An Expert Questions China’s Manufacturing Prowess

I am no expert on China, but the amount of space given over to the subject of China on the blogosphere has never ceased to amaze. I am also surprised that I rarely see any opinion that suggests that the country is not destined to become one of the most formidable forces on the planet. There seems general agreement that China will grow to super power size economically and politically.

So maybe that’s why I found this article on Clusterstock so interesting. It’s by Bill Waddell, a manufacturing consultant. He contends that China’s best days may be behind them because they haven’t taken the right steps to move their manufacturing processes beyond a simple reliance on cheap labor.

Here is the essence of his argument:

It may have passed under your radar in the global economic hubub, but Chinese manufacturing is in the tank and sinking deeper.  While the economic meltdown threw a fair amount of gasoline on the fire, Chinese manufacturing was heading in the wrong direction well before the credit and capital markets went haywire.

The cost of labor in China is going up fast, fueled by inflation (before the economic debacle) and by Chinese government actions.  The goal of Chinese economic policy is twofold: first to draw in vast amounts of foreign – mostly American – cash.  They have obviously met that goal very well.  They also look to create jobs; after all they have 1 point 3 billion mouths to feed.  Here they have come up short – about 300 million mouths short.

To correct this the Chinese toughened the minimum wage and overtime laws at the beginning of ’08.  The idea was to cut back on hours worked so manufacturers would hire more people.  The result has been about a 20-30% increase in labor costs, which was China’s stock in trade.  Absent cheap labor, China is just a very, very far away place that manufactures stuff with dubious quality and absurd lead times.

Compound all  of that with their lead-in-the-toys and toxins-in-the-milk-and-baby-formula fiascos, which led to tighter regulation and enforcement, which resulted in even more cost increases.  Then throw in a taste of just how expensive Chinese logistics can be when oil is selling for over a hundred bucks a barrel, and the net result is 70,000 Chinese factories closing over the course of the last 12 months and more than 20 million more unemployed Chinese workers.

It is thought provoking. Or then again maybe I just find it so because I have some skepticism about the China as all conquering nation theory. That skepticism I might add is only based on my general wariness towards overly large consensus on issues.

When I look at China I see a country that has admittedly made incredible strides in modernizing and growing its economy. It is also a country that currently wields a great deal of power by virtue of its vast surplus. But I also see a country that is still controlled by a totalitarian political party, has failed to embrace a set of laws that provide for personal and property rights, suffers from extreme personal income disparities and has perhaps the most intractable demographic problem of any developed nation on earth. 

Any one of those conditions would call into question the long-term viability of a country. Taken together they almost insure failure. Naturally China could surprise and properly address all of these issues save the last. The demographics are baked in the cake. The only way around that one is large scale immigration, something completely at odds with the culture of the country.

I’ll end the way I began. I am not a China expert nor am I likely to become one so I may be completely missing the boat here. I’m probably being too simplistic.

more: here (this is a link directly to Biil Waddell’s article)

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