In the race to be China's factory of the world, countries such as Mexico, India and Vietnam face a formidable rival: China's vast interior.

Low-cost manufacturing is moving away from China's bustling coastal areas as companies look for cheaper land and labor in central and western provinces. The pace of manufacturing migration has accelerated in recent years as U.S. tariffs have pushed up factory costs and China's big coastal cities have focused on high-tech electronics, electric cars and other advanced industries.

As a result, exports from China's inland provinces have boomed, dwarfing the acceleration of exports from rivals seeking to challenge China's manufacturing supremacy.

Further development in China's hinterland could help the country cement its dominance in global manufacturing, even as Western countries grow wary of China becoming a supplier to key industries such as semiconductors and renewable energy.
To maintain its leading position, China still faces major challenges. This demographic deterioration means that China's manufacturing workforce is shrinking and foreign investment in the country is drying up.

Many manufacturers are operating Vietnamese factories like the one pictured here to help mitigate risk by diversifying their supply chains.

The United States and its Allies are using subsidies and other incentives to persuade companies to embrace countries other than China, but it could be years before a major shift in corporate purchasing takes place, economists say.
Gordon Hanson, an economist and professor of urban policy at Harvard University's Kennedy School, said China would remain a major player in global manufacturing for the foreseeable future. He explored the possibility of more manufacturing moving inland in a 2020 paper.

"China's capacity is simply too big for the world not to rely on China for quite some time."

Since the beginning of 2018, exports from 15 provinces in central and western China have increased 94 per cent cumulatively as factory production expands beyond the Pearl River and Yangtze deltas. The Pearl River Delta and Yangtze River Delta regions are the engines of China's industrial economy.

Exports from these provinces totalled $630 billion in the 12 months to August, according to official figures compiled by data provider CEIC, surpassing exports from India ($425 billion), Mexico ($590 billion) and Vietnam ($346 billion) in the same period.

Despite the surge in interest in alternative manufacturing bases outside China, exports from inland China are growing faster than those from all three countries.

Since the beginning of 2018, India's exports have increased by 41 percent, Mexico's by 43 percent, and Vietnam's by 56 percent. All three countries have benefited from the reshuffling of global supply chains in the wake of the US-China trade war and the coronavirus pandemic. In 2018, Mexico's exports exceeded those of inland China, but that was reversed in 2020.

China's coastal provinces remain global manufacturing powerhouses. Manufacturing hubs such as Guangzhou and Shenzhen in the south, Ningbo and Shanghai in the east, and Qingdao and Tianjin in the northeast are all located along the coast. In the 12 months to August, goods exports from these regions totalled $2.7tn, about half the combined value of the US, EU and Japan in the same period.

Pursue lower costs
Behind the shift of manufacturing to China's interior is the hunt for Labour. In the 1990s and 2000s, millions of Chinese left the countryside to work in factories that mushroomed in coastal cities.

That trend is now coming to an end, and wages in coastal areas have risen sharply as companies compete for workers.

According to China's National Bureau of Statistics, average annual wages for private sector workers in Guangdong more than doubled in the decade to 2021. Better-educated and younger workers in coastal cities are starting to give up grueling factory jobs for service jobs.

Ray Zhou, head of supply chain at Commerse, a fashion brand based in New York and China, said the company began moving production from coastal areas to inland China in the second half of 2022.

About half of the machine sewing is now done in factories located in China's interior, including Guangxi and Hunan provinces. While producing clothing inland means it takes longer to ship to the U.S., overall labor costs are about 30 percent lower than in Guangzhou, he said.

Most of the workers employed in Commerse's supplier factories are in their 30s and 40s. 'Young people would rather deliver food than sew clothes in factories,' Ms. Zhou said.

Other factors driving companies inland include the search for cheaper factory space; Stricter regulations in coastal cities are aimed at reducing pollution or rezoning industrial areas for residential development.

Niche industries sometimes cluster in one place. One town in Anhui specializes in brushes, while another in Henan makes tape measures. The mountainous province of Guizhou is home to numerous companies that make high-quality guitars, as well as the highly prized liquor Moutai.

