Beyond Factory Asia

As production in Asia becomes more expensive due to rising wages, ballooning commodity prices and a shrinking labor pool, the region is losing its cost advantage. Given the changing global patterns of growth, demographics, and technology, Asia's growth model needs to evolve accordingly. Will developing Asia manage to invest in skills, technologies, and the private sector to move beyond low-cost manufacturing and ensure that economic growth remains strong?

Date: 13 May 2013

Related publication: Beyond Factory Asia: Fuelling Growth in a Changing World

Transcript

Karen Lane: Good morning and welcome to today's live chat on the issue of Beyond Factory Asia and whether Asia should move beyond low-cost manufacturing and, if so, how it should do that.

We discussed this in our report: Beyond Factory Asia: Fuelling Growth in a Changing World available here: http://www.adb.org/publications/beyond-factory-asia-fuelling-growth-chan....

We are chatting today with Ramesh Subramaniam, Senior Director, and Thiam Hee Ng, Senior Economist, both with our Office of Regional Economic Integration. I'm the moderator – Karen Lane from ADB's Department of External Relations.

Ramesh Subramaniam: Greetings! Welcome to the Live Chat on Beyond Factory Asia.

Thiam Hee Ng: Thank you for joining us this afternoon for the Live Chat on Beyond Factory Asia.

Karen Lane: We had some questions in ahead of time. This one from Kevin Lim in Singapore: What view do you have on governments identifying and promoting certain sectors as a means of creating jobs and moving up the skills ladder? For instance, Indonesia's attempts to get commodities firms to process the commodities in Indonesia rather than export the raw commodities.

Thiam Hee Ng: In response to the question from Kevin: government support for certain sectors can help promote the development of industries especially if there are problems of market failures. However, there is a risk that government support can result in inefficient industries that are propped up through state aid. There have been a few cases of success but also many failures. The Republic of Korea, for example, has had some success in promoting the development of high tech industries. Some of that success can be traced to benchmarking its support to firms' export performance. It is important for Indonesia to ensure that commodities processing firms have the necessary infrastructure and skilled workforce to draw upon to develop the sector.

Karen Lane: For this livechat, we asked the question: "Can Asia move beyond manufacturing?" Ryan Sumo responded: Of course it can, but it has to go through this process first. He also asked: Have any developed countries actually managed to move to a knowledge-based economy without the transformative power of millions of blue collar workers educating their children through manufacturing jobs?

Thiam Hee Ng: Hi Ryan. As you pointed out, education is key. But the manufacturing sector is not just a source of revenue for providing education. The manufacturing sector is also the laboratory where new ideas and innovations can be tested and improved upon. Therefore we believe that there is a close connection between the development of manufacturing and innovation. A knowledge economy is not necessarily a substitute for a strong manufacturing sector but rather complementary.

Karen Lane: This one also from Singapore: Do you have any thoughts about manufacturing satellites and/or satellite components or water treatment, which are industries Singapore is supporting through heavy investments in R&D?

Thiam Hee Ng: Water treatment looks promising for Singapore given that it has utilized the technology in the country. This has helped it to demonstrate the potential of the technology. Having proved that the water treatment plant can be run successfully would be a strong selling point. In the satellite manufacturing industries where existing firms have a big headstart, new entrants might face high hurdles to succeeding. The high cost and limited launch windows may discourage firms from experimenting with new suppliers.

Karen Lane: Another question earlier: Does ADB have any views about the ease some firms have in hiring lower-cost workers from neighboring countries, which reduces the pressure to upgrade their processes and what the appropriate government policies should be? (Am thinking of Myanmar refugees and illegals in Thailand, Bangladeshis, Filipinos and Indonesians in Malaysia etc).

Ramesh Subramaniam: Thanks for your question on migration. The answer lies on a number of fronts. First, it is critical that basic rights of workers are fully met. Second, full compliance with national policies is a must. If appropriate national policies are not there or are weak, then they should be articulated. What should those be? In countries where such labor is required, a more accommodative approach may be adopted. Yet, if the Government's vision is to move up on the technology value chain, then process upgrades should not be sacrificed.

