Exactly a year ago I wrote on the dominance of Factory Asia (China and south-east Asia supply chains) in contributing half of the world’s manufacturing output.
This year, how will rising protectionism from the US administration, disruption from forces such as Brexit and increased security threats affect the Asian manufacturing outlook? The UN Industrial Development Organization (Unido) expects global manufacturing to remain weak, but compared with other regions, Factory Asia will experience relatively higher growth. The World Bank’s manufacturing Purchasing Managers’ Index signals continued expansion in China, Indonesia and Vietnam, but a slowdown in Malaysia.
Unido forecasts China’s manufacturing output will increase moderately, at 6.5%, as it is in transition period into higher value-added activities, so facing more balanced growth. India, while experiencing a slight 0.7% dip, is progressing to hi-tech manufacturing. Japan’s output is expected to drop (negative 1.8% in 2016) due to a fall in external demand amid a rising yen, while South Korea’s 2016 manufacturing output remained the same as in 2015.
Manufacturing output for south-east Asia is forecast at 4.7% as some production shifts from China due to rising wages. Also, south-east Asian manufacturers continue to meet Chinese demand for goods, an advantage over competitors located further away.
Indonesia recently entered the top 10 of the world’s largest manufacturers, growing 5.6% in the second of quarter 2016. Other Association of South-east Asian Nations members such as Singapore, Taiwan and Vietnam also grew through making computers, electronics and optical products. Vietnam maintained a two-digit growth rate in manufacturing output for the seventh quarter in a row, while Cambodia continues to expand, with the garment sector growing more than 10% annually.
However, Factory Asia still depends on financial sector support for investment to avoid a low-growth trap. The Asian capital market is cautious with little investment incentive; as companies are less willing to expand, demand for loans reduces. Other dampeners include high inventory-to-sales ratios, lower commodity prices and weakening regional currencies against the US dollar, increasing manufacturing input costs.
Overall, Factory Asia is expected to grow slowly over the next two years. For Asian manufacturers, slow growth is better than negative growth. What is vital is the extent to which weak external demand will be offset by robust domestic demand.
Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services. Email: firstname.lastname@example.org