Competing with the future:
Creating supply chain competitive advantage

Emerging markets face competition on multiple fronts as they look to build and maintain their positions in global supply chains over the next decade, retain manufacturing sector employment and achieve national security through access to materials and products.

Historically, this process has involved leveraging basic materials and labor in low-value-added assembly manufacturing for export, a strategy central to China’s economic development since 2004.

Most recently, Vietnam has emulated China’s strategy as firms seek cheaper labor and lower risk from the trade protectionism of customer markets such as the US. Vietnam’s exports of goods and services per employee surpassed China’s as early as 2014; this metric grew 5.8% annually in the five years to 2023 and is expected to grow 5.1% annually in the next five years. India is on a similar path, leveraging its domestic market and innovative support mechanisms for manufacturing in higher-tech industries.

This “supply chain development pipeline” may not be sustainable for emerging markets that have already benefited from it, nor is it guaranteed that countries with lower-value-added manufacturing can participate. The risk comes from economics — the more countries that attempt this strategy, the more competition there will be for the same end markets, and the worse the strategy will perform.

If part of the attraction of reshoring to new markets is access to lower-cost labor, then emerging markets have an eroding competitive advantage over the coming decade versus frontier markets, particularly if local labor cost inflation accelerates.

S&P Global Market Intelligence estimates show that India’s manufacturing compensation cost of $4.2 per hour in 2024 is half that of Mexico’s and 78% of Malaysia’s, both of which are competitors for reshoring of electronics manufacturing. Yet, India’s cost is 34% higher than the Philippines and 81% above Indonesia, which may threaten India’s more mature manufacturing businesses.

Therefore, the key to success is for governments to establish policies to upskill workforces both generationally (e.g., schooling) and in the short term (e.g., incentives for workplace education) and to reduce the “brain-drain” effects of high-skill worker emigration.

Assuming equal labor costs, competition with other emerging markets is a function of attracting investment from global multinationals and creating state-supported domestic firms, or “national champions,” without falling foul of global rules on industrial subsidies.

The key is to enhance the domestic market's attractiveness to augment export production and the ease of doing business. From a supply chain perspective, scoring countries’ comparative risks from disruptions (e.g., labor strikes or infrastructure) and regulatory risks (e.g., administrative burden, enforcement of contracts or expropriation risks) falls within the purview of government policy.

S&P Global Market Intelligence risk scores show that countries in the Association of Southeast Asian Nations (ASEAN) have a similar low chance of labor strikes, while the risk scores for Mexico and India are somewhat higher. For Mexico, the risk of labor strikes is partly linked to the implementation of labor rules under the US-Mexico-Canada Agreement, illustrating the double-edged sword of membership to a regional free trade agreement (FTA).

However, such memberships can provide a competitive advantage by making an emerging market a manufacturing base for sales across the FTA, which can be particularly advantageous for countries with lower labor costs. For India and China, a large domestic market can obviate the need for regional FTA membership.

Everyone wants manufacturing jobs, including developed economies, which have recognized a generational shift in some sectors (e.g., the electrification of vehicles) and national security incentives in others (e.g., semiconductors) to rebuild their manufacturing base.

This desire has led the EU, US, Japan and South Korea, among others, to provide direct investment in manufacturing and persistently use rules of origin within such schemes. The efficacy of these policies can be seen in the high levels of private investment in those countries, although their economic success has yet to be proven. Success for emerging markets could involve adopting subtly different government-led policies than those of Malaysia, Indonesia and India.

Malaysia is well established as an export manufacturing center, drawing reshoring investments from chip manufacturers, including Intel Corp. and Texas Instruments Inc. in the Penang area in the 1970s. Its initial advantages have continued, with exports of computer chips growing 12% annually since 2015.

Low operational risks, a willingness to sign free trade deals and a light touch on regulations (rather than mass intervention) have been key to Malaysia's success. The country has 16 FTAs, including seven bilateral agreements, such as with Japan and India, and membership in the free trade groups ASEAN (which also provides FTAs with China and South Korea), Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). As a result, 62% of Malaysia’s trade is with FTA partners, with a further 8% covered by the EU and 13% by the US.

