of rapid development, and many sectors in China require it today. The emergence of world-class Asian companies such as Samsung and LG in South Korea, or Huawei and Lenovo in China, would not have been possible without technology and knowledge transfers from Western companies such as Nokia, Phillips, Hewlett Packard, Motorola and Dell locating manufacturing plants in the region.
Since the 1950s, this East Asian model of rapid development and industrialization has laid the foundations for a handful of countries with a combined population of around 250 million people to reach high-income status. Now, countries with a combined population of almost two billion people are seeking to replicate the success of countries such as Japan and South Korea to reach middle-income status ($15,000 per capita), in order to escape the “middle-income trap” and become fully industrialized and wealthy nations.
There are differences among those economies not yet fully developed. Middle-income countries like Malaysia, and those close to attaining that status such as China, are seeking to move up in the world by matching the innovation and productivity levels of fully industrialized peers. Even if China, in particular, is less dependent on net exports to generate growth now than it was in the previous decade, it is still heavily reliant on the activity of foreign firms in its export-manufacturing sector.
In comparison, poorer countries such as Indonesia, Vietnam and Burma are seeking to exploit their plentiful supply of low-cost labor to do what China did in the 1990s and 2000s and Japan did in the 1970s and 1980s—that is, grabbing a larger slice of the export-manufacturing pie and making products for the world’s wealthy consumers. For example, in 2000, China made 40 percent of Nike’s shoes, while Vietnam made 13 percent. As wages have risen in China, its production share of Nike shoes is now about 30 percent while Vietnam’s share has increased to 42 percent. Even so, one in three Chinese workers in urban areas is engaged in manufacturing, while in countries like Vietnam and Indonesia the figure is only one in seven.
But both low- and middle-income countries have something in common: they will depend on the spillover effects of export-manufacturing firms from advanced economies operating in that country even as the indigenous economic capabilities of developing East Asian countries expand and deepen. Indeed, the realization of the “Asian Century” depends on it.
The combined population of Japan, South Korea and Taiwan in 1970—a period when these countries were in the midst of pioneering the export-manufacturing path—was only about 150 million. The combined population of the industrialized economies in North America and Western Europe, their main markets, was around four hundred million people at that time. This balance will be reversed for the next generation of ambitious exporters. There are one billion or so consumers in the handful of advanced economies, while there are now some two billion people living in developing countries in East Asia. Sluggish growth in the advanced economies means those scales won’t tip soon, even if we add in the fifty to one hundred million consumers in China with similar buying power to their counterparts in advanced economies. This is not even allowing for the very real possibility that other low-wage countries with large populations, like Mexico, Ethiopia or Nigeria, will also try to break into the export-manufacturing game.
THERE ARE other strong headwinds coming for the “Asian Century.” The vast majority of technological changes are incremental—doing things better, faster or cheaper. But genuinely “disruptive” manufacturing technologies are likely to grow in importance. These technologies will change how products are made and how value is created, and they’ll alter the basic cost structure of production. All this will have enormous implications for low- and middle-income export-oriented countries in East Asia.
The first example is advances in industrial robotics, or “advanced robotics” for short. Industrial robots have traditionally taken on a variety of manufacturing tasks, usually jobs that are difficult, dangerous or too physically onerous for humans to do; for example, spray-painting, welding and lifting heavy materials.
Although robots and automated processes have been around for decades, the emerging revolution in traditional manufacturing is occurring now for a number of reasons. The first is that these are becoming less and less expensive, meaning that they will make more commercial sense even in smaller-scale operations. The average cost of robot prices has been cut by more than half since 1990 even as they have improved in reliability and speed.
Another is that industrial robots are becoming more and more sophisticated in what they can physically do, making them truly “advanced” and also disruptive. This means that they are no longer just machines used for tasks like assembly and packing. When ever-improving mechanical designs and capabilities are matched with already-occurring advances in what industrialists call the “automation of knowledge” (encompassing advances in artificial intelligence, machine learning, voice and instruction recognition, etc.), robots can be trained to follow new routines through user-friendly but powerful touch-screen interfaces and even via complex oral commands. In other words, robots are increasingly being used not just to perform repetitive tasks faster and more reliably than humans, but also to work within traditional human environments. Moreover, advanced robots are growing more capable of realizing and correcting their own mistakes, and those of other robots or humans. They can increasingly sense problems in the manufacturing process and improve them without human instruction. Using other advances in information and communication technologies, they may be able to communicate and coordinate processes with each other in real time, even with robots thousands of miles away.
