China is now "the world’s sole manufacturing superpower" and Russia’s productive capability is greater than that of Germany’s, according to recent studies on the changes to the world’s manufacturing make-up.

The nominal sizes of Russia and China’s economies are dwarfed by those of the G7 richest countries in the world, but after drilling into their manufacturing power, then the picture that emerges is China is the most powerful manufacturer in the world and Russia is the most productive in Europe. Winning a war is not about how much money you have; it’s about how many bombs and planes you can make, and how fast you can do so.

A war at the heart of Europe and China aligning with Russia in a militarily charged showdown with the West has focused attention on industrial production abilities and capacities as the prospect of WWIII, which the Kremlin recently said would be “inevitable” if Nato sends troops to Ukraine, is no longer a zero-probability event.

Russian President Vladimir Putin has put Russia’s economy on a war footing and ramped up military production to supply his forces in Ukraine. As bne IntelliNews has been reporting, Moscow’s production of the crucial 155mm artillery shells has become a major factor in the conflict and Russia is not only massively out-manufacturing Ukraine in shell production but it is also out-manufacturing all of the EU as well.

Despite two years of a hot conflict in Ukraine on the EU’s borders, the member states and the US have failed to invest into expanding their military production and can’t keep up with Russia, which will expand its shell production this year from 2mn rounds to just under 3mn, according to the Kremlin. In general, Russia’s industrial capacity utilisation rate has risen to 81% – a modern history all-time high.

The only arms firm in Europe that has significantly stepped up its production, even without concrete government contracts, is the German arms maker Rheinmetall that has been investing in increasing its capacity and has outstripped even the US.

"Some crucial segments of the European defence industry are now performing better than US defence industry....Rheinmetall in Germany is producing way more 155 artillery shells than the entire US defence industry combined,” Czech defence policy chief Jan Jires said at the end of February, highlighting the lack of investment that has gone into expanding military production despite two years of open warfare in Ukraine.

Rheinmetall is moving into Ukraine, where it has a two-year plan for the supply of weapons to Ukraine and a joint venture agreement to build a factory there. Rheinmetall said this month that it is the only Western defence contractor capable of supplying the Ukrainian military with many new medium- and large-calibre ammunition, including supplies for the Marder infantry fighting vehicle, Leopard 1 and Leopard 2 tanks as well as the badly needed shells.

Europe's Centre for Economic Policy Research (CEPR) found in a study that although it's widely perceived that "the US is the world’s sole military superpower", spending more on its military than the ten next highest spending countries combined, when it comes to industrial production capacity it is trailing far behind China.

The US even trails Russia in terms of shell production. Pre-war the US was manufacturing some 1,000 155mm shells a month, which has doubled to about 2,000 now. But Russia was making ten times as many 155mm shells pre-war and is currently manufacturing over 150,000 shells a month, which is due to increase by a third over the course of this year.

"China’s industrialisation is unprecedented. The last time the ‘king of the manufacturing hill’ got knocked off the throne was when the US surpassed the UK just before WWI. It took the US the better part of a century to rise to the top; the China-US switch took about 15 or 20 years. China’s industrialisation, in short, defies comparison," CEPR said.

Part of the reason for this growing mismatch are consequences of globalisation, where rich Western countries exported much of their manufacturing capacity to the cheaper countries of SE Asia. In parallel is that Western countries are increasingly driven by services, not production, leaving them without either factories or the staff to work in them.

Germany is the most productive country in Europe, with manufacturing accounting for a quarter of its GDP – twice as much as the next closest large EU power. But as bne IntelliNews reported last August, Russia overtook Germany to become the fifth biggest economy in the world in PPP terms, which better captures the benefits of production capacity.

