Just Cheap Labor? How China Became a Manufacturing Powerhouse

"Chinese wages are 2.5x higher than in Mexico or 5x higher than in Vietnam"

Many people have simple narratives about China’s rise as a manufacturing powerhouse. And this misunderstanding (ignorance?) is also the reason why the same people believe that multinational corporations are going to quickly move or re-shore factories out of China. The logic behind this narrative mostly boils down to, “China has cheap labor and thus became a manufacturing giant.”

For starters, if poverty is the sole requirement to become a manufacturing center, obviously every other developing country would have performed well. Consider this: while China and India have almost the same population, China’s manufacturing is almost 10x India’s. Thus, let’s analyze this phenomenon more closely.

China’s growth in manufacturing over the last forty years has been nothing but astonishing. Consider that, in 1980, US manufacturing output was almost five times as large as China’s. However, just thirty years later — in 2010 — China surpassed the US as the world’s #1 manufacturing country. This was also quite momentous, since the US had been the manufacturing leader for the previous 110 years!

One more astonishing data: in the last one year, China’s trade surplus in manufactured goods was … whopping $1 trillion.

Of course, cheap labor made a big difference in the 1980s, 1990s and even until 2006 or so. However, after that, China’s wages caught up with other middle-income developing countries. Now, Chinese wages are 2.5x higher than in Mexico or 5x higher than in Vietnam.

Thus, while the Chinese wages tripled over a decade (2008-2018), China’s share of global manufacturing value added almost doubled from 15% to 28%!

So, obviously, there’s lot more than cheap labor. In fact, there are dozens of holistic factors that make a country a successful manufacturer. (Not all of them are positive — for example, lax environmental laws — but that’s the dark side of manufacturing). Understanding these will help see what a daunting challenge foreign companies will face in finding new countries to replace China.

There’s no one magic bullet, and all the ten factors listed below are critical:

**1. Skilled, Productive and Disciplined Labor: Yes, more than being cheap, even the lowest paid workers must have all these three qualities. The people making shoes or assembling gadgets still need skills and consistency. Products and requirements change all the time, and the workers should be able to adapt. Moreover, these people must show up for work every day and consistently perform. In many countries, you can’t find such high-quality workers.

**2. Medium and Hi-tech Manufacturing Factories: A plastic toy or a bulb may seem very simple, but there’s a lot of chemistry, metallurgy, materials science, and much more behind how to make them from raw materials. Now imagine TVs, car engines, etc. Factories need very sophisticated engineers to make the products to specifications at the right cost. There’s a lot of innovation here behind the scene. Here’s a quick note from Tim Cook (Apple’s CEO) on this topic:

**3. Producing at Scale: Assembling 100,000 iPhones a day requires a totally different factory from the one that churns out 1,000 smartphones a day — every process will be different from end to end. Automation, smart factories, robots, and 5G will be increasingly crucial in the factories of the future.

Since 2016, China has been #1 in purchase of industrial robots. Last year, China installed more robots than US, Japan, South Korea and Germany *combined*!

**4. Elasticity and Flexibility: Can you handle a sudden extra request for 1 million new gadgets to meet demands for Christmas? Can you quickly switch from one version to a newer version of a product? For example, China was able to rapidly build huge mask factories and COVID19 testing labs within 2-3 weeks.

**5. Design to Prototypes to Products: Customers just come up with vague or highly complex product designs and then expect the manufacturer to do all the work. Chinese firms have so much talent and experience that they can often create a prototype within a couple of days. And these firms must be creative enough to suggest alternative designs and features. These are invaluable skills that just can’t be developed in a few months.

**6. Logistics: How do you make sure that the parts and raw materials are always available for the factories? How resilient, agile and efficient are your supply chains? How do you manage all the workers? How about testing and shipping out all the products on time? How do you work with customers from all over the world and deal with different languages, legal issues etc.?

