Has China “won” manufacturing?

By Matt Tank

When I was growing up, every cheap, crappy toy (and plenty of other things) always had the same three words printed on them: “Made in Taiwan”. Fifteen years later, I was working for an importer that specialised in computer monitors. By then, “Made in Taiwan” became something that we could say to help sell monitors. It meant that the quality was good, at a time when all the cheap stuff was being built in Chinese factories.

Today, pretty much everything is coming out of China. Chinese manufacturing has improved, like Taiwan’s before it, and Taiwan is mostly out of the picture now. While the quality of goods coming out of China has improved, costs are still low. It has been estimated that the cost of an iPhone would more than double if it was produced in the US, as Donald Trump suggested during the 2016 presidential campaign. However, wage growth in the manufacturing sector has trebled in the last 10 years, making Chinese goods more expensive to produce.

So this is where the cycle continues, right? As China is being priced out of the market, goods are being made cheaply in places like Bangladesh and Vietnam, and China will eventually be a manufacturing bit-player, as their economy matures. Not so fast… Some of this is starting to happen already, but a combination of technology and government may help China maintain a stranglehold on manufacturing for a long time.

The key to competing in manufacturing is to keep production costs down, even as wages rise on the back of skilled workers. Traditionally, this could only be maintained for so long. Automation is set to change that. By increasing the number of robots on factory floors, you can offset rising wages. This happens in two ways. First of all, the robots themselves are cheaper than an equivalent human worker. Secondly, by reducing the amount of human labour, you create an oversupply of skilled workers, which puts pressure on wage growth. China understands this, and is making huge strides towards automation. Already boasting the world’s largest workforce, it is now focusing on increasing its robot to worker ratio to help it maintain its edge.

The other half of the equation is political. At the 2017 National People’s Congress, Xi Jinping capped off a rise to power that had already seen him take control of the Chinese government, military and Communist Party. As European and US global reach diminishes, corresponding with an increase in nationalist sentiment, Xi’s three-and-a-half hour speech at the NPC laid out his plan to fill the void and establish China as a global economic and cultural leader.

The Chinese government has historically been willing to prop up the manufacturing sector, and continue to do so. Now, initiatives like the “One Belt, One Road” policy will improve access to regional markets, and provide the chance for China to be the architect of trade in the region, at a time where the US has relinquished their opportunity to do so, by withdrawing from the Trans-Pacific Partnership – its own deal.

So what stops China from winning manufacturing? Timing may not be on its side. It failed to capitalise on the rise of autonomous technology under previous president Hu Jintao, and is now having to play catch-up. In comparison, Japan, South Korea, and Germany, among others, have maintained an advanced manufacturing capability, and have a far greater saturation of robots in their factories. South Korea leads the world by a large margin in this statistic, with 510 robots per 10,000 human workers (as of 2015), while Japan is the world’s leading producer of robots, at 47% of global production. These factors may help these countries eat into China’s manufacturing output. Another big shift may also be on the horizon. 3D printing costs are rapidly decreasing, and the technology is improving. When it reaches critical mass, it may shift manufacturing centres, especially for certain goods, from large Chinese factories, to smaller local operations, and eventually into the home.

It’s probably too early to crown China as the king of manufacturing long-term. However, it does look like the losers will be the developing world. For those countries, the cost of entry into manufacturing may suddenly become too high, as humans, even at subsistence-level wages, may no longer be able to compete with the established, roboticised manufacturing industries, and the cost of entry into manufacturing may become too high.

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