Dragoman Digest

China struggles to close the gap in advanced machine tool technology

Foreign manufacturers maintain dominance in high-precision equipment despite China’s self-reliance push

China has mostly failed to develop advanced machine tools essential to manufacturing despite its strides in artificial intelligence, EVs, and semiconductors. These sophisticated tools – used in the manufacture of everything from jet engine components to circuit boards – remain predominantly supplied by Japanese, European, and American companies. The continued dependence represents a critical vulnerability in Beijing’s manufacturing ecosystem, with machine tools described by analysts as “the base of everything” and “an indispensable part of the supply chain”. China’s particular challenge lies in mastering the computer numerical control (CNC) systems that operate precision equipment, an area dominated by Germany’s Siemens and Japan’s Fanuc. China’s lack of progress comes despite a 2015 pledge to significantly decrease foreign dependence by 2025 including through the Made in China 2025 initiative.

Foreign manufacturers Fanuc (33 percent), Mitsubishi (20 percent), and Siemens (16 percent) command approximately two-thirds of China’s machine tool market. These established players benefit from powerful network effects, with some likening China’s challenge to “trying to sell a PC with a home-made operating system”. Chinese companies have focused on competing through aggressive price cuts in the lower end of the market, leading to deteriorating industry economics. Reflecting this, a recent report from the China Machine Tool and Tool Builders’ Association highlighted a 76.6 percent collapse in sector profits to Rmb26.5 billion (US$3.7 billion) due to what the association termed “the intensification of vicious competition”.

The industry’s struggles reflect both market forces and policy shifts. Government support for machine tool development, prominent in China’s 11th Five-Year Plan (2007), initially sparked a boom in manufacturers. However, subsequent consolidation saw major players like Dalian Machine Tool and Shenyang Machine Tool declare bankruptcy in 2017 and 2019, respectively. China became a net exporter of machine tools in 2021, though primarily in mid and low-end segments, with many exports coming from foreign companies operating in China. Local government support has diminished amid revenue shortfalls and a shift in focus to robotics, EVs, and semiconductors.

Apple’s pivot to India gathers momentum

Supply chain diversification becomes a strategic imperative amid rising trade risks

India’s smartphone exports have surged nearly 50 percent in the first 10 months of this fiscal year, with total exports projected to reach Rs1.8 trillion (US$21 billion) for the full year; up from Rs1.3 trillion (US$15 billion) in 2023-24. Apple is a big part of this growth trajectory. Apple’s keystone Taiwanese supplier Foxconn and India’s Tata Electronics are now helping manufacture Apple’s latest products in India, including the flagship iPhone 16 Pro. India accounts for 15 percent of global iPhone production: Apple aims to expand this figure to 25 percent by 2027.

For Apple, this represents is a calculated response to converging business pressures. Overwhelming dependence on China for production became untenable following COVID-19 disruptions that cost Apple up to US$8 billion in a single quarter of 2022. Growing US-China trade tensions have only heightened the need for alternative production bases. Concurrently, Apple is searching for new growth markets. China has limited governmental use of Apple devices, and challenges implementing AI features have exacerbated intense competition from domestic companies like Huawei. Apple’s China sales contracted 11 percent in the last quarter.

Challenges in India do remain though. Apple operations predominantly involve the assembly of imported components, with India lacking China’s dense supplier network. Tata is emerging as Apple’s key Indian partner through acquiring Wistron’s Bengaluru facility and securing a controlling stake in Pegatron’s Tamil Nadu operations. While currently focused on assembly, Tata has broader manufacturing ambitions with planned semiconductor facilities in Gujarat and Assam. Other component makers like US-based Corning and Jabil, alongside Finnish firm Salcomp are establishing Indian operations, but a more comprehensive shift will take time. Geopolitical tensions between Beijing and New Delhi create additional complications. China has impeded the movement of technical specialists, while India’s restrictions on investments from neighbouring countries have affected Chinese suppliers. Labor market dynamics further constrain growth, with limited female workforce participation making it difficult to replicate the massive factory operations common in China. Apple’s India expansion will test both India’s manufacturing ambitions and the feasibility of “China Plus One” diversification strategies.

Thailand deploys monetary and fiscal tools to revive sluggish growth

Bangkok faces mounting pressure to stimulate an economy lagging behind regional peers

Thailand’s economy expanded by 2.5 percent in 2024, falling short of the government’s 2.7 percent target and highlighting ongoing challenges. Whilst higher than the 2 percent recorded in 2023, Thailand remains significantly behind regional peers such as Indonesia, which grew at 5 percent. The underperformance has triggered coordinated monetary and fiscal interventions, with the Bank of Thailand (BoT) cutting interest rates to 2 percent on February 26. Prime Minister Paetongtarn Shinawatra’s administration followed on with a US$13.5 billion stimulus program centred on direct cash handouts – part of the government’s promised “digital wallets” scheme.