**7. Infrastructure: The Chinese government has to make sure that the factories have land, electricity, water, buildings, warehouses, roads, Internet etc. And they must be affordable. These may sound easy to someone in the US, but developing nations like India or Indonesia may struggle to provide high-quality infrastructure. For example, until recently, massive power outages used to be very common in India. Check out this video below of the world’s largest container port in Shanghai. It is now automated and run by robots, autonomous vehicles and 5G. There’s no other seaport like this in the world.

**8. Transportation: Although this falls under infrastructure, it must be spelled out. A bullet train that reduces travel time by 60% … deep sea ports that can handle massive ships and millions of containers … new strategically located airports all over the country … freight trains that can travel thousands of miles (like from Xian, China to Barcelona, Spain) … these are monumental projects in which no country can match China. This is why Xi Jinping’s Belt and Road Initiative is truly visionary.

**9. Ecosystem: This is a unique success factor for China. There is an ecosystem for every kind of factory. For example, a clothing factory would greatly benefit if there are dozens of nearby factories that specialize in different kinds of materials — cotton, wool, silk, denim, nylon, polyester etc. Similarly, a smartphone company would like to work closely with other firms that specialize in microphones, speakers, cameras, screens, printed circuit boards etc. Other services experts such as international lawyers, marketing consultants, and designers are also indispensable. Without such 360-degree ecosystems, no country can expect to be a manufacturing superpower. Shenzhen, the electronics capital of the world, is a stellar example of such ecosystems.

**10. Tax Breaks, Subsidies, IncentivesTrade Agreements: Finally, you need a very smart and visionary government that plans 5, 10, 20 years in advance, makes huge investments, knows how to attract and keep foreign and domestic investors, provide tax cuts and subsidies, negotiate smart trade agreements etc. to create a win-win environment.

So, these are the secrets behind China’s success. Other countries can try to replicate this model, but they need to be prepared to invest a lot and plan for the long term. While low-end manufacturing will move out of China because of high Chinese wages and China’s desire to improve its environment, Americans shouldn’t dream of quick decoupling or re-shoring factories. This is why 75% of US manufacturers in China say they won’t move any production out of China! Moving out of China in any meaningful way will take a decade … if other developing nations execute their manufacturing strategy flawlessly.

Bonus: China exported whopping 150 BILLION surgical masks to the rest of the world between March and September of this year. How? Even electric car companies like BYD converted some of their factory spaces into hi-tech and automated mask production:

Source: World Affairs

  1. cechas vodobenikov says

    “Tsarist Russia is more free and just than amerika where corporations rule and Robbery and thievery is made official”. Vissaron Belinsky
    also something examined by Robert Michel: “iron rule of oligarchy”
    it has also been observed that the anglo economic model contrasts with the “Rhine model” observed in most European nations
    Certain cultures—Asians, Jews, cherish education, not for status or income, but for enrichment and development. the anglosphere has always been anti-intellectual and amerikans hostile to education, something observed by many


    RISE OF the KINGS OF the EAST…
    all those companies that sold out and sent our jobs overseas

    1. cechas vodobenikov says

      required by amerikan consumerism—the need to “keep up with the Jones”

    2. someone curious says

      please evaluate what you mean

  3. The Globalist says

    China’s economy (in PPP) will be twice that of the US in less than 15 years, as it drives the 4th industrial revolution. And nobody is going to take it away from them. They have organized a society that is working quite a bit better than ours at improving people’s lives.

    It is time for us to look for ways to work with China rather than being vindictively trying to stymy them at every move and causing WWIII. Send half a million Americans to China to study Chinese, hire Chinese economic and other specialists who actually have been born and raised in China (rather than some white guy from London). Improve our education system to do better, also focusing more on engineering and so on. We have to up our game, folks, study their successes and emulate them!

    Let’s integrate with China as they have done with us. We are not going to beat them.

