What Country Is the World's Next Manufacturing Hub?

Contributors to this report: Joe Casiglia

For the past decade, China has been the world’s largest manufacturing hub. Lower labor costs, a strong business ecosystem, skilled working professionals and favorable business policies are just a few reasons why many global manufacturers have set up shop in China. 

As a result, China has experienced incredible growth and has developed into a major economic power. However, the country is now faced with escaping the “middle-income trap,” where wages rise faster than an economy can create higher-paying, value-added jobs, such high-tech manufacturing or information economy work. Exports lose their competitive edge because rising wages raise the overall cost of products, leading to fewer sales. In these conditions, countries get stuck in a “trap,” with declining exports, stagnating wages and slowing growth.

Is China Avoiding the Middle-Income Trap – or Falling Into It?   

China is close to escaping the middle-income trap. The standard of living has continued to rise, new domestic sectors have been developed, and overseas projects have been successfully completed. In 2010, China became an upper-middle income country, starting the last leg of its journey to becoming a high-income country. But Chinese growth may be losing steam. Since the beginning of 2018, the US and China have engaged in an escalating trade war, and important industries for Chinese growth have been nearshored as geopolitical tensions rise. As China has seen less growth, economic and labor conditions in Southeast Asia have started to change, presenting opportunity for both China and neighboring countries to change economic plans. 

In this article, we examine the indications that China may, or may not be, falling into middle-income trap, and how nearshoring/onshoring has affected economies and labor markets in surrounding countries. 

China is remarkably close to becoming a high-income country, with the gross national income per capita in 2024 being $13,400, and the threshold for high income being set at $14,005. Chinese economic structures have also changed since 2010 and may allow China to continue to grow.

China has been able to create higher-paying, value-added jobs. China is a world leader in solar panel and electric vehicle production, and has since started a domestic semiconductor industry. The growth of these industries has been strong, even in exports. China has been able to double its exports of value-added products since 2017, showing that its economy can transition to products typically made in high-income countries.

China has also been working on the Belt and Road initiative to open new markets across the world. Transportation, port and infrastructure projects have connected countries in South America, Africa, the Middle East, Eastern Europe and Asia to a Chinese trade network. Much like the US Import/Export bank strategy of the 1930s, China has created infrastructure and subsidized demand for its products abroad. Many of these countries are low- to middle-income, so as they develop, China will be in position to provide them with products that growing middle-class economies want to buy. This is a long-term growth bet and assumes that the countries China has invested in will continue to grow and spend.

Conversely, China has become an upper-middle income country and GDP growth has slowed, leading some to believe it is falling into the trap. In 2010, GDP grew at 10.6%, as the Chinese economy began to mature. In 2023, Chinese GDP grew by only 5.2%. This decline in growth has been driven by three primary factors:   

1. Foreign direct investment has continually fallen from $344 billion in 2021, to $42.7 billion in 2023. This has been lowest amount of foreign direct investment into China since 1993. In early 2024, the Chinese real estate market experienced turbulation that caused the Chinese government to bring forward aid packages for the sector. China was able to stave off a financial crash, but now faces the possibility of a balance sheet recession, with more stimulus on the way. Investors lack the confidence in China to produce returns due to slowing growth and financial system instability, which has created a cycle of decreasing investments. International investors have looked elsewhere in the region for better returns. 
   
   
2. As Chinese exports have become less competitive on the world market, the Chinese government has worked to boost domestic consumption of those goods. The plan involves financial support to small firms across the country and more tax deductions for childcare, eldercare and education. When countries start to fall prey to the middle-income trap, they often try to boost domestic spending to reach growth goals. 
   
   
3. Geopolitical competition with Europe and the US have contributed to the decline of GDP growth in China. The trade war between the US and China has shut high-tech Chinese products out of markets in the West. Chinese EVs, solar panels and semiconductors all have high tariffs on them, making them too expensive for western consumers to buy. Changing Chinese policy towards political and economic freedoms have driven competition as well. China assumed control of Hong Kong in 1997 and has continually exerted more control over it. A series of national security laws have changed the island and have caused many Western companies to move their Asian headquarters to other nations. This split has also been exacerbated by nearshoring/onshoring. The loss of industry in China has contributed to the growth slowdown. As geopolitical tensions have continued to rise, Western countries have moved their manufacturing facilities to other countries in the region.

China may or may not fall into the middle-income trap. No matter what happens, the cost of doing business in China is rising, and many companies are looking for alternatives. Other countries, such as Mexico, Vietnam and India have been able to capitalize on the growth slowdown and de-coupling of the West and China. This will have large impacts on labor markets in the region, as industries move to other countries. Companies that can ride this wave of change – and anticipate where the next economic hubs will emerge – will be ahead of the pack and positioned for success.  

