China’s Angst: When Low-Cost Manufacturing Dies

Global manufacturing is in transition. The advantage of Chinese manufacturers is slipping, and every day brings more news of another American manufacturer gaining (or recovering) a little piece of market share.

As both a college lecturer and strategic adviser to firms on both sides of the water, I’ve watched this process unfold for several years. And while we hear a lot about the Chinese economy from an American perspective, we don’t hear much about China from the Chinese point of view.

The truth is, the Chinese are becoming quietly desperate. They know that they are no longer the low-cost place to manufacture, but they don’t know what to do about it.

Many of these companies built their entire business model around cheap labor. Now that advantage is gone. Most Chinese business owners realize that they need to radically change their thinking about concepts of quality and productivity. But meanwhile they are suffering serious cash flow problems, and the shakeout is going to be very noticeable.

The response of typical Chinese manufacturers to this new climate is very similar to the response of many American manufacturers in the 1980’s, with similar results.

Here are the commonalities that I am seeing, none of which really make the Chinese manufacturer stronger:

1. Denial. They blame current difficulties on external challenges, not on their own outdated business models.

2. Frustration with employees. Chinese business owners are unhappy with their workers. In the past, workers would accept low wages and long hours without complaint. Now, workers demand high wages and will quit if they don’t like the job. The managers don’t understand how to manage without being autocrats, and that doesn’t play well with the younger generation.

3. Frustration with bankers. Chinese banks for many years did whatever was necessary to maintain the growth. Now the easy loans are gone, and factories are saddled with debt. They can only pay the debt if they grow, and they can only grow if they take on more debt. It’s a classic cash-flow problem that won’t be resolved with the current business model.

4. Moving factories to cheaper labor pools. Factories along the coast are moving inland, or to other Asian countries, or to Africa.

5. Focusing on the domestic market. Many companies see Chinese customers as their only hope for survival. Expect the Chinese government to come under extreme internal political pressure to put up fences to protect these firms from foreign competition.

6. Taking the profits and getting out. Millions—literally, millions—of Chinese business owners are trying to pull cash out of their businesses and move them to the Unites States, Canada, or Europe. They are concerned that a Chinese government in need might not respect their ownership of property, so they are transferring these assets to nations with laws that allow stronger property rights.

Two other factors in America are helping this trend. First, in case you hadn’t noticed, America has debts it cannot likely pay back. Debts that cannot be paid are resolved by a transfer of collateral assets. Properties are for sale. Second, older Americans who hold assets are motivated to sell as they reach retirement, and few young Americans have the ability to buy. (As an American, I don’t think this trend is all bad.  It’s a solution to a problem.)

The Chinese government has laws that limit outbound asset transfers, but citizens are routinely finding ways around those laws. Their need to earn a return on these investments is only a secondary consideration. The first consideration is capital protection.

Did I paint a bleak picture for Chinese business? Don’t get me wrong. Despite these challenges, China is still strong in manufacturing. I believe in the future that China will be even stronger. But the future will belong to a new set of winners who have a business philosophy that is very different from the “low-cost labor” model that worked for 30 years.

I try to discourage American business owners from thinking of these trends as nationalist competition. Try to see strategic opportunities for partnership in these trends. The Chinese are generally quite patriotic, but they admire the U.S. and place a very high value on developing equal cross-border relationships. Global winners in the next generation will need those relationships and partnerships to capture market share here, there, and everywhere else.

Stay tuned for my next article on how I believe the best Chinese companies will get through this transition. (Hint: The winners will follow the American manufacturing playbook, refocusing on quality and productivity.)

Photo by China Photos/Getty Images.

Find out more about MJ McKay Strategic Consulting.


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16 thoughts on “China’s Angst: When Low-Cost Manufacturing Dies”

  1. Anon E Mouse says:

    We are consumer goods company manufacturing in China. we probably will leave China because there is no respect for IP, trademarks, or copyright. If you manufacture in China, it WILL get stolen and counterfeited. The cost of these counterfeiters is far greater than any potential savings in labor and COGs.

    1. Doug says:

      Unsure that’s a good solution, because they will bootleg your product regardless where you make your product. So if getting ripped off is a given, you might as well manufacture in China and enjoy the manufacturing cost savings.

      1. Narg says:

        True… though there’s a difference in bootleg when the product in question is reversed engineered, or if the product is copied exactly because they have your blueprints. The classic risk versus reward scenario, but the risks are growing larger and the rewards growing smaller. Plus for some firms, having the product manufactured outside of China is good for PR purposes… and good PR can make incredible sales.

  2. pbernasc says:

    the truth is .. American workers are now enslaved .. so yeah .. manufacturing is back , forced labor that is .. Thank you

  3. Layne says:

    Due to the rapidly onrushing trend toward automation, robotics and new technologies such as additive manufacturing, future industrial jobs will be held by a relatively few with highly advanced technical skills. However, a mass market possessing average income levels capable of absorbing production must exist in order for this model to be successful, which would necessitate the proportion of people employed in services to expand and wages to rise. But–this is not occurring now on a significant scale and there’s no reason to believe it will happen going forward. Conclusion: systemic collapse.

    1. Jason says:

      I would have to agree, the fact that our companies are very top heavy doesn’t help the economy either.

  4. Martin Grafilakis says:

    One growing and prevailing element not mentioned in the article is the grass-roots movement promoting the boycott of Chinese products. Americans are increasingly unhappy and showing it by choosing American-made over Chinese products. People have come to understand that when they buy American, their money stays in America, ultimately benefiting every single American.

    1. Jared Keller says:

      That, and the crap from China doesn’t last very long. Their quality is abysmal at best.

      1. Douglas Chew says:

        Like China today, there was a stretch of years when “Made in Japan” was the laughing stock of manufacturing. Then they slowly proceeded to become a respected threat in consumer electronics, photography, and the automobile industry.

        My impression is that China is going through their version of an Industrial Revolution, They will likely outgrow this phase of development and find some balance.

        Further, physicist Michio Kaku claims by 2050 85% of the world’s middle class will reside in Brazil, Russia, India, and China. If you believe Michio Kaku, I don’t think that means China will get there by turning out crap that they do today.

        Place your bets, gentlemen.

    2. yeh sure says:

      I call BS. I buy Chinese stuff carefully, not any old thing will do. I am rarely if ever disappointed. I can buy many tools for example from Harbor freight 3-5 times over for what American stuff costs and the American stuff is only 10% better if that. To claim all Chinese stuff is junk is to display silly nationalistic traits. I just bought a 7″ Chinese tablet off alibaba. $59 +$4 shipping from China. Only 1 GB of flash but has a camera, wifi, autorotation, capacitive touch, a small battery (too small) a camera and a reasonable color lcd display. The plastics look good and it works well for what I’m using it for. Tell me which US manufacturer will provide a $63 7″ android 4.0 tablet to your doorstep?

  5. Thilde says:

    I am a new manufacturer in the US. Interesting times indeed. Sewn products still need skilled human labor to sew. Not sure our American work force is skilled enough or willing to do this type of work. Most of the work is done by Chinese immigrants, older women. The young folks, regardless of their ethnic background are not interested in hovering over a sewing machine all day. Most people have no idea how much work goes into producing sewn apparel. We’ll see what happens.

  6. Thilde says:

    I am a new us manufacturer. Interesting times.sewn products still require skilled human labor to sew. Most young people have no interest whatsoever in this work, especially Americans but all immigrants, too. Most people have no idea the work that goes into producing apparel. This is a big deal. Many things that we take for granted are endangered. The 90s made us spoiled. I’m still hopeful, though. It’s exciting.

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