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May 31, 2006
The Problem with Chinese Manufacturing in Two Easy Paragraphs
In yet another article on labor shortages, a couple of short paragraphs explain some of the big problems affecting the Chinese manufacturing industry:
Since China initiated reform and opening-up policies in late 1970's, noted Prof. Wen Tiejun with elite Remin University in Beijing, factories and enterprises, obtaining cheap land thanks for governmental preferential policies and mainly engaging in processing materials supplied by overseas clients, have mushroomed in southern and eastern China cities.
The factories and enterprises reaped profits by capitalizing on cheap land and labor resource, but did not establish their own brands and intellectual properties, as they failed to inject enough input into research and development. Therefore, overproduction and excessive competition emerged in the country's manufacturing industries. For the sake of survival, some factories kept the salary at a low level for the rural migrant workers without buying their social insurance, Wen said, adding that poor salary and welfare system cooled the migrant workers' zeal for working in cities.
And some rural labor began returning home because of poor welfare system for migrant workers in cities. . . .
In just a few lines, you can get an explanation for:
--Why a "low cost labor advantage" is ephemeral
--Why China has a trade deficit with the rest of Asia (much of its manufacturing base is devoted to "processing materials supplied by overseas clients")
--Why Chinese officials are placing such an emphasis on upgrading technology and enhancing research & development
--Why China's equity markets, this year's surge notwithstanding, have been relatively lousy over the last several years
--Why value-added manufacturers in the United States (and the West generally) who make innovation a priority don't have to cower at the mention of "China"
--Why some Chinese manufacturers will find it increasingly attractive to locate facilities in the United States
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