The End of Cheap China — But Not China Manufacturing

The End of Cheap China – Yes and No
Yes, the cheap China era is over, but China manufacturing isn’t

Pivoting off of a post by China Law Blog from the other day, entitled The End of Cheap China, With a Giant Caveat, it is worth examining a few points about the relative decline of Chinese manufacturing output and the potential for these jobs to come back to America. But before I get started, consider this:

When it comes down to it, how many of you want your kids to work in a factory, mindlessly putting together toys, sewing socks, breathing in industrial pollutants and dreaming of a better life for $7.00 an hour and few, if any, benefits?

How many of you want your kids to enter fields where machinery, automation and robotics increase productivity at the cost of a shrinking and unneeded workforce? Is that the future you want for your kids and country?

Right. Wouldn’t you rather have them working in knowledge based jobs, or in high tech manufacturing jobs that require skill, ingenuity and which command premium salaries?

So, while the end of cheap china is here, it is relative, and China is still a relatively good bargain because:

1. It does not appear likely that China will make enough progress in building a service and consumer driven economy in the next five years to make up for a major loss or move away from manufacturing. It would be politically and economically impossible for the Government to allow that to happen.

2. China’s interior provinces are still a viable alternative to the more expensive and saturated coastal cities. The 12th Five Year Plan makes clear that more equal development and sharing of wealth is a priority. Companies can take advantage of lower costs and great incentives by producing/sourcing in non-traditional areas. Of course this needs the continued build-out of infrastructure and supporting services but Chongqing is a good example of how it can work and we believe the trend will continue.

3. America can not, and will not, win back the low value-add, commodity based manufacturing jobs it once had. If these jobs leave China, as some already are, they are going to SE Asia and South America. The US and Europe need to focus on the high-value add, technology driven export economy that Germany has perfected and which keeps it in the black.

4. China is working toward moving commodity based manufacturing inland, but is also developing higher value-add and higher technology manufacturing in the coastal areas. It is NOT abandoning manufacturing and has the money to support and subsidize it where needed. In other words China will move from selling toothpicks to the machines that make them (formerly bought from Germany).

5. China still has stellar infrastructure, with scale, built for manufacturing and export that the likes of India can’t compete with.

6. China for China – As more and more Western companies turn their focus to China as a market, they are shifting their in-country manufacturing and sourcing to creating products for China, as well as export. We expect that this will have a positive effect on China’s overall manufacturing out put in the next five years.

7. All things being equal, American retailers are not yet willing to pay the premium that MIA products command and will not be willing t pass those costs on to customers.

8. As a new generation of entrepreneurs and factory owners rises many of the old inefficiencies, quality problems and lack of understanding regarding the needs of Western markets will begin to fade providing a new advantage for China.

All this being said, it is likely that China’s economy will cool a bit in 2012 and there are major shifts taking place in the manufacturing sector, but China needs to employ a lot of people to stay afloat and for the Party to maintain legitimacy. Right now that still means a lot of manufacturing jobs, of both the commodity and high value add sort.

We see the rapid decline of China manufacturing and the rapid rise of Amero-European manufacturing to be highly exaggerated. In the end the likely and hopeful scenario is that America starts producing high-end products that produce high end wages and leave it to China and the rest of the developing world to provide the rest.