By Martin Hutchinson
Contributing Editor
There’s more bad news for those of you who are worrying about the United States’ global geo-strategic position. According to a recent report, starting next year, Chinese manufacturing output will exceed that of the United States.
In concrete figures, of the world’s $11.8 trillion of manufacturing value added output expected to be produced in 2009, China will account for 17%, while the United States will account for 16%.
For investors, even those based in the United States, the implication is clear: a substantial part of any investor’s portfolio should be in China and any other countries where manufacturing is growing as a percentage of the world total.
China’s manufacturing share has been accelerating rapidly since 2000, when it accounted for only 7% of global value added. Back then, the United States accounted for around 25% of the total. China’s growth spurt in the last year has been caused not by any special acceleration in China’s growth, nor is it the product of a sudden collapse in the U.S. manufacturing economy. The decline in the dollar – and the rise of the Chinese renminbi against the dollar – is what has inflated the value of Chinese manufactured goods.
For the United States, economic theory suggests there is no need to panic. Most services have at least some component of local supply, so they cannot be outsourced easily overseas (the exceptions being such services as computer software or accounting). Hence, it is natural that richer countries will tend to specialize more and more in the service sector, while poorer countries become more devoted to manufacturing products that can be easily shipped around the globe.
Nevertheless, there are a number of moderately disturbing implications to this news. To the extent that Chinese or other poor-country manufacturers acquire additional capabilities by manufacturing products for Western use, they may become more competitive in the international market against Western companies. Research and development, in particular, require a deep understanding of the production process to be successful – an understanding that is difficult to acquire from a distant country.
For investors, the exciting opportunities are likely to arise in China, and in other low-wage manufacturing countries that are opening up to Western markets. There are also opportunities in countries, such as Taiwan, that have the ability to marry their own technological capabilities with low wage manufacturing in China or elsewhere in Asia.
To take advantage of this trend, you might look at the following companies, all of which stand to benefit from the move of global manufacturing to China and other low-wage economies:
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