GDP distribution by sector in selected countries

Indeed, in another bne IntelliNews deep dive on Putin’s big bet on the Global South Century that compared developed world economies with those of the Global South in PPP terms, most of the developing world is rapidly catching up with the big Western countries, or in the case of the biggest emerging markets, have already overtaken them. Economists say that the Global South will overtake the developed world in nominal GDP terms as well by 2075. Most of this growth is based on the expansion of manufacturing, not services, although these play an important role too.

One of the constraints of expanding weapons production in the US over the last two years has been the shortage of qualified skilled labour to work the new factories, which requires arms makers to train new staff, and that takes at least a year.

The global pandemic in 2020 has reversed this trend and encouraged companies to unwind their globalised production and “nearshore” their industrial capacity, or even bring it back home, but that is proving to be a slow process.

Russian production capacity

In a war, having a large industrial base is a big advantage, as the rate a country can produce arms is a key factor in the fight. In these terms Russia is even bigger than Germany, itself no mean industrial country, according to research by Jacques Sapir, director of studies at École des Hautes Études en Sciences Sociales (EHESS) in Paris.

“Simple GDP statistics have arguably lulled the West into a false sense of security. By GDP, Western economies appear dominant and their capacity to impose sanctions decisive. But the West’s reliance on service sectors – and the relative weakness of directly productive sectors like manufacturing, mining and agriculture – introduces critical vulnerabilities in goods production and supply chains. In times of peace and unimpeded trade, such vulnerabilities may seem insignificant. In periods of deglobalisation, geopolitical competition and state-versus-state con­flict, however, these weaknesses can have profound impacts, while basic productive sectors take on greater importance,” Sapir said.

Russia was famously roasted by the late Senator John McCain as a “gas station masquerading as a country," as it has a GDP that is smaller than either Italy or California. But that fails to take account of its ability to make things; one of Russia’s Soviet legacies and its heavy emphasis on industry is that it has a lot of factories.

Looking at just nominal GDP, Russia's share of the global economy was 1.9% in 2019, against US’ 24.4% and China’s 16.4%, according to the International Monetary Fund (IMF). In PPP terms Russia does better with a 3.1% share of adjusted global GDP, with the US falling into second place with 15% against China’s 17.3% as the world leader.

GDP Russian productive sector comparison vs France Germany US China

But looking at productive capacity skews the picture even further towards Russia and China.

“During wartime, services lose their importance relative to agriculture, industry and construction. It then becomes necessary to calculate the share of the goods-producing sectors across different economies in order to have an accurate understanding of how they really compare,” says Sapir.

Russia is between China, where services represent only 49% of GDP, and countries like the United States, France and Italy, where services represent at least 75% of GDP. Germany occupies an intermediate position, with 69% of its GDP coming from services.

Looking at the share of productive industry then Germany is only 90% of Russia’s in terms of productive industry, while France is a mere 44% of Russia’s industrial power.

China is even further ahead, with Germany equivalent to only 11% of China’s productive industry, and even the US is only 34% of China’s productive power, according to Sapir.

Of course it's not only about the number of widgets you can make. The quality of the widgets is also very important, and on this score Russia falls down, as it remains heavily dependent on Western technology, as bne IntelliNews reported in a deep dive into Russia’s precision tools sector, the Kremlin’s soft sanctions underbelly. Following the collapse of the Soviet Union, Russia missed out on two revolutions in machine tools that has left it impossibly far behind the developed world. China, on the other hand, has been investing heavily into R&D and is rapidly closing the gap with the West.

And Russian industrial power is no idle boast; the Kremlin has been putting all those factories to good use, which has caused a military Keynesianism economic boom.

Russia’s industrial production has been running hot all of last year and, after a dip in December, expanded by 4.6% in January, RosStat reported on February 29. (chart), Russia’s manufacturing PMI has done even better, surging in February to post 54.7, up from 52.4 in January, putting in its biggest gains in 13 years, S&P Global reported on March 1, driven by massive state fixed investment into military production. PMIs in the rest of Europe remain deeply in the red, with Germany doing worst of all, although analysts say the bulk of the slowdown may be already over. Russia is on course to spend a whopping 8% of GDP on defence this year, far outstripping most of Europe, which has yet to reach the 2% of GDP mandated by Nato membership.

