Can Automation Keep China’s Factories at Home and Rewrite the Future of Global Manufacturing?

Automation could help China retain manufacturing despite an ageing workforce, challenging the traditional shift of factories toward younger, low-cost economies. Developing countries must combine demographic advantages with skills, technology, infrastructure and open trade to capture future manufacturing investment and jobs.

The traditional path through which factories moved from richer Asian economies to lower-cost developing countries is becoming far less predictable as automation, ageing and protectionism reshape global manufacturing. A study by researchers from the World Bank's Development Economics Research Group, the World Bank's Office of the Chief Economist for Asia and Université de Sherbrooke finds that countries with young populations could gain from demographic change. Still, cheap labour alone may no longer be enough to attract factories. Automation could help established manufacturing powers, particularly China, retain production even as their workforces shrink.

The study revisits the "Flying Geese" model of industrial development, under which manufacturing shifted from Japan to newly industrialised Asian economies and later towards Southeast Asia, China and Vietnam as wages rose. China now faces a major demographic transition, with more than 400 million people expected to be aged 65 or older by 2050. A shrinking workforce would normally increase wages and encourage factories to relocate. But rapidly improving industrial robots could weaken that process by allowing companies to replace some increasingly expensive labour with machines.

Young Economies Gain a Powerful Demographic Opportunity

Using International Federation of Robotics data and OECD Inter-Country Input-Output information covering 77 countries, the researchers examine protectionism, projected population changes through 2035 and improvements in robot productivity.

The demographic results show significant potential opportunities for countries with expanding workforces. Under the study's modelled 2035 population scenario, China's real GDP declines 5.60% and exports fall 2.05%. Thailand experiences a 6.24% GDP contraction and a 3.09% decline in exports.

India, however, records an 11.33% increase in GDP and 8.40% growth in exports. The Philippines sees GDP rise 15.59% and exports 8.82%, while Malaysia's GDP increases 13.23%, Mexico's 9.09% and Vietnam's 4.91%.

The regional results are even more striking. South Asia records a modelled 17.83% GDP increase and 10.26% export growth from projected demographic change, while Sub-Saharan Africa sees increases of 29.15% and 17.86%, respectively. These are counterfactual model results rather than forecasts, but they demonstrate how younger workforces could influence future competitiveness.

For governments, the opportunity is to turn demographic advantages into productive employment before that window closes. Skills development, reliable electricity, transport infrastructure, industrial zones, logistics and easier business conditions could determine whether growing labour forces actually attract manufacturing investment.

Robots Could Disrupt the Low-Cost Labour Advantage

The major challenge is automation. China already has a relatively strong industrial robot base, meaning improvements in robot productivity could help manufacturers absorb some of the effects of worker shortages.

With projected population changes, China's GDP falls 5.60%. When robot productivity doubles globally, the decline narrows to about 4.94%. A tenfold productivity increase reduces the contraction to 3.22% and turns the export impact from a decline into a 0.75% increase.

The ability of robots to compensate for labour shortages varies dramatically by industry. The study estimates that around 46.7% of tasks in vehicle manufacturing are potentially automatable, compared with 20.3% in computers and electronics and 13.3% in metals.

If China's labour supply falls 10%, roughly doubling robot productivity could preserve competitiveness in vehicle manufacturing. Computers and electronics would require robot productivity to increase by about 220%, while metals would require an increase exceeding 330%. In metals, automation cannot fully compensate once the labour-force decline exceeds roughly 14%.

This means developing countries should identify industries where their labour advantage remains meaningful instead of pursuing manufacturing investment without considering the technological structure of individual sectors.

Trade Barriers Can Overpower Technology Gains

Protectionism presents another major risk. The researchers simulate a 10% increase in trade costs for exports to 46 advanced economies, with an additional 10% increase affecting Chinese exports to those markets. Additional barriers between European Union countries are excluded.

The results are substantial. China's exports decline 13.44%, while its GDP falls 0.57%. Across advanced economies, exports decline 16.05% and GDP falls 2.57%. India's exports fall 5.48%, the Philippines' 6.71%, Mexico's 6.92% and Vietnam's 4.20%.

Automation cannot completely overcome this disruption. Doubling robot productivity turns China's GDP impact under the combined protectionism scenario slightly positive at 0.11%, but exports remain 12.88% below the baseline. Even with robot productivity increasing tenfold, Chinese exports remain 10.92% lower.

For governments and businesses, the message is clear: productivity improvements cannot substitute for access to international markets. Trade openness, diversified export destinations and resilient supply chains therefore remain important parts of industrial policy.

Industrial Policy Must Move Beyond Cheap Labour

For international development partners, the findings suggest industrialisation programs may need to place greater emphasis on technology adoption, technical education, digital infrastructure and productive capabilities alongside traditional investments in roads, electricity and industrial parks.

Development finance could also help smaller manufacturers acquire machinery, digital technologies and workforce training. Without such support, automation could widen the productivity gap between large companies that can invest in new technology and smaller domestic suppliers struggling to modernise.

Private-sector stakeholders face opportunities in industrial robotics, machinery, software, logistics, worker training and technology-enabled manufacturing. But investors should not assume factories will automatically leave ageing economies for countries offering cheaper workers.

The study ultimately suggests that demographics can still create major opportunities for developing economies, but capturing them will require much more than an abundant workforce. Governments that combine skills, infrastructure, technology adoption, competitive business environments and access to global markets will be better placed to convert demographic advantages into manufacturing investment, exports and jobs.