China's Manufacturing Dominance Persists Despite Global Decoupling Efforts

Shifting production out of China does not necessarily reduce reliance on China's components, machinery and industrial expertise. Morgan Stanley analysts, including chief Asia economist Chetan Ahya and chief China economist Robin Xing, found in a report published earlier this month that China's share of value-added content in global imports rose from 12.6% in 2017 to 14.3% in 2024. The analysts argued that China was well-positioned to deepen that presence because of high-growth sectors, integrated supply chains, strategically aligned finance and skilled workers.

Morgan Stanley said India still imports substantial intermediate and capital goods from China, with 52% of India's imported Chinese content going into domestic investments. The analysts found that 55% of Vietnam's imported Chinese content goes into exports. The analysts found rising Chinese value-added content in the rest of Asia's exports to both US and non-US markets, indicating regional supply-chain integration centred on China.

Indian hardware engineer Neeraj Arora imported finished phone chargers from China a decade ago, while more chargers can now be made in India using China's parts. Arora said repeated visits to Shenzhen, Dongguan and Guangzhou exposed an ecosystem offering competitively priced parts, from power-switching transistors to charging chips. Arora said Taiwan's higher-end products were less suited to the low-cost goods Arora's customers needed, while Vietnam offered fewer options. However, Arora cited progress through Dixon Technologies' television and phone assembly and Indian firms' growing ability to develop circuit boards and prototypes locally. Arora estimated that China had accumulated 20 to 25 years of electronics manufacturing experience, compared with India's push that gathered pace around 2015. Arora argued that India could reach China's current capabilities within five to seven years, although Arora expected China to advance further by then.

India's Electronics Component Manufacturing Scheme, launched in 2025 and expanded to 400 billion rupees (US$4.2 billion) in the 2026-27 budget, supports local parts and partially assembled products. India's government said 106 projects had been approved by August. India's government said 38 plants had begun production by August. However, India's government acknowledged continued import dependence for critical components, including printed circuit boards, camera and display modules, connectors and capacitors. Vietnam's revised industrial policy, effective in September 2025, supports technology transfer, training, certification and programmes helping local companies supply multinational manufacturers.

Morgan Stanley estimated that the US and EU together accounted for about 80% of the increase in global reliance on Chinese value-added content. China's share of direct US imports fell from 22% in 2017 to about 8% currently. However, Morgan Stanley found that Chinese value-added content in US imports remained broadly stable in recent years, standing at 15.4% in 2024. The analysts found that only five of 13 manufacturing sectors materially reduced the Chinese value-added share of US imports since 2016. The analysts estimated that about 25% of Chinese content in US imports now arrives indirectly through third economies, up 10 percentage points from 2017. Nearly half of that indirect value passed through Mexico, Taiwan and Vietnam, with Vietnam showing a much higher Chinese-content share in exports to the US.

Morgan Stanley said the increased use of indirect channels, particularly from 2022 onwards, was unique to US-China trade and consistent with production relocation using China's inputs. The analysts said imports outside the US, including EU imports, showed no similar shift towards indirect channels. The analysts estimated that Chinese value-added content in Europe's imports rose from 6.9% in 2017 to 8.3% in 2024. Morgan Stanley found that China's value-added share of global imports increased in 10 of 13 manufacturing sectors over the past decade, spanning lower-value and advanced industries. Morgan Stanley put China's share of value-added content in global electrical and optical equipment imports at 33% in 2024. The corresponding share for machinery and equipment was 24%, according to Morgan Stanley. The corresponding share for transport equipment was 10%, according to Morgan Stanley.

Customs data released on Wednesday showed that China's exports rose 36.3% year on year to US$447.18 billion last month. Strong global technology demand and shipping ahead of the golden week holiday drove the momentum, producing 2026's highest monthly trade surplus and pointing towards another annual record. Goldman Sachs found in a report last week that China's share of global exports rose from 4% in 2000 to 15% in 2025, exceeding Germany's 1970s and Japan's 1980s peaks. Goldman Sachs said robust real export growth could continue over the next few years, but further growth would eventually depend on stronger importing economies.

Morgan Stanley said China increasingly plays a critical supply-chain role in high-end capital goods as well as low-cost components. Morgan Stanley's China team expects artificial intelligence and robotics-enabled manufacturing, described as Industry 5.0, to strengthen China's manufacturing advantage. Morgan Stanley's earlier May report argued that humanoids and other robotics could consolidate China's manufacturing dominance, building on a decade of electric vehicle manufacturing expansion. The bank projected that China's share of global exports would reach 16.5% by 2030, up from about 15% when the May report appeared. Morgan Stanley argued that diversification is achievable but decoupling will be challenging, as alternative manufacturing hubs need the suppliers, expertise and networks China developed over decades.