 

China is the new manufacturing superpower

China is also putting its industrial might to work. It has been building two coal-fuelled power plants a month in the last year and the Chinese People’s Liberation Army – Navy (PLA-N), is now the world’s largest. It has been growing feverishly, leaving India and the US far behind in terms of ship construction capability, adding the equivalent of the entire French navy to its fleet every four years. Between 2017 and 2019 China reportedly built more vessels than India, Japan, Australia, France and the United Kingdom combined. 

China’s fleet is now bigger than America’s. The Pentagon’s annual report to the US Congress on Chinese military and security developments estimates that the Chinese Navy had 350 warships compared to 293 warships in the US Navy battle force. And now the PLA-N is ramping up its submarine production. China’s civil-industrial system supports what is now the world’s largest shipbuilding industry by funding facilities, training, employing and rotating workers to create a huge machine that can pump out destroyers and corvettes on a monthly basis. Last year Chinese shipyards completed the first indigenously built aircraft carrier in a record three years from scratch.

CEPR used the recently released 2023 update of the OECD Trade in Added Value database to paint an eight-chart portrait of China’s journey to superpower status and the asymmetric impact that its dominance has had on global supply chains, according to note from Richard Baldwin, Professor of International Economics at IMD Business School, Lausanne, et al.

The chart shows in the left panel world shares in terms of gross production; in the right panel, the same is shown in terms of value added. Six countries manufacture at least 3% of the world total, says Baldwin. China is followed by the US, Japan, Germany, India and South Korea.

The world’s biggest manufacturing economies

From this list, only three of these countries are long-established industrial economies; the other three are newly industrialised economies and four of the G7 don’t make the cut, a point that Putin was rubbing in during his State of the Nation Speech this week.

"The BRICS countries will generate about 37% of global GDP already in 2028, taking into account the states that have become the association’s members recently, whereas the G7 figure will drop below 28%. These figures are very convincing, considering that the situation was quite different some 10-15 years ago. I spoke about that publicly. But these are the trends, do you understand?" Putin said.

The chart separately identifies nations with shares of at least 2%, and on the left, this includes Italy, France and Taiwan (two of the G7, the UK and Canada, don’t make the cut). In the right panel (value-added basis), the UK makes an appearance with a share just above 2%, according to Baldwin.

“When it comes to gross production, China’s share is three times the US’ share, six times Japan’s, and nine times Germany’s. Taiwan, Mexico, Russia and Brazil now have higher gross output than the UK. Canada is further down the ranking, in 15th place,” says Baldwin.

The OECD data only goes back to 1995, when China started the race a bit ahead of Canada, Britain, France and Italy. China passed Germany in 1998, Japan in 2005 and the US in 2008. Since then, China has more than doubled its world share, while the US’s share has fallen by another three percentage points. Today China’s share now exceeds that of all the next largest manufacturers combined.

The world’s share of gross manufacturing production

China’s dominance in exports of manufactured products is less strong, but still large. In 1995 China had just 3% of world manufacturing exports; by 2020 its share had risen to 20%. The corresponding fall in the G7 share was less dramatic than for its share of production. At the same time, China’s export to production ratio, having peaked at 18% in 2004, is 13% in 2020 – almost back to its 1995 level of 11%.

The world’s share of manufactured exports

Where you export to is also an important vector and China is and always has been more reliant on sales to the US than the other way round. In the mid-2000s China’s dependence on the US was ten times the reverse dependence, but the asymmetry has narrowed substantially in recent years. China’s economy has matured and it has been transitioning away from being “the world’s factory” to being a more modern service-reliant economy.

