In the midst of a steaming-hot Malaysian jungle, sweat-stained factory workers bend over their looms, threading copper into bales of cable wire that gets so hot, it must snake through culverts of water before it can be touched. The factory floor is awash in tea-colored light from windows smeared with soot. The grinding of machines creates a constant, earsplitting din. There is no air-conditioning. “It would cost too much,” says Alvin Mui, president of P.I.E. Industrial, which operates the factory.
The roar from this Dickensian forge in the port of Penang is part of a greater reverberation across Asia. Call it the China Effect. As China progresses from a low-cost manufacturer dependent on exports to a service-oriented economy driven more by domestic demand, wages there are rising. As a result, the lowest-end factory work once done in the Middle Kingdom, like wiremaking, is now being done in neighboring countries, from Malaysia and Thailand to Vietnam and Bangladesh.
After ferociously sucking jobs and investment out of Southeast Asia over the past two decades, the China Effect is now lifting once declining industrial hubs like Penang out of their long economic slump. The northern Malaysian state attracted $4 billion in investment for its manufacturing sector in 2010, according to the Malaysian Investment Development Authority, a 465% jump from 2009. “It’s been rocky at times,” admits Lim Guan Eng, Penang’s chief minister. “But being an underdog has kept us on edge and made us work harder.”
Penang’s nascent boom is partly fueled by Western manufacturers wary of China’s rising costs. It also stems from dramatic changes in China’s economy that are redirecting trade flows across the region. Not all of the companies relocating to places like Penang are Western multinationals; in fact, many are Chinese firms. As salaries and spending power in China rise, the Chinese are importing more goods from the rest of Asia. At the same time, those rising salaries are forcing China to outsource more of its low-end manufacturing. According to a 2010 Citigroup ranking of 12 Asian countries by manufacturing wages, China was the seventh least expensive and Malaysia the eighth. “The pure-cost reason for being in China for certain economic activities is being eroded,” says Sanjeev Nanavati, CEO of Citigroup Malaysia.
The result is a virtuous trading circle for Asia as the Chinese outsource more to and import more from the region. According to HSBC, intra-Asian trade is forecast to grow at an average annual pace of 12.2% until 2020, 40% higher than the rate by which Asia’s trade with the U.S. is expected to grow in the same period. Nearly 50% of Asian exports