Guest: Hi, what is your view on Malaysia's manufacturing sector? Do you think the proposed measures identified under the Economic Transformation Programme are efficient and effective to transform the manufacturing sector while the education is yet to be at the desired level?

Thiam Hee Ng: The Economic Transformation Program aims to move Malaysia into more advanced manufacturing sectors. The government is encouraging firms to invest in new sectors. At the same time, it is important to recognize that more sophisticated manufacturing processes require highly skilled workers. Therefore, there should be sufficient investment as well in education and skills.

Karen Lane: Babes-au M. DE Leon on Facebook said: Of course, remember that in manufacturing, the makers are also the clients. They buy what they make, for example, when a mother bakes cookies, whether it's for export, or just for the children, we all eat it. Either we buy the cooked baked cookies or give it to our children. My share in this: can Asia move beyond manufacturing? Every country will always have the management, the manufacturing, the sales, the marketing, the export/import part, if a country has the best persons to do or create a pool in such, then it's in training them to become entrepreneurs later. Teach them the ropes to become small owners of stores that either sells services or products. Another is to become managers, who manage people, so they also become leaders and have workers under them. Remember, that those on top, will eventually retire and become old, who takes over by then?

Ramesh Subramaniam: To the comment on managerial/demographic evolution. In general, agreed. In moving Beyond Factory Asia, all of the tasks/challenges you note need to be tackled simultaneously. More critically, as product and process innovations accelerate in a few countries, others will have compete and find niche areas. Most would need a strong(er) manufacturing sector to ensure job creation. A few may specialize in purely knowledge-based activities and "leapfrog" to higher value added. On your point on demographic evolution, our view is that the future is going to be one of continuous and rapid learning and reskilling.

Karen Lane: This question came in by email: Do you expect inflation in Japan and a depreciating yen to negatively affect manufacturing in developing Asia?

Thiam Hee Ng: Japan's attempt to stimulate its economy can provide a welcome boost to demand for the region's manufactured products. A depreciating yen also helps reduce the cost of Japanese inputs in the Asian manufacturing sector.

Karen Lane: A guest asks: What about demographic changes? Some countries will have younger populations and some will have older ones in the future. Which ones are best placed to deal with Beyond Factory Asia?

Thiam Hee Ng: Demographics will be a big challenge for the region in the future. As the population ages and shrinks, some countries will see wages rise. This means they will have to move up the value chain to avoid being priced out. Meanwhile, other countries when the population is still young and growing will have the advantage in labor costs. It is important to recognize that as countries move to Beyond Factory Asia they need to invest and improve the skills of workers to equip them with more skill-intensive production.

Karen Lane: Jasmine Terrace Villa asks: how many countries in Asia can shift to a service economy in the future?

Ramesh Subramaniam: On the services sector question of Ms. Jasmine Terrace Villa. If we take OECD countries or even Developing Europe as benchmarks, Asia will have to boost its services sector share by about 15 to 27 percentage points of GDP. It is hard to say how many countries would become dominant service economies (e.g. more than 50% of output), but we can say that most middle income and large economies in Asia today will cross that threshold by 2030.

Karen Lane: This redirected from email: "Is it realistic to expect that developing Asian nations will grow to develop solid domestic markets?"

Thiam Hee Ng: As the region becomes richer, the middle class population is increasing fast. We can expect the middle class population to start buying consumer durables. For example, the People's Republic of China now tops the US as the largest automobile market, with annual sales of nearly 12 million, up from just 1 million in 1992.

Karen Lane: Piet IJben, Chairman, Emda Network Organisation, Luxembourg – Netherlands commented on our question:

  • Involve Fair Trade initiatives in new product lines.
  • NGOs in Europe are directing toward sustainable production with spin off to the social sector. This is also the new strategy of the Dutch Government with Development Aid.
  • Meso Impact Finance is one of the tools for this...likewise discussed in the IB Forum at ADB recently.

Ramesh Subramaniam: On Piet Ijben's comment. We agree with you. While the manufacturing sector needs to flourish and create jobs, we should not miss any opportunities for greater social responsibility.

Karen Lane: By Facebook: You mentioned 3D printing in the report. Will this take off in Asia and if so, how soon?