Which Country Is Positioned as the Next Global Manufacturing Hub?

Long regarded as the world’s manufacturing powerhouse, China continues to face growing competition from countries like Mexico, Vietnam and India that are prompting companies to diversify their manufacturing bases. 

Mexico

Mexico has recently become the US’ No. 1 trading partner, now making up 15% of annual trade. However, most of the investment being made into Mexican manufacturing has been reinvestments, with only 16% of total investment spending currently going to new projects. Deloitte has raised the possibility that delays in new nearshoring investments in Mexico may come down to infrastructure. Current grid capacity and transmission infrastructure may not be enough to support additional demand for electricity from nearshoring. Despite the hype, the Mexican economy has yet to attract a major wave of investment in the wake of China’s decline.

Vietnam

Vietnam has become particularly attractive as a manufacturing hub for many of the same reasons as China did decades ago. The country has strong English proficiency and low labor costs even when compared to its neighbors. The offshoring market in Vietnam has grown an average of 12.7% each year from 2016 to 2023 and is estimated to continue growing an additional 8% each year from 2024 to 2028.

Even with this success, McKinsey has highlighted some major challenges to further investments in Vietnam. While Vietnam is very well positioned to absorb the low-cost manufacturing demand for items like textiles and other basic manufactured goods, more complex manufacturing may be out of Vietnam’s reach for the time being. Talent availability for higher-skilled roles has been a struggle, and while legal barriers have been steadily reformed in recent years, global companies are still apprehensive about making major investments in the country. As labor costs continue to rise, businesses will need to begin considering upskilling local talent to boost productivity to ensure Vietnam remains an attractive offshoring destination. 

India

India has been the primary “pivot country” for many who were looking to diversify their supply chains in the wake of the pandemic, exposing the vulnerabilities in the status quo of global trade. It also has unique strengths in chemicals, electronics and basic manufacturing. India has lagged behind its peers in global trade historically, but thanks to these advantages, it is now expected to see manufacturing exports hit $1 trillion by 2028.

India’s key challenge to becoming a manufacturing hub will be talent availability and cost. Wages have risen by 9% or more for the last four years as booming domestic and foreign demand has absorbed much of the available talent for non-college-educated roles in traditional offshoring hubs. Foreign businesses looking to expand into the country will need to consider local costs when picking their next site. It may be necessary to make investments into less developed areas, particularly for goods where low labor costs are critical.  

Current Emigration Trends

As outsourcing has shifted in the last few decades, more emphasis is being placed on finding workers to fill complex high-skill roles rather than just cheap alternatives to filling low-skill roles in high-cost countries. As stated, higher-end skill sets tend to be more challenging to offshore due to legal, cultural and logistical barriers. So rather than going to where the workers are, employers have been hoping they will come to them.

Foreign labor is expected to add 5.2 million people to the US workforce and expand GDP by 2% in the next decade. Europe is also looking to foreign labor as 74% of small and mid-sized EU businesses struggle with labor shortages, with digital skills especially lacking. As skilled talent shortages have gone well beyond the pandemic, it’s become clear that Western nations will need to begin seriously considering help from abroad in order to fill consistently high job vacancy rates.

So where is all this help going to come from? Very few countries have large populations looking to move out each year and even fewer with large numbers of highly skilled workers to fill these shortages. Among them, India is the largest contributor, with 979,000 people leaving to live abroad in 2023 alone. As mentioned previously in the Workforce Trends Report, large amounts of the Indian economy is still operating in the informal sector. This has made creating new jobs for college-educated talent, especially outside of the established IT offshoring industry, quite challenging.

While India is continuing to add jobs at a record pace, it cannot keep up with its massive population of college-educated youth demanding better paying and more skill-intensive roles, driving migration out of the country. China is also a major source of emigration with 568,000 people leaving the country in 2023. Wealthy Chinese investors and skilled college students tend to be among the most likely to emigrate from China, making it a major resource for countries looking to fill holes in their economies.

With countries in need of talent, where are new immigrant workers landing? In a study by Indeed, Australia, Canada and the UK attracted the most interest from foreign workers on job postings. The US and EU trailed far behind with only 3.2% and 2.8% of foreign workers looking there respectively. Today large English-speaking countries dominate the list of places with the largest number of foreign workers, with the US, Germany, the UK and Canada, comprising the top four.

These countries benefit tremendously from the diverse skills and perspectives that immigrants bring, which further drive innovation and economic growth. And as these developed countries continue to suffer from aging populations and population decline, immigrants will remain critical when filling labor shortages in sectors such as healthcare, technology and agriculture.