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.

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67 thoughts on “Myth of China’s Manufacturing Prowess

  1. 1. Actually if we include the environmental impact as cost, it is highly probable that China is running manufacturing operation with negative margin.
    2. It is irrelevant whether who is the biggest. It is more relevant who has the highest economic value add (EVA) or IRR
    3. Using the historical population migration patterns of the developed countries, we are staring at the tip of an iceberg on the growth of available Chinese manufacturing labor force. Where will the jobs come from? I think creating job is now the highest priority for the central government to maintain low unemployment rate.

  2. This was an eye-opener for me and I’d like to share it with my readers. Will you send me an email and let me know if that would be alright?
    Your web site is very well done. I have a number of Chinese readers who will enjoy it and learn from it. Thanks for what you shared and taught us. Regards, Marc

  3. Good article and great perspective. I wish more people viewed themselves as citizens of the world. We would have fewer problems.

    Lawrence York

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  6. Partially true but it misses the point. China uses its manufacturing and export subsidies not just to keep the masses employed, but largely (I’d say primarily) as a way of getting technology for free. That’s always been the endgame, and that’s what it still is. Remember, this is a country run by engineers. When China feels it no longer needs to steal Western technology, the doors will close and a large number of boots will contact a large number of foreigner behinds. It’s puzzling to see that so many choose not to see this when the writing is on the wall.

  7. Helen, This is a good article. I am constantly surprised at the negative emotions evoked by the growth on China. This is a good way to address the fears. well done.

  8. When China feels it no longer needs to steal Western technology, the doors will close and a large number of boots will contact a large number of foreigner behinds.</

    Sure that’s the Chinese plan.

    It wont work though. The culture that favors stealing will never the producers in its own country.

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  12. Helen,

    Good article, but misses the real point. China sells labor. Therefore, two issues make China the largest manufacturer in the world,

    1. If one were to measure manufacturing in UNITS rather than in DOLLARS, the conclusions in your well written article won’t hold up…China would be the largest manufacturer in the world. Given the disparity of the cost of labor, transportation prices, etc. one cannot use dollars as the measure.

    For example, for the average $700 retail value of a laptop computer manufactured in China, only $15 stays in China (source, Andy Rothman, “Reinventing China”. The good news is that it leaves a great deal of the Retail Value in the hands of the supply chain. The bad news, is that this low cost skews the dollar based value analysis.

    2. With the cost of labor in the U.S., if a machine can replace several laborers, the U.S. uses it. The U.S. (as an example) is only doing higher value manufacturing as all the lower skilled manufacturing has been outsourced.

    Since American labor cannot compete on a cost basis, American’s are upset by the NUMBER of U.S. jobs being lost, even though they may be replaced by 5 to 25 Chinese workers.

  13. Great article. Due to the nature of my work i am always being asked about China and when they are going to “take over the world” (politically and in business) and i often use examples similar to those listed in this article to explain that the US is still the worlds largest manufacturer. This blows people away every time.

    I personally think that shifting the lower value jobs to china increases our global competitiveness – we become more technologically advanced, our companies revenues grow because our products become more competitive, and our people are forced to educate themselves. All of these things allow our business (small, medium and large) to prosper, create more jobs and ultimately create more value for our nation.

  14. @pau:

    All developed countries except for Britain entered the world economy by providing low-cost labour and exporting cheap goods.

    Should Britain have taxed Swedish imports in the 1860s?

    The world economic history is “deja vu all over again”.

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  16. the disk drive industry makes an interesting case study.
    a couple of decades ago all disk drives were made in the U.S.
    then a factory was established in Singapore, then another and another.
    Singapore got too expensive, drive manufacturing shifted to Malaysia. Malaysia got too expensive, drive manufacturing has shifted to thailand and now to mainland china.
    this phenomena is occurring across multiple geographies in lots and lots of specialized industries.
    this gives me general optimism about the world as a whole. a tiny bit of prosperity, education/literacy, a ray of hope, some positive view of the future will erode hate and conflict and erode the influence of the crazies who make a career of creating conflict.

  17. Actually the manufacturing output numbers mean nothing. How much does a Boeing 777 contribute? Maybe 100 mil?

    On the China side, how much does an iPhone contribute? Maybe $2?

  18. I agree with Derek. How many of those supposedly manufactured goods in America actually use parts manufactured in the USA? I’d be willing to bet that most of the high tech/electronics/aviation products produced in the USA use parts made in China, since most component part (chips, transistors, capacitors, diode, etc…) are not made in the USA anymore. That being the case, then the numbers really mean nothing.

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  20. The point here is that machine Vs labor, 1 high tech machine is basically equivalant to about 25 chinese labor. I see no harm in that the govt of china trying to keep umemployment at lower levels by providing mass employment opportunity.
    This acts to the advantage of the developed nations also as their goods become competitive in the market. How long will this cycle last is questionable though?

  21. I’d like to know how many jobs in China (and India) are the direct result of Western companies. Are we talking 10 million jobs? 100 million? I’ve never seen an estimate before. Just a lot of rhetoric.

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  23. Yup good article Helen, I always like to tell my Chinese friends in China that China is still way behind the USA and it will still be some time before they (China) catches up

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  25. I wonder if I can trouble you to post a link for your source

    GDP & breakdown at current prices in US Dollars
    -all countries for all years
    -manufacturing (ISIC D)

    I was checking this and it seems slightly different from what you’ve posted, maybe I’m not reading the right thing?

  26. I just know China copying a lot of things, and sell it for a cheaper price. But anyway, quality is not the same 🙂 Though nowadays i see Chinese is doing great progress, and sooner or later it’ll becomae the greatest country again, as in the far far past!

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  28. Moving manufacturing offshore is moving it outside of your direct influence and control. This is the cost of the dollar saving that China deliver to Australian manufacturers. It’s all about the balance between how cost effective is your management of additional ‘troubles’ that introduced by outsourcing versus cost saving generated by outsourcing.
    Some companies manage it by transferring only small or simple parts manufacturing offshore, not the whole product. In this case companies that specialize in outsourcing can help a bit by resolving a lot of issues on your behalf in China:

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