The advantages of China's inland areas
In many ways, China's manufacturing migration is similar to the migration of industrial activity in the United States after World War II, when the emergence of new roads and shipping containers allowed factories to move out of big cities in search of lower taxes and cheaper workers.

Beijing has pushed to move basic industries such as power generation, steel and weapons manufacturing inland to protect them in the event of war.

The Chinese government concluded in the 1980s that this was mostly a waste of resources. But Covell Meyskens, a historian of China and an associate professor at the Naval Postgraduate School in California, said the practice laid the groundwork for later industrial development, such as building roads, schools and power grids.

For decades, China's central planning authorities have emphasized the importance of creating an integrated national economy, Mr. Ko said. The interior "cannot be treated as a rust belt that can be completely abandoned."

Even today, the booming industries in the interior tend to be labor - or resource-intensive or relatively low value-added manufacturing, while China's coastal regions focus on more advanced manufacturing.

According to Chinese customs data, the central province of Hubei, home to about 58 million people, more than doubled its exports of heavy industrial products such as chemicals, metals and cars between 2018 and 2022, while exports of labor-intensive industries such as clothing, furniture and toys rose 90 percent.

The landlocked province, whose capital city is Wuhan and home to the Three Gorges Dam, is a magnet for companies seeking new bases: road, rail and river links to the coast and the rest of the world; The province has universities focused on technology, science and business; The average wage in the private sector in the province is 77% of that in Guangdong.

Turbocharger maker Garrett Motion said in June it had expanded capacity at its Wuhan plant by 50 percent. German auto parts maker Webasto has said it plans to set up a global research center in Wuhan.

A steel factory in Sichuan Province, China. Factories around the world are expected to remain dependent on Chinese suppliers for materials and components.

Why can China be the world's factory?
Some Western countries, such as the United States, are increasingly uneasy about being dependent on China for manufactured goods, especially as it compets with Western manufacturers not only for cheap furniture and toys but also for smartphones, machinery and sales of cars, especially in the auto industry, where China is becoming more competitive.

The United States and other governments are offering subsidies to lure more manufacturing back home. They also place restrictions on China's access to Western technology, such as semiconductors, that could have military applications.

Many companies, hit hard by the outbreak and rattled by tensions between the Chinese government and Western countries led by the United States, are reshaping their supply chains to reduce their dependence on China.
But economists say it will not be easy to shake China's dominance in global manufacturing.

In 2022, China's share of global merchandise exports was 14 percent, down slightly from 2021, compared with 8.3 percent for the United States in second place and 6.6 percent for Germany in third place. According to a recent report by Rhodium Group, a New York research firm, moving factories from China to other countries is likely to have a minimal impact on China's manufacturing strength because the relocated plants will still rely on Chinese suppliers for materials and components.

"Even as efforts to diversify away from China accelerate, it would not be surprising if China's overall share of global exports, manufacturing and supply chains continued to rise," the report's authors said.

One advantage China has is its size. As Japan, South Korea and other East Asian countries industrialised in the 20th century, they stopped making products such as textiles or furniture and concentrated limited factory capacity on more high-end products such as cars and consumer electronics.

By contrast, China's dominance in the production of a wide range of goods means that its factories have been able to hold down overall costs even as average wages for Chinese workers have risen.
Louise Loo, chief China economist at Oxford Economics, said: "Manufacturing hasn't really moved to other regions. Everything from semiconductors to shoes and clothing is made in China."

Chinese factories also benefit from cheap loans from domestic banks and a plethora of suppliers capable of supplying almost every conceivable component and raw material. For example, logistics costs in China are much lower than in India, and China's port and road infrastructure is beyond India's reach.

All of this means that upstarts in manufacturing like Vietnam, India and Bangladesh face big challenges in competing with China, some economists say.

"I am very concerned about the newcomers," said Stefan Angrick, senior economist at Moody's Analytics in Tokyo. "How do you compete with these advantages in China?"