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The competitive edge for Asian economies — many of which depend on low-cost labor and exports for growth — will likely erode as technology changes the way manufacturers operate, Boston Consulting Group said in a new report.
Technologies such as robotics and digital simulation are allowing manufacturers to make customized products in locations closer to their customers in a more cost-effective way, the consulting firm said. That is a shift from the traditional practice of producing standardized products in a handful of giant factories in low-cost countries in order to achieve scale, it explained.
A number of manufacturers are already doing that. Adidas has moved some of its customized production to Germany; and Foxconn, which used to make all of its electronics products in southern China, now assembles in Mexico and plans to manufacture in the U.S. as well.
Asia has the most to lose in such a shift as many countries in the region, since the end of World War II, have relied on traditional models of manufacturing to propel "hundreds of millions of households into the ranks of the middle class and the affluent."
"(The shift) will compel Asian countries to change their value proposition when competing for manufacturing investments. Rather than offer themselves to multinational companies as havens of low-cost labor, these countries will have to compete on the basis of skills," BCG said in the report that was released in conjunction with the Singapore Summit 2017.
"And they will have to position themselves as locations where companies can reach important new markets and enhance their efficiency by leveraging the latest technologies at every point in the value chain," the company added.
In addition to the changes in manufacturing practices, stalling global trade and rising protectionist sentiment are also threatening Asia's export-led economic models. In many countries including China and Indonesia, exports as a percentage of gross domestic product have declined over the years and are projected to fall further.
The cost advantage that Asia has been enjoying is also diminishing as increases in wages outpace productivity, BCG said, adding that China, Malaysia and Thailand have seen their gaps with the U.S. narrowing.
To thrive in the new environment, those countries need to step up their adoption of technology and develop services industries that can deliver economic growth, the report suggested.
China is worked to boost domestic consumption. The GDP growth of the world's second-largest economy has slowed from more than 10 percent in 2010 to around 7 percent this year, according to official statistics, but personal consumption is projected to reach $6.5 trillion annually by 2020.
More countries can emulate that economic model, the consultancy added. Already, the GDP contribution of services has surpassed that of manufacturing in Indonesia, Malaysia, the Philippines and Thailand.
"The good news is that much of Asia is very well positioned to benefit from the digitalization of global business and the shift to services and domestic consumption," BCG said in the report, adding that the region's middle class — which is also among the world's most digital-savvy — is a prime target for the services industry.
"The rising affluence of Asian households suggests that the region will continue to be the world's biggest growth market for health care, education, financial services, entertainment and other services," BCG said.