The robotic revolution is already well under way. In 2010, the number of automatic robots in use passed one million. In 2013, 179,000 were sold, up from 118,000 in 2010. Over the past five years, sales of manufacturing robots have increased by well over 20 percent each year. More than one-third are bought and used by the electronics and automotive industries—the two most important export-manufacturing sectors in East Asia—with the rubber, plastics and metal sectors also figuring prominently. The McKinsey Global Institute estimates that the advanced-robotics sector could have an economic footprint of up to $1.4 trillion in manufacturing alone by 2025. The same study predicts that advanced robots in the manufacturing and services sectors could replace forty to seventy million full-time workers by this same period.
A SECOND technological revolution is additive manufacturing, commonly known as 3-D printing. This is a process that builds objects layer by layer rather than through preexisting molds or through melding preexisting parts together. 3-D printing can begin with basic materials such as powders, liquids, filaments or sheets to create objects made from materials such as plastic, metal, ceramics, glass, paper and even living cells.
The process enables the creation of products with complex internal structures that might improve strength, durability or functionality, but that were difficult or impossible to create using traditional methods. But the most significant aspect of the process is that a product’s design exists as data that can be manipulated or altered digitally, and then immediately made in the new form. This means that vast improvements across the whole spectrum of production—including in the internal structure and choice of the material used, product design, and the integration of the improved product with other machinery, parts and tools—can be performed virtually before being produced in physical form. The capacity to “turn data into things and things into data,” as Neil Gershenfeld of the Massachusetts Institute of Technology puts it, makes experimentation and innovation in materials, product and design far cheaper and less cumbersome, since it allows a producer to skip traditional manufacturing steps such as making molds and sourcing new parts and materials. The digitization of manufacturing will also supercharge improvements, as it means many more minds with access to the data—designers, producers and end users—can fix flaws and add to the innovation process from the inside out.
Estimates say that 3-D printing could be used for up to 10 percent of all consumer products and be used wholly or partially for half of all direct product manufacturing within a decade. Traditional manufacturing processes will probably still be more cost-effective for the vast majority of products, but 3-D printing is poised to take the lead in more complex, low-volume and highly tailored products.
AS FANTASTIC as these two examples of manufacturing ingenuity and innovation are, it may not immediately be clear why they are “disruptive” to traditional manufacturing, or why such technologies could spell trouble for East Asia’s export-oriented growth strategy. Even if these technologies fulfill the hopes placed on them, couldn’t the low- and middle-income East Asian countries use them to accelerate their development? After all, China is emerging as the largest purchaser of industrial robots in the world, with one in every five sold in 2013 being bought by a China-based firm.
The answer comes down to what could be the radical and game-changing erosion of East Asia’s cost advantage in export manufacturing. The cost of production is the sum of capital, labor and land costs. The lower cost of workers and land on which foreign firms locate manufacturing plants has been a five-decade boon for East Asia. For export-manufacturing giants such as China, rising labor and land costs have been offset by the economies of scale that China-based operations can achieve. In other words, in traditional manufacturing, the cost per unit of producing one product decreases as fixed costs are spread out over an increasing number of units produced.
As ever-improving advanced robots become cheaper to buy and install, the traditional manufacturing cost equation will be fundamentally altered. For one, the greater the automation, the less relevant labor costs become, especially if one considers that robots (unlike human workers) can, in principle, work twenty-four hours a day for little additional variable cost. In fact, once a firm has committed to the sunk fixed cost of automation equipment in a manufacturing plant, the unit cost of a manufactured product made by a robot decreases with every additional product made. If this is the case, then it will eventually be far less attractive on a cost basis for advanced-economy firms to locate manufacturing operations in low- and middle-income countries.
To offer one case study, consider the Taiwanese company Foxconn, which makes products for a number of leading Western brands such as Apple in its major manufacturing plants in China. Foxconn located operations in places like Shenzhen because labor was much cheaper in the Chinese province. Employing more than one million workers, Foxconn is now replacing many of them with a growing army of robots. Some reports suggest that a $20,000 robot can assemble thirty thousand iPhones in one year—a cost of sixty-six cents per unit assembled. That number should be similar whether the robot is located in Shenzhen or Detroit. For Foxconn, or others like it, there will be less reason to build future automated plants in low-income countries like China.
