How to right what’s wrong in East Asian manufacturing

by Shinji Fukukawa

East Asia’s manufacturing industry, with its remarkable growth in recent years centering on China, South Korea and members of the Association of Southeast Asian Nations (ASEAN), has come to be called “the Factory of the World.”

But a shadow of uncertainty is now looming over its future. At the Boao Forum for Asia conference held in early April on China’s Hainan Island, this problem was taken up in one of its debate sessions, which I attended

Certainly the circumstances surrounding the manufacturing industry in East Asia are changing. In the first place, economic stagnation continues in its major export markets such as the United States and the European Union. Their economic slumps will likely persist for years due to the worsening of their fiscal structures and financial markets. Roughly sketched, the East Asian manufacturing industry consists of a network chain in which Japan, South Korea and Taiwan supply high-quality parts and semi-finished products, and China and ASEAN countries assemble them and export the final products to the U.S. and European markets. If their export business stagnates and this role-sharing structure collapses, the region’s overall system for manufacturing will weaken.

Second, it is now increasingly likely that global business competition will intensify in coming years. This is because while manufacturing enterprises in emerging economies are stepping up efforts to improve their supply capacity, the U.S. and the EU have begun to adopt policies of “reindustrialization.”

In the U.S., President Barack Obama has already unveiled his program to double U.S. exports by the end of 2014 and vowed to send Congress a legislative measure to cap the corporate tax rate for manufacturers at 25 percent to help facilitate their revival. Thanks to this federal initiative and the declining value of the dollar, manufacturers in the U.S. South are regaining their vitality.

In Europe, manufacturers in Germany and the Netherlands are active in exporting their products. The ratio of exports in Germany’s gross domestic product is exceeding 50 percent. Such a development, along with the global trend of demand stagnation, is raising fears of oversupply in the manufacturing industry.

Third, energy costs are rising. The demand for energy is steadily growing due to a global population increase and high growth in emerging economies. Meanwhile supply sources of oil are approaching their limit. The WTI (West Texas Intermediate) crude oil price topped $100 per barrel in February and the uptrend continued to early May.

There is a possibility that prices will further rise in the future. If unrest grows in the Middle East through such developments as the enforcement of U.S. and European sanctions against Iran over its nuclear program, the manufacturing industries in East Asian countries that rely heavily on oil supply from the Middle East will be severely affected.

To secure reliable energy supplies and reduce CO2 emissions, major countries had embraced nuclear energy over the years. But their confidence has collapsed in the wake of the 3/11 disaster at Tokyo Electric Power Co.’s Fukushima No. 1 nuclear power plant. Their hopes are now pinned on the development of oil shale and development of new energy sources, but the rising energy costs will adversely affect manufacturing businesses around the world.

Fourth, Asia’s manufacturing industry is lagging in the field of software, which has great potential for expansion. East Asia has achieved excellent records in manufacturing of hardware. But in the rapidly growing smartphone market, in which software plays an important role, the U.S. is putting on an overwhelmingly strong showing.

What kinds of countermeasures should East Asia’s manufacturing firms consider to cope with this situation?

First, efforts should be concentrated on domestic demand expansion in East Asia. The region has a population of about 1.5 billion and the number of middle-income people capable of playing a leading role in regional economic growth is rapidly increasing. China and many other Asian countries are groping for policies aimed at expanding domestic demand, and stepping up urban development and improvement of social infrastructure. These moves will serve as a driving force for a shift toward domestic demand-led economic growth. The question is how Asia’s manufacturing industry will take advantage of this trend.

Second, there is a need to enhance the capacities for technological developments. Recently Asian countries have been placing stress on policies for technological development. The ratio of research and development spending in GDP reached 3.64 percent in Japan, 3.57 percent in South Korea, 1.76 percent in China in 2009, and in 2.77 percent in Taiwan in 2008. These rates compare favorably with those of the U.S. and the EU. There is no doubt that advances in such fields as information science, nanotechnology, biotechnology, life engineering and new energies will open up new frontiers for the manufacturing industry.

Third, strenuous efforts should be made to create new market values. Innovations have changed from supplier-led to consumer-guided. Consumers now tend to give priority to products and services that enhance their value as people, such as health services, medical care, nursing care, culture, learning, communication, the environment, security and safety. Therefore these fields will lead the market trends in years to come.

Asia in particular has a social consciousness that traditionally attaches importance to encouragement of learning, respect for human qualities, mutual trust among people and human symbiosis with nature. So, the Asian region has an advantage regarding the utilization of these values. New information-related technologies have led to the development of such things as highly-advanced equipment for medical inspection and surgery, advanced methods for health control and robots for nursing care. In the cultural sector as well, the latest digital technology has made possible artistic expressions that are comparable to images created by conventional analog skills and has helped create new fields such as the content industry. The fusion of technology and art will surely become a new growth field.

These new challenging efforts are already under way in some enterprises. If such efforts prove successful, East Asia’s manufacturing industry can expect to continue its sustainable progress in the future.

Shinji Fukukawa, formerly vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry) and president of Dentsu Research Institute, is currently senior advisor of the Association for Technological Excellence Promoting Innovation Advances.