It may have passed under your radar in the global economic hubub, but Chinese manufacturing is in the tank and sinking deeper. While the economic meltdown threw a fair amount of gasoline on the fire, Chinese manufacturing was heading in the wrong direction well before the credit and capital markets went haywire.
The cost of labour in China is going up fast, fuelled by inflation (before the economic debacle) and by Chinese government actions. The goal of Chinese economic policy is twofold: first to draw in vast amounts of foreign – mostly American – cash. They have obviously met that goal very well. They also look to create jobs; after all they have 1 point 3 billion mouths to feed. Here they have come up short – about 300 million mouths short.
To correct this the Chinese toughened the minimum wage and overtime laws at the beginning of ’08. The idea was to cut back on hours worked so manufacturers would hire more people. The result has been about a 20-30% increase in labour costs, which was China’s stock in trade. Absent cheap labour, China is just a very, very far away place that manufactures stuff with dubious quality and absurd lead times.
Compound all of that with their lead-in-the-toys and toxins-in-the-milk-and-baby-formula fiascos, which led to tighter regulation and enforcement, which resulted in even more cost increases. Then throw in a taste of just how expensive Chinese logistics can be when oil is selling for over a hundred bucks a barrel, and the net result is 70,000 Chinese factories closing over the course of the last 12 months and more than 20 million more unemployed Chinese wrokers.
It will get worse for China before it gets better. In the long haul, China knows that their ‘One Child Policy’ presents a huge problem. As a Chinese friend told me recently, “Our family trees are all upside-down”. By that, he means that as long as there are >2 children per family there will be more young people working than old folks sitting on rocking chairs. One child per two parents, however, violates that basic law of maths. It is driving China to a population ageing condition that makes the retirement of the baby boomers look like a minor blip. Who is going to pay for the growing hordes of Chinese Geezers?
Add it all up and China’s days as a low labour country are rapidly winding down. This should come as no big surprise. As I have often written, no country can build a long range economy on the principle of low labour costs. It simply cannot sustain. India and Malaysia are already better deals, and Mexico is creeping back into the game.
Another guy I know who is in the business of beating the Chinese bushes to find sources for American companies put it this way: “They just don’t understand that they can’t survive any longer by saying ‘You buy – it’s cheap'”. What he meant was that the typical Chinese manufacturer knows and cares little about quality, customisation, delivery performance, lead times … all they know is low cost. And they have been able to get away with dismal quality and customer service because they were so cheap and could ship in big quantities. Now, as they lose that low cost advantage, they had better figure out the rest. In other words, China had better get on the ball with lean manufacturing.
Ironically, this means that Mexico will get another shot at the brass ring. They completely missed the boat in the 1990’s when they were the low cost country of choice. Instead of grabbing hold of manufacturing and taking it to a higher level, they were content to be a low labour cost enclave, and when they lost that edge, they lost it all. Mexico is beginning to look like they are worth another try – if they can stop shooting each other long enough to get serious about manufacturing.
Then next 5-10 years will be interesting. We shall see if China figures out lean manufacturing fast enough and well enough to remain a global manufacturing player, or if they settle back into being a regional producer for their own sizable market and the countries nearby. Given the dismal record of lean progress in China thus far, their prospects are not good. The few true lean experts trying to help them like McCain Koo have had too big a job to swallow alone.
Oh and that loud popping noise you hear from the east? That is the sound of millions of bubbles bursting in the hallowed halls of the academic elite who have preached long, loud and eloquently that China will be the centre of this flat world throughout the 21st century. It will also be interesting to hear the academic rationalizations for the failure of that prediction, and to hear their next grand global theory of why manufacturing is best performed anywhere but here.
You can read more about the evolving disaster in China in the Shanghai Daily, which I regard as about as good as you are going to get from still heavily censored China.
This post originally appeared at Evolving Excellence.
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