Go back

The Bridge, Insights

Big Shoes to Fill: Who Can Be the Next China?

Jason Hsu, PhD

Scroll down

This following article was first published to
Jason Hsu’s LinkedIn newsletter, The Bridge.
Subscribe via LinkedIn

I’ve been wondering lately which country—if any—can be the next China. Much of what made China a manufacturing powerhouse didn’t happen overnight; it took generations.


For example, when I was growing up in Taipei, my grandpa took piecework from the local hairbrush factory. I would sit next to him and insert thousands of plastic bristles into wooden handles, one at a time, until we hit his quota. Then he’d return the assembled brushes to the factory and get a new order.


My story isn’t unique.


Growing up, one of my elementary school friends worked alongside his grandpa on handicrafts worth no more than a few dollars a week. Another girl I knew worked on an unproductive farm in a tier 5 China city. Today, he’s managing a cleanroom worth hundreds of millions of dollars producing four-nanometer semiconductor chips at TSMC, and she’s training AI to improve autonomous driving for EVs at BYD.


Along with hundreds of millions of emerging market workers, low value-add manufacturing is our origin story. This is where we started. But the sophistication of our skills and education grew alongside the infrastructure of our emerging economies. Most of my childhood friends now work in facilities and have careers that their grandparents couldn’t have imagined.

Cultivating a “Manufacturing Ecosystem”

Unfortunately, this success hasn’t been repeated in other emerging economies like Mexico, Argentina, Brazil, Philippines, Malaysia, or even India. The divergence obviously isn’t driven by disparity in skill, work ethic, or culture. It’s driven by much more mundane factors.

  1. Favorable Policy. Some EM governments adopted policies that supported the development of manufacturing ecosystems over time; others did not. For example, China and Taiwan both offered substantial tax breaks and land subsidies for foreign firms setting up factories, along with a special agency to assist investors with local bureaucracy. Singapore, famously, installed air conditioning.
  2. Education and Innovation. To “emerge,” EM economies needed homegrown talent that reduced dependence on outside experts. This required an educational system to produce high-quality engineers and advanced research capable of adding value. Some EM countries invested heavily in higher education and retaining homegrown talent; others did not.
  3. Reliable Infrastructure. A manufacturing ecosystem requires critical infrastructure. At a minimum, it requires cheap and reliable electricity and water. But it also requires quality rail, roads, airports, and seaports. Building this infrastructure on a national scale is harder than it seems, and some EM countries could not overcome the challenges.
  4. Local Government. Local governments can be a boon to local factories, moderating labor issues to effectively drive regional economic growth. But local governments can also be populist business-killers, shaking down factory owners under the pretext of protecting labor. Given the cost of infrastructure and facilities, it’s hard to secure investment without balanced, competent, and reasonably uncorrupt local officials.


Collectively, these factors create the necessary conditions for a thriving manufacturing ecosystem. Favorable policies and reliable infrastructure attract foreign companies who set up local factories. As time passes, the domestic economy learns from these foreign investors even as its local population becomes more skilled and better educated. Eventually, foreign experts, facilities, and investment can be replaced with domestic talent and capital. Like cultivating a garden, this process takes planning, discipline, and—more than anything else—time.1


We’ve seen this template for growth repeated in Japan, South Korea, Taiwan, and Mainland China. These manufacturing powerhouses have been the world’s factories for decades, increasing quality even while cutting costs. We’ve also seen this process repeated at a smaller regional scale: the quality products produced by some of the world’s most successful regions (e.g., Napa Valley wines, Silicon Valley tech, Hollywood movies, Taiwan semiconductors, German automobiles, etc.) did not emerge because of a single person, firm, or policy. Rather, they emerged as part of robust ecosystems that took decades to cultivate.


And so, while the movement to “decouple” from China is understandable, it’s difficult to see which country—if any—can fill China’s shoes in the near term.

The Difference Between “Labor” and “Talent”

It is an easy mental trap to believe China’s manufacturing success is a simple product of cheap labor. While inexpensive labor may be necessary to “emerge,” it is far from sufficient. Indeed, the question of “who will be the next China?” is not about labor price—after all, low-cost labor is plentiful in Africa, South America, and parts of Europe. Rather, it is a question about labor value.


As with investing, cheap stocks are often cheap for a reason. What you want are value stocks, which are priced below their fair value. Similarly, you’ll get little value from low-cost labor in an economy that is also low skill and poorly educated, with unreliable infrastructure and a corrupt or unsupportive government. It takes a long time to transform “low cost labor” into “high value labor.” If a country hasn’t already made that investment, it can’t transform overnight just because workers in Japan or Taiwan or Mainland China have become more expensive.


For decades, China’s manufacturing economy has been learning and practicing with deliberate coaching from foreign companies and local government development centers. Meanwhile, they’ve overcome intense global competition that demanded survival of the fittest. A hungry young person in this environment competes, learns, and thrives; and a hungry young company emerges as a world-beating TSMC or Toyota. But if you put these same people and companies in an economy with unproductive red tape, inadequate infrastructure, no government vision, populist policies, and leaders with a short-term focus on local political gain—well, those people and firms will wither.


As a personal example, my company has offices in both Taiwan and China. As it turns out, highly educated financial engineers in Taipei earn about one-third of those in Shanghai. But I still don’t hire financial engineers in Taipei.


Why not?


Well, it isn’t about raw talent or work ethic or attitude. I find super intelligent, kind, and hard working young people everywhere we operate. But industry-specific work experience and intuition are not easily trainable. To become valuable, young people must have tried, failed, and competed fiercely to become productive. They must be exposed to the right kind of challenges at an early age. This is how “labor” turns into “talent.”