Karen Lane: I think the questioner is talking about our Beyond Factory Asia publication which is mentioned right at the top with a link

Thiam Hee Ng: If 3D printing technology were to mature and become widely available, its impact would likely be global. It will transform the nature of manufacturing. We will enter an era where production can be customized easily and we can produce on demand. We can naturally expect it to be adopted in Asia as well. It is difficult to predict the rate of adoption but a horizon of 5-10 years is likely.

Karen Lane: One query on jobs: "Don't some countries need low level manufacturing jobs? I mean, volume jobs not a few quality jobs?"

Thiam Hee Ng: It is important to provide high quality jobs to workers who are joining the labor force. Manufacturing has traditionally provided well paying jobs. While technology and structural changes might reduce the number of jobs in certain sectors, it will create new jobs in other sectors.

Thiam Hee Ng: Just to add to what I just said, it is important to equip workers with flexible skills that can be adapted to different manufacturing tasks. This will enable them to move easily between different jobs.

Karen Lane: In response to our original question "Can Asia Move Beyond Manufacturing?", Joseph Reyes asked: Do we need to? I don't believe that Asia needs to move beyond manufacturing (not yet) because it is where we could compete globally (i.e. lessening the cost of production at the same quality as those produced in the west). Asia has not yet reached its full potential and there are still opportunities to grow. Manufacturing is one industry that will provide jobs to its already big population and process its rich natural resources to be consumed by the same industries. However, Asia should gradually invest in R&D so that we will not be dependent on technologies from the west. Growth in manufacturing will create jobs and business, jobs will alleviate poverty, increase economic activity and in the long term reduce population.

Thiam Hee Ng: Manufacturing will remain an important sector for Asia. We do not advocate dismantling the sector but rather transforming it. Global trends are changing the face of manufacturing. So the region’s manufacturing sector will have to adapt to continue to thrive and prosper.

Thiam Hee Ng: In addition, I agree with you Joseph that the region should invest more in R&D. Currently most R&D is done in the advanced economies because consumers are based there. But with the manufacturing sector having moved to Asia and Asian consumers rising in importance, the region now has an advantage in innovation by being close to the production base and, increasingly, to Asian consumers.

Karen Lane: This on the way ahead and what can be learned from the region: Is there one way of moving up the value chain? Should countries assess the example of Japan or Korea, for example?

Ramesh Subramaniam: Japan and Republic of Korea have succeeded in moving up the value chain and are now technological leaders. Their success can serve as useful guide to how to move up the value chain. Both countries have pursued an export-led manufacturing path and continued focus on improving productivity. They also invested in the education sector to provide a large pool of skilled technical staff for their manufacturing sector.

Ramesh Subramaniam: To add to that, Japan's and Korea's successes can provide lessons for countries trying to move up the value chain. However, there is no single recipe. Individual country circumstances differ so countries will have to craft their own policies. For example, the People's Republic of China was able to use the access to its large domestic markets to attract foreign investment and technology. Other countries may focus on improving their investment climate and infrastructure to attract firms to locate there.

Karen Lane: Thank you to everyone for their participation. We are closing the conversation now. We wish you a good week ahead and do keep sending in your comments by Facebook or Twitter on this and other subjects.

Thiam Hee Ng: Thank you for participating in the live chat.

Ramesh Subramaniam: I enjoyed answering all the questions. Thanks very much for taking part.

Ramesh Subramaniam
Ramesh Subramaniam is Senior Director at ADB's Office of Regional Economic Integration (OREI) where he manages four teams dealing with the pillars of its Regional Cooperation and Integration Strategy: Trade and Investment; Monetary and Financial Integration; Infrastructure Connectivity; and Regional Public Goods. His research and work over the last 22 years has focused on policy and institutional change in developing Asia.
Thiam Hee Ng
Thiam Hee Ng is Senior Economist at ADB's Office of Regional Economic Integration (OREI) where he manages the Asian Bonds Online website, produces the quarterly Asia Bond Monitor and conducts research on capital flows, economic integration and financial market development. Prior to joining ADB, Ng worked at the United Nations Industrial Development Organization (UNIDO).