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.