'Factory Asia' is the term attributed to the phenomenon of Chinese and surrounding south-east Asian supply chains, which contribute half of the world’s manufacturing output. In turn, China contributes half of Asia’s manufacturing output.

The UN Industrial Development Organisation’s latest World Manufacturing Production Report shows that China’s manufacturing output slowed at 7% growth in the third quarter of 2015. While China’s manufacturing output growth declines slightly, growth in other Asian countries is strong, notably in Pakistan and Vietnam. Among developing Asian economies, Pakistan, Vietnam, India and Indonesia reported remarkable growth in manufacturing output of 12.9%, 12.5%, 4.6% and 4.2%, respectively. Increasing foreign investment is significantly boosting Vietnam’s economy, while growth in Pakistan and India is largely attributable to growth in the manufacture of textiles and wearing apparel. Indonesia benefited from significant growth in the manufacture of machinery and equipment in the third quarter of 2015.

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Therefore, manufacturing which leaves China shifts to south-east Asia, sustaining factory Asia’s manufacturing dominance. So, China continues to play a huge role in Asian manufacturing and three advantages will sustain its dominance.

First, China continues to focus on low-cost manufacturing, even as it diversifies into higher value activities. Its industrial clusters of suppliers, infrastructure and continuing innovation, which boosts productivity, all offset the effects of higher wages.

Second, as Chinese wages rise, some manufacturing is shifting to large, lower income south-east Asian countries. Thus, factory Asia reinforces a regional Asian supply chain revolving around China.

Third, Chinese demand for goods is being met by factory Asia manufacturers and suppliers, which have a distinct advantage over competitors that are located further away.

Changes in the technology structure of factory Asia also helps sustain its manufacturing dominance. Asia has enjoyed the most significant change in technology structure: over the past 40 years, its share of hi-tech activities grew by 10% at the expense of low-tech share. Asia’s economic success is thus concurrently driven by increased manufacturing and by technological upgrades in the sector.

So long as Asia’s industrial development is driven by well-designed industrial policies and regional trade pacts from supportive governments, local enterprises willing to innovate and upgrade, as well as a workforce willing to upgrade its skills and education and relocate, a resilient factory Asia should continue to dominate world manufacturing output, despite a temporary slowdown.

Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services. Email: lawrence@asiabizstrategy.com