Reinventing Manufacturing

Major Drivers of Change
Figure 4: Middle Class Population Projections
Population (Billions)
3,228
2010
2030
facility location choices and consider reshoring their
manufacturing operations closer to Western markets.
The United States, United Kingdom and even Italy
are increasingly seeing manufacturers return to inregion
operations.
The Rebalancing of Global Value Chains
525
314 338 322 313
138
181
Asia Africa USA &
Canada
Source: World Bank; Brookings Institution
Latin
America
663 680
Europe
This wealth shift is driven largely by the accelerating
growth of an emerging “global middle class,” as
working class wages increase, giving workers economic
access they didn’t have before (see Figure 4). This will
be a particular characteristic of China and India, which
are both expected to see the size of their “middle class”
income groups more than double by 2030.
By 2030, over 70 percent of China’s population will have
entered the “middle class,” consuming nearly $10 trillion
in goods and services. Similarly, India could be the
world’s largest middle class consumer market by 2030,
surpassing both China and the US.
The implications of this transition are twofold. First,
manufacturing and logistics networks that have historically
been optimized primarily to supply the West will
face demand from Eastern markets. Manufacturing
assets, which are still largely based in Asia, will therefore
increasingly serve local markets. This change in focus
paired with higher overall demand on the same assets
will likely result, at least in the short term, in increased
product cost and/or slower delivery response time to
serve Western customers.
Second, the wage differentials that historically drove
Western companies to move manufacturing to Asia are
shrinking, causing these companies to reevaluate their
China continues to be an important provider of manufactured
goods. However, due to ongoing annual labor
cost increases of 10–20 percent, China is quickly losing
its status as the low-cost manufacturing country of
choice. This will change the role played by China in
global manufacturing, as less complex and cost-sensitive
production moves to other countries.
But its global leadership position will continue in a
different form as China develops and reshapes its manufacturing
capabilities. A shift away from low-technology
and low-productivity to high-technology and highproductivity
manufacturing is already occurring, though
at a fairly moderate pace, as many Chinese companies
adopt lean techniques and automation to compensate
for higher labor costs.
This effect is already underway in sectors like Automotive
where labor-intensive, low-tech production is moving to
countries with lower labor costs, such as Vietnam and
Bangladesh. Meanwhile, the flow of high-end production
from Western countries to China–mainly spurred by local
market growth, an acceptable productivity and labor-cost
ratio, and a strong supplier base–is overcoming hurdles
like IP risks, underdeveloped infrastructure (inland) and an
opaque political environment, to change the landscape
and role of Chinese manufacturing.
As the economics change and the manufacturing role
of China and other Asian countries shifts, the idea of a
massive return of manufacturing activity to developed
countries has gained prominence. For the past 3 years,
the US has seen growing buzz about the promising rejuvenation
of manufacturing, fueled largely by a wave of
manufacturing reshoring. This shift has not yet occurred
on a large scale, but a trend to bring manufacturing
back to the US is becoming more evident.
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