Year in manufacturing: As firms look to nearshore, countries benefit from China's vacuum

Tue 5 Dec 2023
Posted by: Danielle Keen
Trade News

Manufacturing worker in a factory

As the year closes, the IOE&IT Daily Update reviews the state of play across manufacturing industries worldwide, surveying the S&P Global Purchasing Manager Index (PMI), a score which calculates whether a sector is expanding or contracting.

Any score below 50 indicates economic contraction.

Amid an economic slump that’s dampening demand, the global manufacturing PMI has seen fifteen successive months of decline, posting 49.3 in November.

Fergus McReynolds, director of EU public affairs the Institute of Export & International Trade (IOE&IT), said that “2023 continues to be a difficult year for many manufacturers globally as supply chain pressures continue to mount amid a challenging geopolitical environment”.

“This continues a trend which has seen volatility become the norm with many supply chains moving from a ‘just-in-time', to ‘just-in-case' approach.”

South-East Asia

There’s been a significant shift in supply chains in South-East Asia. More companies have adopted a 'China+1' policy in response to the country’s severe lockdown restrictions, only fully lifted this year, or tried to nearshore their supply chains in response to growing political tensions.

Evident in PMI figures, there are some big winners among ASEAN nations which have been able to secure investment from firms aiming to diversify.

As reported by the IOE&IT Daily Update earlier this year, Thailand and Vietnam are both set to receive significant investment in their manufacturing sectors.

After a slow start to the year, Singapore experienced a significant boost to manufacturing output, recording a rise of 7.4% on the previous year in October. Certain sectors saw increases in output of over 10%, such as electronics (14.7%) and transport engineering (12%).

S&P offers its own quarter-by-quarter commentary on the growing strength of Singapore’s manufacturing output here.

China

Unsurprisingly, the result of political nearshoring trends has been a bleaker picture.

Sustained contraction was recorded in PMI data between September and October, with figures falling from 49.5 to 49.4.

Piling on the pressure was the continued fall in exports over the past six months, with the FT noting last week that this is expected to continue into next year.

However, government stimulus has seen this figure rebound in recent months with November’s 50.7 reflecting a 3-month high.

There has been some speculation that China’s government would need to step in as a lender of last resort to rescue struggling property developers – one of its economy’s biggest weak spots.

According to HSBC’s chief Asia economist, Frederic Neumann, “there is a sense that without further policy support, the economy will struggle to reach 5 per cent next year organically”.

The EU

The Eurozone PMI has been below the contractionary figures for 19 months Reuters reported last week.

Currently standing at 47.6 – a four month high – across the bloc many countries are posting improving figures that still reflect sectors in decline.

McReynolds said: “Europe has had a particular challenge with the ongoing conflict in Ukraine and the rebalancing of the energy portfolio, as well as pressures from trade policies starting to hit.

“As the EU enters its election cycle ahead of voting across the block early next June, the questions on the priorities of the next mandate are starting to form, unfortunately not many of the answers are yet.”

It was noted that Germany followed this pattern, with figures showing an easing decline. However, this reprieve may be short-lived as Germany’s constitutional court blocked plans to repurpose pandemic funds for industry subsidies, leading to fears of diminished future investment.

Elsewhere in the bloc, France has continued to post low numbers with this the latest figure of 42.9 reflecting a 2-month high.

Currently the world’s seventh largest manufacturer, Italy recently posted a 5-month low of 44.4. Euronews reports that it’s clinging on to a positive growth forecast of 0.1% next year, with both imports and exports in decline in the past quarter.

UK

November offered a positive outlook for the UK in November, while figures still showed a contraction, the rate of decline eased to lower levels at 47.2, up from 44.8 in October.

While the PMI has been below the growth threshold of 50 for the past 16 months, this was the highest figure posted since April.

S&P’s report stated that this shows the UK manufacturing sector “potentially turning a corner”, however “ongoing market uncertainty and the need to control costs [is] leading to job losses, stock depletion and lower purchasing”.

Ultimately, the year has still yielded progress on the world stage as MakeUK’s analysis of global data showed the UK overtaking France to become the world’s 8th largest manufacturing nation.

India

Another beneficiary of the China vacuum is India. Rising slightly from October’s 55.5, the past month saw India post a score of 56, reflecting its sustained growth throughout the year.

S&P reports a virtuous cycle emerging within the manufacturing sector, which seems set to continue into 2024:

“Indian manufacturers were confident output volumes would increase over the course of the coming 12 months.

“Buoyant customer appetite, advertising, and expanded capacities all boosted optimism.”

A post-Diwali present arrived in the form of Japanese battery manufacturer TKD announcing plans to move production of lithium-ion cell batteries to India.

The batteries are typically used in Apple smartphone products, with other Apple products touted for a move away from China to India, Reuters reported yesterday (4 December).

Mexico

With consistent month-on-month growth, Mexico’s PMIs have remained in the 50s – rising slightly from 52.4 to 52.7 between October and November.

Moving beyond the post-Covid boost, Mexico’s manufacturing output also grew significantly between 2021 and 2022, up 15.48%.

The future is also likely to be rosy for Mexico’s manufacturing sector, as its set to become a major beneficiary of US companies' nearshoring efforts.

Several large firms have announced that they plan to move some of their manufacturing capacity to Mexico, including HP, as reported by the FT in July, and eventually Tesla, which has revealed plans to begin production in the coming years.