  4. Curmudgeon_49 says

    It’s never been about low wages. Put China aside for a minute. Almost 50 years ago, US corporations started blaming unions for high wages. Forty years ago, both Germany and Japan had higher average industrial wages than the US, yet both were producing high quality products at competitive or lower prices. Thirty five years ago, Lee Iacocca said the cost of health insurance was putting the US auto industry at a 30% disadvantage, as all competitor countries had some sort universal system that cost manufacturers much less. Thirty years ago, it was revealed that in Japan, Heads of large corporations made less than mediocre middle managers in US competitors. Twenty five years ago, I read an article about Jaguar, Mercedes and BMW. In the latter half of the 80s all 3 had dated designs and falling market share. All 3 went to their version of Wall Street with substantially the same plan: a massive re-tooling and re-design that would produce little or no profit for 5 years, but in the 5 years following, would produce more profit than doing nothing for 10 years. Frankfurt bought it and advised the shareholders not to sell, London did not, and advised shareholder to sell. Jaguar, strapped for funds, had to delay their plan and was bought by Ford for a song. Today, Jaguar is not a competitor for BMW or Mercedes. Whose advice was the correct one?
    The problem is the US business model (which it shares with the UK) that thinks this year`s profits not long term profits is the way to go. It is part of what the Germans used to call the Anglo disease. The other part of that disease is shoddy workmanship and low interest in improving products or correcting flaws.

    1. cechas vodobenikov says

      partly–however, the absence of industrial policy in USA and the lack of cooperation amongst manufacturers in USA increases costs. in many nations engineers from each enterprise develop particular systems, i.e., steering boxes, drive trains, etc for economy, mid level and luxury vehicles that are shared and due to economy of scale are less costly

    2. ted richard says

      you are quite right but the problem was not the corporation fault. it began in the united states in the mid 1950’s. short term gains at the expense of longer term compettitiveness and larger profits. wall street demanded of companies improvement in next quarters earning to the detriment of reinvesting capital for long term health. by the 1970’s it was already too late for most us corporations whose upper management were either enslaved to the wall street demand for higher next quarter earnings or else to point they began off shoring production to cut labor costs and insurance costs to keep up earnings growth.

      now its too later for the usa without hitting the wall and starting over again at colassal social cost

    3. The Globalist says

      You made a lot of interesting points. Thanks.

  5. freewheelinfranklin543 says

    They were built up with western money and technology and we opened our markets to their goods. Best enemy money can buy.

    1. Saint Jimmy (Russian American) says

      They were built up by those with no loyalty to any country – multi-national corporations. Multi-national corporations only have loyalty to profits. They are now more powerful than any single government. That should be a very, very scary thought for all of us, as they are like sharks… literally like sharks with no soul. They don’t care about countries or ideologies or cultures or morals or ethics or people.

    2. The Globalist says

      Truthfully, our corporations piled into their country like it was a gold rush, thinking we were going to make a killing. Pretty short sited. Should have done much for forward planning and working together like they did.

      Having said that, a lot also has to deal with the hegemony of the US Dollar and keeping the Dollar strong, forcing manufacturing offshore. Our government trying to control the world ended up gutting out our manufacturing.

  6. Jihadi Colin says

    “…until recently, massive power outages used to be very common in India.”

    “Until recently”? When did those massive power cuts stop? Mumbai’s entire grid was down just the day before yesterday!

  7. ke4ram says

    It goes without saying that in the beginning the move to China was low wages and the lax environment laws. The Chinese were low skilled and it took 30 years to train skilled workers and build new modern factories. While they were up skilling and building new factories the USA was down skilling and its factories were rusting. Today, no factories and few skilled workers. It would take the US 30 years to rebuild its production just as it took China.

    China’s wages are growing which is why American corporations are slowly moving to India, Viet Nam, Mexico and else where.

    As for the 150 billion useless face diapers,,,lol,,, that is one of the reasons they are being mandated otherwise there would be 150 billion useless face diapers gathering dust on store shelves. Today they’re decorating the worlds parking lots, roadways and parks and just blowing around in the wind.

    1. geronimo says

      Same was said about Japan lsat time. Same could have been said about good old USA in the late nineteenth/early twentieth century period.

  8. Carlos Muro blacker says

    And lets dont forget that China was beg to open their country to foreign investment by HENRY KISSINGER and RICHARD NIXON both under orders to do so by the Planners of the NEW WORLD ORDER, the ROTHSCHILD and their vision for WORLD DOMINATION.

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