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China's appeal as a destination for manufacturing investment has diminished

2019-02-26

China is still the most favoured manufacturing destination in the emerging markets. But other developing countries such as Mexico and Indonesia are showing promise.  


Over the past decade, China reigned comfortably atop the list of destinations for greenfield manufacturing facilities by foreign companies, with its level of inbound capital investment on manufacturing projects dwarfing that of other developing countries. Since 2005, China has received three times the number of projects and capital investment of its closest competitor, India, according to fDi Markets, an FT data service. 


But over the past year Mexico has gained momentum as a manufacturing destination, moving up to the number two spot and edging out India by number of projects. In 2014 Mexico attracted 165 investments. Vietnam is another fast riser, ranking second by capital investment, at $19bn against China’s $40bn and Mexico’s $16bn. India, riding on an economic resurgence and an FDI boom, continues to perform well in manufacturing, attracting 149 projects worth $7bn. 


Russia, suffering from a lack of investor confidence due to geopolitical tensions and economic uncertainty, has slipped down the charts. Having been ranked fifth by number of projects between 2010-14, last year it came tenth by the same measure. But large investments by Chinese automotive companies bolstered capital investment levels to $9bn. 


Indonesia attracted only 56 projects last year — a sixth of the number that went to China — but for an estimated total of an impressive $12bn. The country’s performance as a manufacturing country has been strong over the past five years, with its $55bn in capital investment placing it fifth during that period. Among the more sizeable recent investments, Netherlands-based VI Holding, through its subsidiary Vimetco, a producer of aluminium products, said in the autumn of 2014 that it planned to invest $1bn to establish an alumina refinery in Kalimantan. The company also announced plans to invest $500m to establish a ferronickel smelter in Indonesia through a joint venture with a local partner. And late run 2014, China-based Shandong Fuhai Group, another provider of aluminium products, said it would invest $1.2bn with Ansteel Group in the development of an industrial estate and infrastructure facilities in Ujung Jabung. The project includes a steel plant that is expected to have a 1.75m tonnes-per-year capacity, to be primarily sold in the domestic market.


An analysis of manufacturing costs byfDi Benchmark, a location assessment data service owned by the FT, reveals that Indonesia’s success could be at least in part cost-driven. Combining compound labour costs for a hypothetical aerospace manufacturing facility, the study shows costs in Indonesia declining 5 per cent since 2010. Costs in China, in contrast, have increased nearly 16 per cent, against a nearly 4 per cent rise in Vietnam and 3 per cent in Mexico. Thailand has experienced a notable cost inflation of more than 10 per cent, although this does not appear yet to be hurting its attractiveness for manufacturing projects: the country continues to rank comfortably within the top ten locations. 


Indonesia, though, stands poised to take on other Southeast Asian countries as a manufacturing hub for the region, if it could tackle its longstanding problems of bureaucracy and corruption, improve infrastructure and make other improvements to the investment climate. 

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