Saturday, March 17, 2012

Manufacturing: What Happens when China is No Longer Cheap?

China watching is a professional pastime for many. One of the most discussed topics is the rising cost of doing business in China and what effect that might have on worldwide manufacturing. An article in The Economist addressed that issue: The End of Cheap China
"China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close."

China’s major manufacturing areas are beginning to have to pay the price for its narrow focus on rapid growth.

"Costs are soaring, starting in the coastal provinces where factories have historically clustered.... Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour."

Wages have been growing at double digit rates over the past few years, prompting one outfit, AlixPartners, to produce some optimistic projections that might indicate problems ahead for China, and, perhaps, a minor renaissance in manufacturing in the US.

There may come a time when manufacturing in the US is generally as cheap as outsourcing to China, but three years from now seems overly optimistic. The point is made that gradually industries should begin to reconsider their outsourcing strategies and match China against working in other countries, including the US.

This is already occurring in the most labor intensive areas where heading to Sri Lanka or Vietnam makes sense. However, China has been depending less and less on unskilled labor.

"Chinese wages may be rising fast, but so is Chinese productivity. The precise numbers are disputed, but the trend is not. Chinese workers are paid more because they are producing more."

For the products the Chinese are most interested in, the cost of labor is not the dominant concern. For example, one manufacturer considered moving his operation to Vietnam, but concluded it was best to remain in China.

"Labour was cheaper there, but Vietnam lacked reliable suppliers of services such as nickel plating, heat treatment and special stamping. In the end, PPC decided not to leave China. Instead, it is automating more processes in its factory near Shanghai, replacing some (but not all) workers with machines."

China’s infrastructure seems to have provided a secure lock on consumer electronics production.

"Dwight Nordstrom of Pacific Resources International, a manufacturing consultancy, reckons China’s supply chain for electronics manufacturers is so good that "there is no stopping the juggernaut" for at least ten to 20 years. This same advantage applies to low-tech industries, too. Paul Stocker of Topline, a shoe exporter with dozens of contract plants in coastal China, says there is no easy alternative to China."

Decades ago our business leaders and our high priests of economic theory decided that the US should withdraw from most areas of manufacturing because we would never be able to compete with the Chinese and others on labor costs. The result was the hollowing out of our manufacturing infrastructure.

The New York Times reports that Steve Jobs was asked by President Obama what it would take to bring Apple’s manufacturing jobs back home.

"Mr. Jobs’s reply was unambiguous. ‘Those jobs aren’t coming back,’ he said, according to another dinner guest."

"The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that "Made in the U.S.A." is no longer a viable option for most Apple products."

It appears that there will soon come a time when we will be paying a premium to have our gadgets manufactured in China because we have allowed our infrastructure to decay to a point where we cannot compete at any level. For this we have our far-sighted business people, our politicians, and our economic shamans to thank. Perhaps it was too much to ask of them to consider that if you keep transferring your wealth to another country that country might do something intelligent with it.

We got here because China was always a cheap alternative. It seems that China is no longer an alternative, but rather our only option. This is not a healthy situation to be in.

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