Developed economy chip manufacturing support has largely focused on the latest technologies rather than the “mature node” systems in which Malaysia specializes. An emergent challenge, however, may come from a push by the Chinese government to support production of mature node systems, potentially squeezing Malaysia’s market share.

Indonesia has successfully broken out of the commodity trap that has led many emerging markets to prioritize short-term export earnings over using natural resource control to ensure the development of higher-value-added products. The need for nickel in electric vehicle batteries and the production of stainless steel provided fortunate timing.

The Indonesian government banned the export of nickel ore in 2014 and again from 2020 onward to encourage investment in local refining and, in due course, downstream manufacturing. The country expanded the ban in 2023 to include other materials. Subsequent investments by metals processors, particularly those in China, resulted in 28% annual growth in the country’s exports of nickel-related products between 2015 and 2024.

The investment in Indonesian capacity by Chinese firms raises a challenge for Indonesian exporters as the ownership stakes may make Indonesian products ineligible for US Inflation Reduction Act subsidies; the US is also developing its own nickel resources, which presents a long-run challenge. Indonesia’s next step may be to move further downstream into battery and even vehicle manufacturing, although the inclusion of Chinese stakeholders in those projects would again preclude Inflation Reduction Act eligibility.

India’s expansion in electronics has thus far followed an assembly-to-component strategy, using tariffs and production-linked incentives to draw investment in the manufacturing of smartphones and other network-connected devices. The sheer scale of sales opportunity in the Indian market has also provided “in-market, for-market" justifications for investments in manufacturing in the country.

India’s consumer spending on goods is worth $1.29 trillion in 2024, S&P Global Market Intelligence forecasts show, with the inflation-adjusted growth of 4.8% in the past five years expected to increase to 7.0% in the next five years. The acceleration in growth is particularly marked in export industries such as apparel (9.5% in the next five years), household equipment including appliances and electronics (8.8% in the next five years) and transport equipment (8.5% in the next five years).

Aside from manufacturing for local sales, the contracted electronics manufacturers also export products, particularly smartphones, driving 44% annual growth in telecom equipment exports from 2015 to 2024.

The challenge for India’s strategy of working upstream from assembly is that many developed economies and China are actively looking to build up their electronic components sectors. Heavy-handed application of trade management conditions, as India tried but abandoned for laptop computers in 2023, can dampen global investment. Instead, widening the range of assembled products that benefit from production-linked incentives should drive economies of scope that make upstream supply chain investments more compelling.

If labor is the bedrock of emerging markets’ economic development through supply chain integration, then the biggest obstacle for these markets may not be cheaper frontier markets, more accommodating emerging markets or big-spending developed economies; rather, it may be a declining requirement for labor. The requirement for labor in the manufacturing sector — particularly assembly — is falling in the 10-year view as the latest manufacturing hardware technologies evolve to include more advanced additive manufacturing and as robotics are augmented by rapid software developments in machine vision and other AI systems.

This decline is a particularly appealing situation for developed economies, where other motivations for manufacturers considering reshoring, including being close to market and mitigating political and geopolitical risk, are sometimes disregarded due to expensive labor.

While some sectors, particularly apparel, will remain difficult to mechanize, over time, the push by developed economies to bring back local manufacturing jobs and by emerging markets to maintain economic growth will drive the need for companies to invest in both the manufacturing systems and the skills needed to maintain and develop new systems.

Thus far, the major emerging markets are experiencing a falling share of global investments in industrial automation products. In aggregate, in 2023, emerging markets imported only 30% of the $12.1 billion of global trade in industrial robots and similar products, of which China accounted for 12 percentage points.

Without a marked increase in investments across labor skills and support for manufacturing, emerging markets risk being squeezed between low-labor-cost frontier economies on the one hand and increasingly mechanized developed economies on the other.