Asia today accounts for about 40 percent of the world’s GDP. Based on this figure, McKinsey GlobalInstitute (Asia’s Future Is Now, July2019) has declared that the 21st century is indeed Asia’s century.
Asia’s economic surge in the last four to five decades isattributed by ADB economists to thetransformation of the region as the world’s factory, with China assuming a leadership role. John West of the Asian Century Institute (Asian Century on a Knife-Edge, 2018) describes Factory Asia as follows:
“East and Southeast Asia is criss-crossed by a dense network of GVCs fora wide range of manufacturing products, notably electronics, automobiles,machinery and clothing. Each country specializes in tasks according to theircomparative advantages. Hong Kong andSingapore tend to specialize in logistics and finance, and be home to corporateregional headquarters. Japan and Koreafocus on branded product designs and high-tech companies, and Malaysia andThailand specialize in mid-range manufacturing. Thailand has become a regional manufacturing hub for the automobileindustry in particular, being used by companies like Toyota, Mazda and Ford.China specializes in product assembly and lower-skilled manufacturing, althoughit is now graduating to higher value-added activities. Bangladesh and Cambodiaare very active in clothing manufacture, while Indonesia and Mongolia are richin natural resources.”
The GVCsreferred to above are the global value chainfacilities in Asean and other Asian-Pacific countries established by the multinationalcompanies (MNCs). The pioneer GVC MNCs from Europe, the United States and Japansucceeded in atomizing industrial production in the 1970s-1990s, dividing it intotwo major clusters: the capital-, knowledge- and skills-intensive cluster andthe labor-intensive, low-tech cluster. The former was retained in the developedcountries, while the latter was outsourced to developing countries. Most of the GVC investments have beencaptured by host countries through the establishment of special economic zonesor export processing zones where duty-free re-export manufacturing isencouraged.
The leading players in Factory Asia are Japan and China, that is, Japanas the leading outsourcer (especially auto parts manufacture and autoassemblies) and China as the leading assembler of almost every imaginableindustrial product. With its “mercantile innovation” culture, China has alsomade huge advances in technological upgrading and has succeeded lately in doingsome industrial outsourcing herself across Asia.
Is Factory Asia sustainable? Canthe present constellation of GVCs in Asia keep growing uninterrupted?
There are signs that Factory Asia is highly vulnerable to economic,political and technological disruptions.
First, Factory Asia’s leading market destination, the United States, hasbecome protectionist. In fact, DonaldTrump, with his America First battle cry, has launched a vicious “trade war”against China. This trade war has aweakening impact on US-China trade, with some observers even predicting aglobal recession resulting from this war.
And there are other trade conflicts that are roiling global and regionalmarkets. For example, themuch-publicized Regional Comprehensive Economic Partnership (RCEP), projectedto become the world’s biggest free-trade agreement, got bogged down with thewithdrawal by India, whose domestic farming and manufacturing sectors lobbiedagainst a China-dominated RCEP. On theother hand, within the RCEP, two countries are so distrustful of each otherthey de-listed each other as a “trusted trade partner”. These are Japan and South Korea.
However, the immediate problem for some Asian countries, the Philippines included,is that most of the GVC facilities are interlinked or “networked” with oneanother. In the case of the electronics industry, a series of assembly work andtesting makes it possible for electronics GVC investors to assign assembly workin different countries based on skills and technology sophistication obtainingin these host countries.
Somehow, the Philippines, due to lack of a clear industrial vision in thepast, has remained stuck at the low end of the electronics assembly ladder(since the 1970s!). This explains why incertain years the leading export destination for Philippine electronics wereSingapore and Malaysia, which were engaged at a higher sophisticated level ofassembly, testing and even industrial application. Today, the leading exportdestination is China, which has become the “final-stage export platform” forelectronics and other GVC products coming from different Asian countries. The reported decline in Philippineelectronics exports is due to the slowing Chinese economy, which, in turn, ispartly due to the US-initiated tariff war against China.
The disruption threat is coming not only from America with the inward-lookingpolicy of Trump. Other GVC export destinations in Europe have also becomeinward-looking or protectionist.
And then there is another disruption threat: the global advances inautomation and robotization. Some labor-intensiveGVC industrial processes are now vulnerable to possible “reshoring”. This is amply illustrated by the success ofAdidas of Germany in building in 2017 a factory in Germany and another, inAtlanta, USA. Adidas once had a giantshoe factory in Novaliches.
Given the foregoing, a developing country that is organizing its economy byfocusing mainly on how to increase its participation in the GVC system of theMNCs is facing an increasingly uncertain future. In the case of the Philippines, it has beentrying to lure GVC investors for nearly four to five decades under the Neda’sso-called “labor-intensive export-oriented” (LIEO) industrial strategy, shortenedin the 1980s to “export-oriented industrial” (EOI), with limited success. Alarmed by the poor Philippine industrialperformance, the ADB itself has been nudging the Philippines to be moreforward-looking in industrial programming and to scale up its participation inthe GVC system. In a way, this ADBadvice means abandoning the existing neo-liberal policy framework of simplyopening up the economy’s trade and investment regime, with the hope that moreGVC investments shall flow into the country.
But given the uncertainties facing the GVC system of Asia today, is the GVC-scaling-upstrategy the best or the only policy option for the Philippines? How about going into non-traditional GVCindustries and, yes, domestic-oriented industries?
Right now, the DTI focus is on how to persuade Japanese auto makers toassemble more cars in the country by offering fiscal incentives to those whocan assemble a certain number of vehicles per year. The idea is for Japan to replicate what itdid for Thailand, which has been transformed into a major auto hub in theregion, manufacturing over two million vehicles a year with the support of over2,000 car parts makers. In contrast, thePhilippines, once a leading car assembler in Southeast Asia, hasjust only over a hundred active car part makers, half of which are doing parts production on apart-time basis.
But are the Japanese willing to develop a “complete” auto hub in thePhilippines to compete with the existing Japanese-led auto hubs in Thailand, Indonesia, China and otherAsian countries? And what is the futurefor the old-style car assembly when the race today world-wide is for theproduction of cleaner e-vehicles at affordable rates? In short, are there no other policy choicesin car assembly and parts production? How about consolidating further the nichethat the Philippines has developed in wire harness production? As DTI reported, the country accounts forover 20 percent of the global demand for wire harness. The biggest Philippine factories today arethe wire harness factories.
The whole point is that theeconomic-technological threats shaking Factory Asia, felt Asia-wide, requiresour industrial policy makers to go back to the drawing board to craft a more holistic,realistic and balanced industrial program that is not wholly dependent on theexisting but crumbling GVC system.
