In my previous article, I have mentioned that after decades of globalization, the U.S. economy has evolved into one that mainly focus on finance and big tech, and manufacturing capabilities have been mostly outsourced to other countries. China, in contrast, has incubated the world’s most comprehensive and sophisticated supply chain, ranging from textile products to high-tech products such as intelligent electric vehicles (IEVs). Now we are at a pivotal era of reshaping the global geo-economic landscape. In this article, I argue that winning the Global South is a key strategic move for businesses in both the U.S. and China, but for different reasons.
The Global South is a term generally used to identify developing countries in the regions of Latin America, Africa, Asia and Oceania. Today the Global South represents 85% of the world’s population and nearly 39% of global GDP. Some leading countries in the Global South include India, Indonesia, Nigeria, and Brazil. These countries are enjoying the demographic dividend, with the expectation of them to go through a period of rapid economic development.
For enterprises in the U.S., the Global South is key to replace China to fulfill the missing manufacturing capabilities and to provide affordable products for U.S consumers. The past three decades of globalization presented the U.S. companies with a golden opportunity to make easy money through outsourcing their manufacturing capabilities. However, purely driven by profits, easy money can also be poisoned candy. Now manufacturing in the U.S. falls far behind China.
Just how far behind is the U.S. manufacturing compared to China? “Manufacturing in America is a joke!” one day I was having dinner with a Chinese technology tycoon whose company owns more than 50% of the global market share in an advanced manufacturing industry. The tycoon once tried to set up a factory in the U.S., but the project failed since the investment and operating costs were projected to be five times higher compared to manufacturing in China. His comment shocked me as he was not talking about a labor-intensive business such as textile, but an advanced manufacturing business that demands highly skilled workers.
Many have concluded that the U.S. lost its manufacturing foundation to globalization, of which the U.S. has benefited more than the rest of the world. Since globalization emerged in the 1970s, the U.S. has gained trillions of dollars, or 11%~19% of its annual GDP. Many technology companies, such as Apple, have outsourced their advanced manufacturing plants to emerging markets such as China and India, to minimize costs through employing affordable labors and to maximize profits through accessing these booming markets.
To address the internal social problems brought by globalization and to bring manufacturing jobs back to the U.S., the Trump administration applied tariffs on imported products. But this approach has been proven ineffective as it introduced additional social problems, such as the recent surge in inflation. This approach is not sustainable as well, take India for example, the current population of India is 1.4 billion, and the growth rate is 0.8%, and the median age of India’s population is 28.4, India’s skilled worker monthly average salary is $422. Compared to India, the U.S. is facing the problem of an aging population and high labor costs. U.S.’s skilled worker average salary is around $3000.
I argue that the only viable solution for enterprises in the U.S. now is to quickly incubate manufacturing capabilities in the Global South, leveraging these countries’ affordable skilled labor to fulfill the manufacturing gap left out by China. Indeed, many U.S. companies have already started the process of moving manufacturing plants out of China to India and Southeast Asia. In addition, the recent establishment of TSMC semiconductor plants in Arizona demonstrates the U.S.’s determination to regain its advantage in the most critical technology industries.
On the other hand, the situation in China is the complete opposite. In the past few decades, with a fully developed supply chain, China is now actively looking to export its products to emerging markets, and the Global South becomes a perfect target for Chinese products and brands. For instance, China’s BYD is actively expanding in the ASEAN market, trying to establish itself as the leading IEV brand there. Also in the consumer electronics sector, China’s Xiaomi, Oppo, and Vivo have been consistently increasing their market shares in the ASEAN market.
To win the Global South, in the past decade China has done much more than having its private companies gaining market shares in these markets. China has invested tens of billions of dollars into infrastructure projects in the Global South countries. Today China is building more than 30% of Africa’s infrastructure projects, and the same happens in Latin America as well.
In addition to hard investments such as infrastructure projects, China also has committed to soft investments such as providing scholarships for students from the Global South to pursue advanced studies in China, and setting up Confucius Institutes in many Global South countries to teach the Chinese language and philosophy. As the Chinese roots deepen in the Global South countries, people in the Global South countries, especially the elites who were educated in China, will gradually get used to the Chinese way of living and ideology. Naturally, this trend will accelerate the integration of the Global South countries into China’s economic network, catalyzing the globalization of China’s RMB.
In summary, I argue that a more important strategic move for the U.S. businesses is winning the Global South, as strengthening the economic ties with the Global South will ensure that the Global South fulfilling the manufacturing void left out by China and maintaining the U.S. dollar’s global dominance. For China, winning the Global South will ensure China’s enterprises’ rise to global economic dominance and the globalization of the RMB. Hence, the Global South is the real frontier of the U.S.-China business competition.
