China Demographics Dictate India as Global Manufacturing Hub

China’s rapidly aging population is set to dramatically shrink its workforce and effectively pass the baton to India as the world’s manufacturing hub, according to analysis from Morgan Stanley and the Global Times. China’s one child policy, which has seen it manage its population over the past three decades, is now finally kicking into the work pool and reducing the number of Chinese workers.

The Global Times says, “2015 will mark the beginning of the end of China’s demographic dividend.” The World Bank also echoes those sentiments, predicting that China’s GDP growth will fall to 7.7 percent in 2015 and to 6.7 percent by 2020. Morgan Stanley expects India’s growth to head in the opposite direction and to surpass China’s growth two years from now. Personally, I suspect that when speculation and manipulation is stripped out of China’s current GDP growth rates, India’s economy is already growing at a faster pace than China’s.

China’s aging workforce is already having an impact on the nature of conducting business in the country. It was in recognition of this that China strengthened its labor laws two years ago, making it more difficult for employers to lay off aging staff without having to pay significant compensation, based on years of service, for loss of employment. That move effectively made employers financially responsible for at least part of the nation’s pension requirements. China will possess 200 million people above 60 years in 2015, and workers coming to retirement age are expected to add an unprecedented 10 million retirees per annum to that figure. That loss of workforce is already starting to make China more expensive, and this trend will continue. India, however, is poised to provide the vast bulk of the global labor pool. By 2020, the average Indian will be 29, while the average Chinese will be 37.

The data has interesting repercussions.

China is becoming a consumer market to sell to rather than a global manufacturing hub
This is often quoted as the dynamic that will maintain China as a major destination for foreign direct investment. While this is true, the nature of selling to China is still wrapped in many problems, especially for overseas investors. The China market is prone to protectionist measures, and with the Chinese government itself still a major shareholder in many Chinese state-owned enterprises, foreign investors will have an increasingly tough time competing with them. Additionally, selling to China requires a profound knowledge of Chinese culture and tastes. Then there’s the stranglehold that China has on much of its domestic logistics industry. Selling to China is fine, but it is a path fraught with difficulties. The successful foreign investor will have deep pockets and a sound Chinese joint venture partner to help them. The domestic expertise and finesse to assist sales of products to the Chinese consumer will invariably require Chinese local expertise. Brands well-known globally will have to adapt marketing, positioning and even recipes to fit the Chinese model. As I pointed out two months ago, white goods need to become red. [Source: Op-Ed Commentary for China-Briefing: Chris Devonshire-Ellis

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