The Economist - manufacturing in China(1)

The Economist

Global manufacturing

Made in China?

Asia’s dominance in manufacturing will endure. That

will make development harder for others

Mar 14th 2015

BY MAKING things and selling them to foreigners, China has transformed

itself—and the world economy with it. In 1990 it produced less than 3% of

global manufacturing output by value; its share now is nearly a quarter. China

produces about 80% of the world’s air-conditioners, 70% of its mobile phones

and 60% of its shoes. The white heat of China’s ascent has forged supply

chains that reach deep into South-East Asia. This “Factory Asia” now makes

almost half the world’s goods.

China has been following in the footsteps of Asian tigers such

as South

Korea and Taiwan. Many assumed that, in due course, the baton would pass to

other parts of the world, enabling them in their turn to manufacture their way

to prosperity. But far from being loosened by rising wages, China’s grip is

tightening. Low-cost work that does leave China goes mainly to South-East

Asia, only reinforcing Factory Asia’s dominance (see article). That raises

questions for emerging markets outside China’s orbit. From India to Africa

and South America, the tricky task of getting rich has become harder.

Work to rule

China’s economy is not as robust as it was. The property market is plagued by

excess supply. Rising debt is a burden. Earlier this month the government said

that it was aiming for growth of 7% this year, which would be its lowest for

more than two decades—data this week suggest even this might be a struggle

(see article). Despite this, China will continue to have three formidable

advantages in manufacturing that will benefit the economy as a whole.

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First, it is clinging on to low-cost manufacturing, even as it goes upmarket to

exploit higher-value activities. Its share of global clothing exports has actually

risen, from 42.6% in 2011 to 43.1% in 2013. It is also making more of the

things that go into its goods. The World Bank has found that the share of

imported components in China’s total exports has fallen from a peak of 60%

in the mid-1990s to around 35% today. This is partly because China boasts

clusters of efficient suppliers that others will struggle to replicate. It has

excellent, and improving, infrastructure: it plans to build ten airports a year

until 2020 (see article). And its firms are using automation to raise

productivity, offsetting some of the effect of higher wages—the idea behind the

government’s new “Made in China 2025” strategy.

China’s second strength is Factory Asia itself. As wages rise, some low-cost activity is indeed leaving the country. Much of this is passing to large low-income populations in South-East Asia. This process has a dark side. Last year

an NGO found that almost 30% of workers in Malaysia’s electronics industry

were forced labour (see article). But as Samsung, Microsoft, Toyota and other

multinational firms trim production in China and turn instead to places such

as Myanmar and the Philippines, they reinforce a regional supply chain with

China at the centre.

The third advantage is that China is increasingly a linchpin of demand.

As the spending and sophistication of Chinese consumers grows, Factory Asia

is grabbing a bigger share of higher-margin marketing and customer service.

At the same time, Chinese demand is strengthening Asian supply chains all

the more. When it comes to the Chinese market, local contractors have the

edge over distant rivals.

Deft policy could boost these advantages still further. The Association

of South-East Asian Nations (ASEAN) is capable of snapping up low-end

manufacturing. China’s share—by volume—of the market for American shoe

imports slipped from 87% in 2009 to 79% last year. Vietnam, Indonesia and

Cambodia picked up all the extra work. But ASEAN could do far more to

create a single market for more complex goods and services. Regional—or,

better, global—deals would smooth the spread of manufacturing networks

from China into nearby countries. The example of Thailand’s strength in

vehicle production, which followed the scrapping of restrictions on foreign

components, shows how the right policies can weld South-East Asian

countries into China’s manufacturing machine.

Unfortunately, other parts of the emerging world have less cause to

rejoice. They lack a large economy that can act as the nucleus of a regional

grouping. The North American Free-Trade Agreement has brought Mexican

firms into supply chains that criss-cross North America, but not Central and

South American ones. High trade barriers mean western Europe will not help

north Africa in the way that it has helped central and eastern Europe.

And even when places like India or sub-Saharan Africa prise production from

Factory Asia’s grasp, another problem remains. Manufacturing may no longer

offer the employment or income gains that it once did. In the past export-led

manufacturing offered a way for large numbers of unskilled workers to move

from field to factory, transforming their productivity at a stroke. Now

technological advances have led to fewer workers on factory floors. China and

its neighbours may have been the last countries to be able to climb up the

ladder of development simply by recruiting lots of unskilled people to make

things cheaply.

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Exports still remain the surest path to success for emerging markets.

Competing in global markets is the best way to boost productivity. But

governments outside the gates of Factory Asia will have to rely on several

engines of development—not just manufacturing, but agriculture and services,

too. India’s IT-services sector shows what can be achieved, but it is high-skilled and barely taps into the country’s ocean of labour.

Put policy to work

Such a model of development demands more of policymakers than competing

on manufacturing labour costs ever did. A more liberal global regime for trade

in services should be a priority for South America and Africa. Infrastructure

spending has to focus on fibre-optic cables as well as ports and roads.

Education is essential, because countries trying to break into global markets

will need skilled workforces.

These are tall orders for developing countries. But just waiting for

higher Chinese wages to push jobs their way is a recipe for failure.

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The Economist

Manufacturing

Still made in China

Chinese manufacturing remains second to none

Sep 12th 2015 | From the print edition

AMID ALL THE excitement about high tech and the push into services, it is easy to

forget that China’s modern economy was built on the strength of a solid and often

low-tech manufacturing sector. Now manufacturing is widely thought to be in trouble.

Factories are squeezed, labour costs are rising and jobs are being reshored to America.

Competitors such as Germany are said to be leaving China behind by using robotics.

