The Chinese manufacturing myth

Helen Wang writes about what is happening on the ground in China regarding the manufacturing sector. She touches on the problem of graduate unemployment which is something I covered in my last post.

The unemployment of graduates has important implications for UK and world Universities. Will the shortage of graduate jobs translate into a fall in the supply of students willing to invest large sums of money for a graduate education? Helen suggests this is the case with more vocational courses coming on stream.

Helen raises some interesting points about the production process and the role of innovation. China lags behind of course but is catching up quickly. Japan and Korea followed a similar development path and are now leading the world in terms on innovation and hightech production. China will catch up quickly and is reinforced by the new 5 year plan.

Myth of China’s Manufacturing Prowess [HelenWang]

In a meeting in Silicon Valley with high-tech and business professionals, I asked how many of them thought China was the world’s largest manufacturer. Almost 90 percent raised their hands.

The latest data shows, however, that the United States is still the largest manufacturer in the world. In 2008, U.S. manufacturing output was $1.8 trillion, compared to $1.4 trillion in China (UN data. China’s data do not separate manufacturing from mining and utilities. So the actual Chinese manufacturing number should be much smaller).

Contrary to the conventional view, manufacturing in the U. S. has been growing in the past two decades despite the decline in manufacturing jobs.

It is true that China’s manufacturing is growing faster than that of the United States. However, there is a key misconception about China’s manufacturing prowess.

In the United States and Europe, the manufacturing industry was created due to technology innovation. In China, the manufacturing industry is being created in response to global demand. Chinese manufacturers take orders from Western companies that have designed products for their home markets. They have no involvement with product development, innovation, market research, and even packaging.

Unlike the manufacturing industry in the West that gave birth to a middle class of both white-collar and blue-collar workers, manufacturers in China mostly absorb surplus labor from rural areas with few skills. Those rural migrant workers live in dormitories, earn about $100 to $200 a month, and hardly fit into the category of the middle class. (To be clear, there is a burgeoning middle class in China. Most of them are in urban private businesses, state-owned enterprises, and multinationals).

James Fallows, national correspondent for the Atlantic, visited many factories in China. He saw people working on the assembly lines and was convinced those tasks would only be performed by machines in the United States.

While people in the West fear China as a global manufacturing powerhouse, the Chinese consider their manufacturers to be the sweatshops for the world and see themselves as being in a disadvantageous position.

Yes, China is making efforts to drive its economy up the value chain. The 11th Five-year Plan (2006 – 2010) called for “scientific development.” A key initiative is an increase in the R&D-to-GDP ratio from about 1.3 percent in 2005 to 2.5 percent by 2020. However, how much of the funding is actually used for research and development and how well the research is being transferred into manufacturing are both highly questionable.

Given the unpredictability of the regulatory environment, many Chinese manufacturers tend to focus on short term gain. They compete on volume and price, and only enjoy wafer-thin profit margins. This has kept Chinese manufacturers from investing in research and development or training employees.

Recently, Chinese manufacturers experienced a shortage of low-waged workers. On the other hand, millions of college graduates have been unable to find jobs. With college tuition sky high, more and more young people are turning to vocational schools, which may offer better prospects of employment at lower cost. This means a majority of Chinese workers may be trapped in low-skilled jobs, making China’s move up the value chain even more challenging.

While the rest of the world fears China’s manufacturing power, China is trying to move away from its “sweatshop” manufacturing and become a service-oriented economy. However, China may find itself locked into place, at least for now, due to the hundreds of millions of rural migrants that need jobs.

In this regard, China is doing the world a service, producing affordable goods for Western consumers, which improves living standards and keeps inflation low in Western economies.

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