The growing interdependencies as the trade flows become more balanced suggest that decoupling from China would be difficult, slow, expensive and disruptive – especially for G7 manufacturers. The same is true for the Russo-Europe relationship, where it is becoming increasingly transparent that Europe was a lot more intertwined with the Russian economy than was first appreciated. As bne IntelliNews has reported, the extreme sanctions on Russia have been bouncing back in a boomerang effect that is hurting Europe more than it is Russia.

China, US trade interdependencies

China is a net exporter of manufactured goods and a net importer of everything else – agriculture goods, mining goods and fuels and services. Both the positive and negative net balances have been growing quickly. It ran surpluses in the late 2000s, which then decreased and turned negative in 2018 and 2019 (black line).

“Until the mid-2000s China was a typical offshore destination: a net importer of intermediate inputs and a net exporter of final goods that embodied the imported inputs. From about 2002 China became a large net exporter of intermediate goods as well as final goods,” says Baldwin, highlighting the growth of China’s manufacturing power and its move up the added-value chain.

China balance of trade by sector

China trade in intermediate and final goods

The sectoral shares for 1995, the first year in the OECD’s database, to 2020 show how China’s manufacturing has moved up the value chain, from being relatively reliant on simple manufacturing sectors like textiles and clothing to more sophisticated sectors like electronics, basic and fabricated metal products, and chemicals and pharmaceuticals.

All of the emerging markets are on the same trajectory. In Uzbekistan, President Shavkat Mirziyoyev banned the export of raw cotton several years ago, long the country’s main foreign exchange earner, and has in effect forced the entire sector to invest into value-added production of textiles. Central Europe has long since completed this journey, travelling from investments into cheap production in light manufacturing to more sophisticated medium weight production of things such as plasma TVs and building up extensive automotive sectors. And now the same revolution is underway in the Balkans. China has also more or less completed this switch: textiles accounted for the biggest share in 1995, but electronics did so in 2020.

China trade export composition manufactures by sector

China’s globalisation ratio shows the country’s gross globalisation ratio (GGR) in manufacturing is the share of manufactured production that is sold abroad, where simple production is measured as the total sales of all China-based manufacturers. It differs from manufacturing GDP since it includes all sales, not just final good sales.

“During China’s rise to manufacturing superpower status, China’s GGR rocketed up – almost doubling – in the first decade of the data,” says Baldwin. “Indeed, most of the action came between 1999 and 2004. That period was an extraordinary feat of globalisation, and it is probably why so many think of China as an economy that is incredibly dependent on exports.”

But as the chart shows, since 2004 China’s GGR has been falling steadily as the country’s manufacturing sector matures and domestic demand becomes increasingly important and a middle class emerges. By 2020 the ratio had fallen back to about where it started in 1995.

“Chinese manufacturing, in short, is no longer as dependent on exports as many might believe. True, the first part of the rapid growth period involved exports growing faster than production (so the GGR rises). But then production grows faster than exports, implying that domestic sales were becoming relatively more important, compared to export sales – even though domestic and foreign sales were both booming throughout the high-growth episode," says Baldwin. “This dispels the myth that China’s success can be entirely attributed to exports. From around 2004, China increasingly became its own best customer.”

“The takeaway is simple: China’s openness, as measured by the GGR, has fallen rapidly. By 2020 it was only slightly more dependent on export sales than it was 1995,” concludes Baldwin.

China’s export and production growth ratio

The shift from a low-cost export-oriented growth model to one where rising incomes have created a substantial domestic market and goods production goes up the value-added chain is well underway in both China and Russia. It sanction-proofs their economies as their own internal markets are increasingly able to drive economic growth, and reduces their dependence on imported inputs and technology.

The increasingly wide and deep industrial bases can help the countries gain a competitive edge in virtually all sectors, especially in China, which remains technologically well ahead of Russia. The exceptions are the most advanced sectors, where the G7 countries still dominate, but as bne IntelliNews has reported, the technology sanctions have more or less failed thanks to partners in the Global South that are happy to act as trade intermediaries.