Chinese officials have responded in the only way they know. In May the State

Council, China’s ruling body, approved “Made in China 2025”, a costly scheme that

will use mandates, subsidies and other methods to persuade manufacturers to upgrade

their factories. The plan is for China to become a green and innovative “world

manufacturing power” by 2025.

China is already the world’s largest manufacturer, accounting for nearly a

quarter of global value added in this sector. Research by Morris Cohen of the

Wharton Business School finds that the country leads in many industries and that

“reshoring to the developed economies is not happening on a large scale.” Even

though some production is moving to countries nearer its consumers, China remains

at the heart of a network known as Factory Asia. It has an excellent infrastructure and

an enormous, hard-working and skilled workforce. Though wages are rising, its

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labour productivity is far higher than that of India, Vietnam and other rivals, and is

forecast to keep growing at 6-7% a year to 2025.

Manufacturing is almost entirely controlled by private firms, both Chinese and

foreign, which unlike SOEs will not be pushed by bureaucrats into making

unprofitable investments. Marjorie Yang, Esquel’s boss, says that subsidies may feel

good but distort investment decisions: “The government loves to fund flashy

hardware and robotics, but there’s no money for the software and data analytics

needed to make proper use of it.” And in any case most of these private firms are

already innovating at a cracking pace without prompting from government.

Manufacturing is almost entirely controlled by private firms, both Chinese and

foreign

Michael McNamara, the boss of Flex, a big American contract manufacturer,

says product cycles have become much faster. Factories in China used to serve export

markets, but are now reorganising to concentrate on the booming local market. They

are sensibly investing in automation, worker training and new methods. In the

process, he says, China is “moving from work engine of the world to genuine

innovator”.

Liam Casey, an Irish entrepreneur who has worked in Chinese manufacturing

for two decades, believes that “a huge amount of innovation” is happening around

manufacturing supply chains. PCH, his firm in Shenzhen, is a supply-chain manager

that now helps foreign manufacturers with design and mass customisation. A private

firm with revenues of over $1 billion last year, it moves up to 10m components a day

and ships merchandise worth $10 billion a year.

Kirk Yang of Barclays, a bank, believes the manufacturing sector is moving

from “Made in China” to “Made by China”. In the 1980s and 1990s most factories

were owned by firms from Taiwan (like Foxconn) or the West (like Flex).

Increasingly, he predicts, the sector will be run by Chinese firms. Taiwan used to

dominate the market for upmarket electronics components, but he thinks many

Chinese parts-suppliers—like BYDE, an arm of the electric-car firm BYD—are now

excellent.

China is the world’s largest market for industrial automation and robots.

Ulrich Spiesshofer, chief executive of ABB, a Swiss engineering giant, reckons that

the latest robots “elevate the nature of work” because they improve safety and

eliminate the need for heavy lifting. ABB’s local engineers developed China Dragon,

a robot made specifically for the computer industry, which sells well globally. In

many industries China is still learning from the world, say the engineers, but its

electronics manufacturing is so advanced that “the world is learning from China.”

Mr Spiesshofer sees China pushing ahead with robots like YuMi, which was partly

developed there. This affordable two-armed creation (pictured above) can be

deployed safely next to humans on assembly lines and is able to do fine work like

inspecting phones for scratches. At its factory in Shanghai, ABB is scaling up YuMi

to mass production this month.

Terry Gou, Foxconn’s boss, claims that within five years the 30% of his

labour force doing the most tedious work will be replaced by robots, releasing them to

do something more valuable. The highly inventive firm, which holds many American

patents, is building all its automation in-house.

Staying ahead of the game allows manufacturers to keep their best clients.

Nike, a global sportswear firm, has seen a lot of its suppliers decamp to cheaper

Vietnam, but still gets 30% of its components from the mainland. Eric Sprunk, its

chief operating officer, looks for suppliers capable of developing novel techniques

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that can inspire new products.

We have a plan

What about the government’s “Made in China 2025” plan? It might succeed on its

more modest goals, says Stephen Dyer of Bain, a consulting firm. Its immediate aims

are to improve quality, productivity and digitisation, and to expand the use of

numerically controlled machines. All these things, he notes, are already in common

use by world-class manufacturers in other countries. A push to invest might well help

Chinese laggards catch up.

China’s state planners also want to help companies leapfrog to the forefront of

technology. Their plan involves policies to encourage the adoption of robotics, 3D

printing and other advanced techniques. But factories will invest in advanced kit only

if it makes commercial sense. “You can’t push this onto firms,” says Mr Dyer. “They

just won’t do it if it’s irrational.”

A visit to a middling factory in a middling city illustrates the point. The

Guangneng Rongneng Automotive Trim Company in Chongqing is not a fancy place.

Stock is piled hither and yon. Owned by a privately held firm, the factory makes

injection-moulded and welded automotive parts, mostly for Ford. Chen Gang, its

director of operations, says wages have gone up so much that he has to pay itinerant

workers the same as they can earn in Shenzhen.

He points to a fancy ABB robot on one side of an aisle that makes complex

parts to go on instrument panels. Across the aisle sits a Chinese robot made by Kejie,

which lacks the range and precision of the foreign model but is one-third the price.

And plenty of the work at his firm is, and will remain, done by hand. “China is

headed in this direction,” he says, pointing to the robots, but the pace of adoption will

vary from factory to factory.

Thanks to Deng’s liberalisation and China’s subsequent accession to the

World Trade Organisation, the country’s manufacturers rose to become export

powerhouses. Because exporters must compete in the global market, the weak and

inefficient—which includes most SOEs—have been driven out.

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