Why can’t the world replace China?

In today’s Finshots, we explain how China’s manufacturing playbook is different and why it is so difficult to replace.

The Story

Imagine you are building a new gadget. The funding is secured, the trademarks are filed, and the paperwork is clean. It’s just the hassle. Now comes the hard part – manufacturing.

You need 10,000 microchips, custom screws, a battery case, a display panel and a printed circuit prototype by tomorrow morning. In most countries this means weeks of emails, minimum order quantities and international shipping.

But in one country it just means walking across the street.

We are talking about China.

In fact, that’s how we see China, right? We define it in terms of cheap labor, mass manufacturing and an obsession with exporting.

But here’s the thing and also the part we rarely talk about. China, like India and most other Asian countries in the 20th century relied primarily on one industry: agriculture.

It wasn’t until 1978 Deng Xiaopinga former high-ranking Chinese Communist Party official, that the country has begun to move away from its agricultural economy and open itself to other markets. Special Economic Zones (SEZs) were carved out as experiments. Foreign capital poured in. And factories replaced farms.

By the time China joined the World Trade Organization in 2001, it had directly integrated itself into global supply chains. The world got cheaper goods. China has gained scale. And that’s how the “factory of the world” was born.

Now this explanation seems comforting, but it is also incomplete because the outside world always thought that the edge that Chinese manufacturing had was cheap labor. But if that were true, rising wages should have weakened it. And if last year was any indication, tariffs should have crippled it.

Instead, something strange happened. China didn’t just keep producing. It got better.

For 15 years straight, China remained the world’s largest producer. It produces almost a third of the world’s manufactured goods. Companies can diversify into other countries. Supply chains can shift at the edges. But the center of gravity remains intact.

Manufacturing today is not just about assembling goods. That is what it was in the past, but now it is more than that. It’s about closeness. When you have suppliers, workshops and component dealers all working so closely together, something unusual happens.

In fact, there is a very interesting theory that economists have come up with. When companies cluster together geographically, they tend to become more productive—not just individually, but collectively. Suppliers specialize. Workers circulate. Knowledge spreads informally over coffee breaks and factory floors. The location itself becomes more efficient than the sum of its firms.

In the 1990s, Nobel laureate Paul Krugman formalized this idea and called it agglomeration or the tendency of industries to cluster and generate increasing returns.

And nowhere in the modern world is agglomeration more visible than in one city – Shenzhen.

Remember that shift in 1978? The decision to carve out some experimental capitalist enclaves within a socialist economy?

One of those experiments was a fishing village bordering Hong Kong. Yes, Shenzhen was just a small town back then. It was supposed to be a policy trial, designated as one of China’s first special economic zones in 1980, and had a population of about 30,000.

Today it is something completely different. Shenzhen is home to approximately 17 million people and generates a GDP larger than many countries.

But the skyline is not the story. The supply chain is. In the heart of Shenzhen is Huaqiangbei, often described as the world’s largest electronics market. This is not a shopping center or shopping complex. It is a vertical system.

One building can house hundreds of component dealers. One specializes in microcontrollers. Another one in lithium batteries. Another one in display managers. Need a niche chip that was discontinued five years ago? Someone probably has old stock. Do you need 5,000 units by Friday? A call is made.

In most countries, supply chains span continents.

But in Shenzhen they span blocks.

This density compresses time.

A design flaw discovered in the morning can be fixed at night. An underperforming supplier can be replaced within hours. Engineers move between firms and carry tacit knowledge that never appears in formal manuals. This is what agglomeration looks like in practice.

As of 2025, the Shenzhen-Hong Kong-Guangzhou cluster is ranked first among the most innovative regions in the world by the World Intellectual Property Organization (WIPO). In simple terms, it had the most patents filed in 2025 than any other region in the world.

Shenzhen did not remain a low-cost industrial center. Over time it has upgraded and now global giants such as Huawei, Tencent and BYD call it home.

And here’s the part that makes Shenzhen hard to replicate.

Eleven suppliers group together, they lower costs for each other. Once costs fall, more firms arrive. As more firms arrive, specialization deepens. And once specialization deepens, productivity rises. The ecosystem simply begins to feed itself.

So yeah, it’s not about labor costs anymore.

At some point, the group becomes so dense that companies don’t choose it for convenience. They choose it instead because leaving them would slow them down.

But Shenzhen is not unique.

Across China, entire cities specialize in entire product lines. China hosts more than two dozen large-scale industrial clusters around specific sectors. Dongguan specializes in shoes and manufacturing. Whole towns specialize in soles, stitching, foaming and packaging. A brand can coordinate thousands of suppliers within a short radius.

Suzhou is known for electronics, semiconductors and precision components, anchored by the Suzhou Industrial Park.

All of this will now make you wonder, if this model is so powerful, why hasn’t the world replicated it? Why didn’t subsidies and industrial parks create the same density elsewhere?

Well, let’s start with time. Shenzhen didn’t wake up one morning as the world’s hardware capital. It was compiled over four decades. Each supplier that arrived reduced friction for the next one. And each engineer trained another.

Another reason is because you cannot import supplier sites today. Sure, governments can attract investment and provide tax breaks. They can even subsidize the land. But what they cannot recreate is a web of thousands of small suppliers sitting within a 10 kilometer radius.

When one string is removed, the system adjusts. But try to build that web from scratch and you only discover the missing strands when something breaks.

At some point, an ecosystem ceases to be a collection of firms and begins to become economic infrastructure. It becomes the invisible system that makes speed normal and friction rare.

Recreating something like this is easier said than done. But it reminds us of one thing: manufacturing is not a short-term boost. It’s a long-term bet.

In this year’s Economic Surveythe case was made for manufacturing-led exports as a way to stabilize currencies, lower borrowing costs and bring discipline to the wider economy. The lesson from Shenzhen adds another layer: manufacturing is not just about output, but about building ecosystems that last.

Because the countries that build dense ecosystems don’t just compete. They are tilting the playing field quietly, structurally and for decades.

Until then…

If this story helped you make sense of China’s manufacturing ecosystem, share it with a friend, family member or even strangers WhatsApp, LinkedIn and x.

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