Many C-suite executives scoff at this idea; they think manufacturing labor is fungible. I think the evidence says otherwise. As many companies have recently learned, the cheapest manufacturing talent isn’t necessarily found where wages are lowest. Instead, it’s found where competition amongst workers is most intense for the specific kind of work you need done—regardless of wages. This is why firms move to Silicon Valley to compete for highly skilled programmers; they don’t move to Bentonville to poach Walmart’s IT team to gain a cost advantage over Amazon.


And as it relates to high-value manufacturing, nothing compares to China.

The Importance of Infrastructure

Years ago, Beijing explicitly concluded that imitating the German growth model was most likely to yield economic success for the country. China viewed itself as an exceptional manufacturer, and it was increasingly engaged in high-end and value-add processes. It also had the internal infrastructure—transportation, facilities, machinery, and labor—to support a manufacturing economy. The government felt poised to build on its past success.


In at least this one area, it looks like Beijing got it right. China has incubated phenomenal factory operators, process engineers, and factory professionals. It has mastered global logistics and financing. It has gradually offloaded low value-add manufacturing (e.g., textiles) and pivoted to high value-add manufacturing (e.g., smart phones, laptops, iPads, and LED TVs). In recent years, production quality has even improved enough to command a brand premium.


Could another EM country replicate China’s success? Of course. In fact, China wasn’t even the first—Japan, Taiwan, and South Korea were building comparable infrastructure while the CCP was still tackling food security and clean drinking water.


But China is the largest. And its exceptional manufacturing infrastructure was built over decades and at great cost. And like China’s skilled generational workforce, this cannot be reproduced overnight. There is simply no other EM country that is China’s equal in terms of manufacturing infrastructure.

Between a Rock and a Hard Place

China is great at what it does, and I don’t envy companies trying to diversify their supply chains. Consider Foxconn, the “gold standard” for operating factories that manufacture high-end electronics. In response to increasing geopolitical pressure, the Taiwanese firm has made several efforts to expand beyond China.


In the United States, Foxconn reached agreements in both Wisconsin and Arizona to invest many billions of dollars in manufacturing plants. And recently, Foxconn signed a partnership with Vedanta Group to manufacture components in India. But as most of my readers know, these deals have all been scaled back or canceled altogether, including some recent drama in which Foxconn said parts of the US lacked the skills and infrastructure to launch a plant.


I don’t want to speculate too wildly about specific cases like Foxconn’s. But it’s a simple business fact that the United States, United Kingdom, Germany, and other developed countries are simply too expensive and lack sufficient unemployment to replace Chinese manufacturing. In addition, cultural, employment, and labor norms have hampered Chinese manufacturing attempts in Western countries. (For those who haven’t seen it, American Factory is an excellent case study.)


At the other end of the spectrum, Africa offers inexpensive labor and investment opportunities. However, the infrastructure and labor force cannot currently support high-end and value-add manufacturing.


At the end of the day, EM is the only viable option. But as Foxconn’s efforts in India demonstrate, there are challenges even within these markets.

From T-Shirts to iPhones

China didn’t start with high-end electronics; it started with t-shirts and toys. And today, there are many EM countries that manufacture t-shirts and toys. The question is this: which of these countries will mature to become the next China?
My answer may be controversial: None of them. There will never be another China.


The conditions giving rise to China’s manufacturing prowess have been unique, including the country’s scale and centrally managed hybrid economy. These will not be replicated, and no country in the near term will match China’s manufacturing capabilities. Despite short-term noise around decoupling—like Foxconn’s misadventures—China will continue to play a critical role in global manufacturing, especially for high-end and value-add products.


That said, there’s no doubt at least some offshoring will occur. And there are certainly a handful of EM countries that are better positioned than others to benefit from this trend. The countries most likely to benefit are those that already look like a “mini-China,” with significant local manufacturing but global distribution. You must look for economies where the infrastructure is already present and growing.


You simply can’t teach infrastructure or generational talent. These either exist or they don’t. And American buyers (e.g., Amazon and Walmart) are not in the business of teaching Mexico how to build globally competitive factories, ports, and rail. Mexico must already be doing that on its own. So, as an EM investor looking to benefit from China decoupling, I am looking to EM economies that are already on the path.


1 One thing it doesn’t take to establish these conditions is a particular form of government. For example, Taiwan, Singapore, Hong Kong, and China all made huge strides in GDP while they were essentially one-party states. Meanwhile, Mexico, Brazil, Argentina, and India have made less progress despite being proper democracies.

Subscribe to receive the latest Rayliant research, product updates, media and events.


Sign up

Important Information

Issued by Rayliant Investment Research d/b/a Rayliant Asset Management (“Rayliant”). Unless stated otherwise, all names, trademarks and logos used in this material are the intellectual property of Rayliant.


This document is for information purposes only. It is not a recommendation to buy or sell any financial instrument and should not be construed as an investment advice. Any securities, sectors or countries mentioned herein are for illustration purposes only. Investments involves risk. The value of your investments may fall as well as rise and you may not get back your initial investment. Performance data quoted represents past performance and is not indicative of future results. While reasonable care has been taken to ensure the accuracy of the information, Rayliant does not give any warranty or representation, expressed or implied, and expressly disclaims liability for any errors and omissions. Information and opinions may be subject to change without notice. Rayliant accepts no liability for any loss, indirect or consequential damages, arising from the use of or reliance on this document.


Hypothetical, back-tested performance results have many inherent limitations. Unlike the results shown in an actual performance record, hypothetical results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over- compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical results in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any investment manager.