The dual policy response comes amid intensifying tensions between political and economic institutions. The BoT initially resisted government pressure to lower rates, with the finance ministry sending multiple formal requests before the BoT’s Monetary Policy Committee voted 6-1 for the quarter-point reduction. The BoT has also taken a dim view of the digital wallet scheme, with Governor Sethaput Suthiwartnarueput publicly criticising it as fiscally reckless. The first stage of the scheme will distribute ฿10,000 (US$300) directly (via bank transfers) to 14.5 million people, including vulnerable populations.

Thailand’s economic weakness is as much structural as it is cyclical. Manufacturing production has declined 11 percent since December 2021. Private consumption grew just 4.4 percent in 2024, down from 6.9 percent the previous year. High household debt, at approximately 90 percent of GDP, continues to constrain domestic spending power and has forced banks to tighten lending standards. External pressures further complicate the outlook, with Chinese imports putting pressure on local producers of textiles, plastics, iron, and steel. Thailand also has reason to fear Trump imposed tariffs given its rapidly growing trade surplus with the US – up 343 percent since 2017, making it the fifth-largest US trade deficit globally. Given these vulnerabilities, economists have warned that the benefits from cash handouts will “quickly fade” without addressing underlying competitiveness challenges.

Taiwan positions itself as democratic alternative in China-dominated drone market

Taipei is leveraging growing concerns over China’s dominance of the drone supply chain

Taiwan’s government is supporting investment of at least US$1.35 billion over four years to develop a self-sufficient drone production ecosystem. The initiative aligns with President Lai Ching-te’s vision, articulated in his May 2024 inaugural address, to establish Taiwan as “the Asian hub of UAV supply chains for global democracies”. This push gained urgency in October when Beijing sanctioned American drone maker Skydio for selling to Taiwan’s fire agency, cutting off its access to Chinese batteries. Taiwan’s government has responded by connecting Skydio with local battery suppliers through a government-backed coalition.

The drone initiative serves dual strategic and commercial purposes. The island’s military has ordered 3,000 domestically produced drones, eyeing Ukraine’s effective use of commercial UAVs against Russia. Defence experts have argued this figure should be much higher. Taiwan’s National Development Council also reports the island is home to more than 40 drone-related manufacturers with output reaching NT$2.86 billion (US$87 million) in 2024. The aim is to achieve monthly production capacity of 15,000 drones by 2028. Foreign Minister Lin Chia-lung has led delegations to Lithuania and is exploring partnerships with the US and Japan to help secure export markets.

Despite this momentum, Taiwan’s drones will struggle to compete with Chinese products on cost. Taiwanese drone manufacturer HY Tech has suggested that non-Chinese components cost three to four times more than their Chinese equivalents at present production rates. The hope is that the ex-China cost premium could potentially be reduced to 50 percent through economies of scale. Many Taiwanese companies maintain dual sourcing strategies – using entirely domestic components for government and security applications while relying on cheaper Chinese parts for commercial products. Meanwhile, Taiwan’s increasingly fractious politics has seen the opposition-controlled legislature freeze government funding for a planned drone industrial park. Industry experts suggest that to compete with China, Taiwan needs a broader strategy beyond government support, including mobilising its electronic hardware giants like Pegatron and Quanta Computer.

Vietnam searches for alternative clean energy supply

Vietnam’s move towards nuclear energy will encounter challenges

Vietnam’s strong GDP growth, at 7 percent in 2024, reflects extensive foreign investment by companies looking to reduce their reliance on China, and evade punitive US tariffs. Overall economic growth is in turn creating surging demand for energy, which is expected to increase by 13 percent in 2025 alone. Vietnam’s energy challenges have been most acute in the country’s north, which has experienced blackouts since early 2023. Although Vietnam made initial headway with renewables, the country’s state-owned utility EVN has struggled to build out the grid at the pace required to integrate intermittent supply. Reduced hydro flows due to drought and bureaucratic inertia (Vietnam’s 2021-2030 power plan has been persistently delayed) have compounded matters.

Vietnam has joined a growing number of countries exploring nuclear energy as a potential reliable and low-carbon complement to renewables. On November 25, Vietnam’s National Assembly passed a resolution to revive construction at the Ninh Thuan nuclear power project, which was suspended in 2016 due to public debt concerns. The project will consist of two reactors with a combined capacity of 4000MW. In recent weeks, EVN and Petrovietnam group have announced plans to invest in the project, and Japan and Russia have both signed MoUs on nuclear cooperation with Vietnam.

However, the Ninh Thuan project is replete with risks. It is unclear whether Japan and Russia would be able to cooperate. Japan participates in the international sanctions’ regime targeting Russia and has grown much warier of its northern neighbour since 2016. The timeline for the project is also highly ambitious, with Vietnam’s 2030 target for completion far ahead of the ten-year timeline nuclear energy projects typically take. Vietnam’s lack of an indigenous capabilities and skills base in nuclear may further elongate the timeline. It is also not clear that the budgetary pressures which stalled the project in 2016 have been resolved.