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 They blame current difficulties on external challenges, not on their own outdated business models.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