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Myth of China’s Manufacturing Prowess

People often compare China’s urbanization to Western industrialization in the 19th century. In both cases, a large population moved from the country to the city. Society advanced from agricultural to industrial via manufacturing on a massive scale.

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. For example, railways came into existence because of the invention of the steam engine and automobiles were created because of technology breakthroughs in automobile engines.

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. Chinese manufacturers have no experience in bringing their own products to overseas markets.

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.

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, some 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.

Contrary to the conventional view, manufacturing in the U. S. has been growing in the past two decades despite the decline in manufacturing jobs. The latest data show 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[1]. This means that the United States is producing goods with higher value, such as airplanes and medical equipment.

In addition, most jobs the United States lost to China are low-skilled jobs. By outsourcing those low-skilled jobs to China, Americans have actually become more competitive in high-skilled jobs such as management, innovation, and marketing. The low-skilled jobs also serve China well as Chinese rural migrants have opportunities to move up in life and gain some skills.

The results are mutual beneficial. On one side of the globe, hundreds of millions of Chinese rural migrant workers earn more, have a higher standard of living, and their children have more training, which leads to more growth. On the other side of the globe, Western consumers are able to afford goods at lower prices and enjoy lower inflation.

[1] UN data. China’s data do not separate manufacturing from mining and utilities. So the actual Chinese manufacturing number should be even smaller.

67 comments to Myth of China’s Manufacturing Prowess

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  • romajm

    Yea, I think the china and the US are both big manufacturing when it comes finding jobs. Neither of this 2 are not backing down for the challenge of who have the best manufacturing jobs.

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