The vicissitudes of American manufacturing has been a long running topic on this blog. But whether one focuses on firms that have always kept their production in North America or those that have reshored manufacturing, there is the question of whether China or other Asian countries are going down without a fight. A recent article in The Economist suggests that manufacturing in Asia in general and in China in particular is going to be around for a long, long while (A tightening grip, Mar 14).
First, one has to recognize that the growth in Asian manufacturing over the last 20-plus yeas has been spectacular. Check out this graphic.
As the article notes, these numbers get a little more extreme if one looks at “intermediate inputs,” doohickeys like displays and circuit boards that go into finished products that may be assembled elsewhere.
So is there any reason to believe that these numbers will change any time soon? Admittedly, Chinese wages are rising (by an average rate of 12% per year since 2001) but the article presents several arguments that suggest that higher wages may not be enough to undercut China’s position. First, Chinese firms are not doing just simple work. Replacing a Chinese supplier is not then just a question of finding someone who is cheap; they need to be cheap and capable. That becomes a tall order once you move past all but the simplest goods. Said another way, one might reasonably expect apparel assembly to leave China (and to some extent it has) but that doesn’t necessarily mean other industries will bail out.
The second point is that China benefits from having a network of suppliers located together. Pulling one step out of China might be possible but unless one can locate a similar constellation of partners, one is still going to be dependent on China but now would be managing those relationships over greater distances.
Finally, China still has lots of room for improvement on the productivity front.
Despite fast-rising wages, China’s factories are still far cheaper than their rich-world rivals. Many pay their employees just above the minimum wage, which at about $270 a month in China is less than a quarter that in America. And they are more efficient than many rivals in the developing world. McKinsey, a consultancy, found that labour productivity increased by 11% a year in China from 2007 to 2012, compared with 8% in Thailand and 7% in Indonesia. With Chinese factories just starting to pour money into automation, there is scope to improve productivity further. China became the biggest market for robots in 2013, buying 20% of all those made that year, according to the International Federation of Robotics. But it still has just 30 robots per 10,000 workers in manufacturing, compared with 323 in Japan. Foxconn, the Taiwanese firm that makes iPhones and has more than a million employees in China, says that it wants robots to complete 70% of its assembly-line work within three years.
The numbers on robots per worker are kind of mind-blowing. Japan has been competitive by substituting capital for labor. China hasn’t been under a whole lot of pressure to do that so far but the combination of higher wages and producing more high-value goods should make greater investments in automation attractive — that could keep China competitive for a while yet.
There is another aspect to this. Sitting in Chicago, it is natural for me to focus on where stuff I buy gets made. However, more and more stuff is being bought in Asia. That too shows up in the numbers.
Rising Chinese consumption is particularly helpful to manufacturers located in its environs. As the purchasing power of Chinese buyers grows, the average distance travelled by consumer-goods exports is changing, depending on whether they are shipped from Asia, Europe or North America. From 2008 to 2012, the average journey length for Asian exports fell by 4.5%, while those from Europe and North America rose by 25.9% and 13.7%, respectively. That makes transportation costs cheaper for Asian factories.