Indeed, global brands consistently name supply-chain risk as one of their major ongoing concerns when it comes to manufacturing. If a product is designed in America and sources the most valuable components from other advanced economies, using robots to assemble the product in developed countries with reliable regulatory, legal and judicial institutions is a far less risky option than if the automated plant were located in China or Indonesia—developing countries with riskier environments and weaker commercial institutions. Bear in mind that while China emerged as the largest purchaser of robots in 2013, the majority of purchases of advanced robotics were by foreign-owned firms headquartered in advanced economies with manufacturing operations in China. It seems only a matter of time before an increasing number of them will prefer to build automated firms in advanced economies to reduce the risks inherent in less developed countries with more opaque and unpredictable political economies.
Moreover, if the primary consumption markets are in the advanced economies, and labor costs of manufacture are less of an issue, then it makes more sense to locate automated plants closer to the end consumer. Doing so will reduce transportation costs and cut the time it takes for a product to go from the drawing board to the hands of the consumer. It will also allow firms to be more responsive during troughs in consumer demand by reducing outlays for redundant labor.
But advanced robotics is not only about making labor costs less relevant. As automation becomes more sophisticated and “intelligent” in the ways described above, the factory manager will be less the boss of a team of production-line workers and more of a highly skilled computer scientist, engineer or systems analyst—skills more common among workers in advanced economies. As advanced robots communicate and work with each other—often with another robot some distance away—such manufacturing firms will need to exist in commercial environments where trust and cooperation between third parties is primarily the function of a political economy that upholds the rule of law in areas such as contract law, property and intellectual-property rights, and commercial confidentiality. That’s not the case in guanxi-type societies, in which trust rests on personal and social networks and loyalties.
Given the more limited application of the technology and the fact that the process is still cumbersome and slow (even if print speeds are rapidly improving), the future of 3-D printing is less assured than that of advanced robotics. Like automation, 3-D printing lowers the relevance of manufacturing workers, making labor costs less important in the cost equation. On a cost-per-unit basis, a 3-D-printed product is fairly constant however many units one makes. This means that 3-D printing could well be more cost-effective when producing a low number of products. In addition to the fact that 3-D-printing operations can be done in smaller spaces, making it a technology eminently suitable to operate in crowded modern cities, advanced-economy firms will have few incentives to locate 3-D-printing operations in low-income countries. The technology is highly suited to producing complex, low-volume and highly customizable products more applicable to advanced economies than developing markets. For example, Western companies such as Boeing are using 3-D printing for around two hundred different parts for ten aircraft platforms.
But the true disruption is in the way 3-D printing allows designers, end users and producers to experiment and innovate from the inside out. This means that advanced-economy firms with a current stranglehold on products with advanced designs and materials will be the first to digitize their products and allow their stakeholders to improve the product and introduce innovations at low cost. For example, NASA and Boeing have signed a multibillion-dollar agreement to develop a giant rocket that could go into deep space. Imagine what scientists, engineers and other highly skilled workers from these two American organizations could come up with using 3-D-printing processes and technology to experiment and innovate.
Possibilities such as the one above are significant. While the traditional value proposition of export-oriented East Asian economies was to produce commodity goods advanced economies needed at lower cost, 3-D printing facilitates the development and production of tailored products and maybe even whole sectors that completely bypass the low-cost, cookie-cutter offerings of developing economies. Far from moving up the manufacturing value chain as developing Asian economies hope to do, many will not be able to even add value when it comes to products designed and produced by 3-D-printing processes. Like many new technologies, 3-D printing (and advanced robotics) may well exacerbate inequality between developed and developing countries, rather than lessening it.
It is impossible to know which manufacturing technologies will take off and become genuinely “disruptive” in the future. It would be foolish to attempt to offer solid predictions of what manufacturing will look like in two or three decades’ time. Instead, it’s enough to note that there are compelling reasons—economic and technological—why an export-oriented model that worked for a few East Asian economies in the past may not work so well for the many in the future.
More broadly, making predictions about future geostrategic power based on linear extrapolations of past national and regional GDP growth into the future is likely to mislead rather than inform. Even if national power is based on economic strength, as the contemporary world assumes, the ways countries grow their economies, and how successfully they innovate and adapt, offer a better insight into national resilience, their future strength and ultimately their geostrategic role in the world.
All of this is to say that the “Asian Century” may well eventually arrive. But for now it’s something of a pipe dream. The two billion people living in developing countries in East Asia may want to follow in the footsteps of their advanced-economy neighbors, but new, formidable challenges stand in their way. They’ll need a changed model, one reflecting the reality that the next half century won’t be a mere echo of the last one.