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China Needs a New Way to Manufacture Export Growth
Chinese workers check compressors at Dalian Bingshan Group Co., Ltd. on September 10, 2013 in Dalian of Liaoning Province, China. (Feng Li/Getty Images)

China Needs a New Way to Manufacture Export Growth

John Lee

China’s emergence as a central hub of global export manufacturing is well known. Becoming increasingly dominant in market share at the lower value-added end of the production chain, it is moving up the manufacturing value-chain whilst holding on to ground gained at the lower end. This means that while lower-skilled economies such as those in Vietnam, Cambodia and Bangladesh find it tough to compete with China for a share of lower-end production and assembly, China is now also eating the lunch of higher-skilled and middle-income countries such as Malaysia and Thailand.

But there are also challenges to China’s dominance in export manufacturing. For example, rises in manufacturing wage costs for firms located in China are much talked about. Unit labour costs in China for manufacturers are now rising above that of middle-income countries such as Malaysia and Thailand. Unit labour costs in countries such as Mexico are now cheaper than in China, meaning that American firms are now looking to their own backyard and not just East Asia to establish manufacturing plants.

But rising labour costs aren’t the only threat to Chinese manufacturing. We are now on the cusp of truly ‘disruptive’ manufacturing technologies that are making a significant impact on how the world makes things. Technologies such as robotics and 3D printing will dilute the traditional advantages that China has enjoyed, meaning that it will have to compete in different ways if ‘Made in China’ is to remain as ubiquitous as it has become over the past two decades.

China’s success in manufacturing, especially for exports, is hardly a new phenomenon in the region. It replicated the highly successful ‘East Asian model’ of development: using a plentiful supply of low-cost labour to produce goods for export at a more competitive price than rivals, and making it as easy as possible for advanced economy firms to locate manufacturing plants in the country through lowering regulatory barriers and offering tax and other incentives such as subsidies.

China also built excellent infrastructure to support export-manufacturing, adopted the historical regional practice of suppressing their currency to keep prices even lower, and also used its size and scale to develop highly beneficial ‘clusters’ of firms and industries to keep the virtuous manufacturing cycle going.

Such success has been based on leveraging its advantages in ensuring a plentiful supply of low-cost capital to help attract foreign firms, a cheap and plentiful supply of labour, offering superior infrastructure such as roads, rail and port facilities to foreign firms, and minimising obstacles such as rapid approvals to rezone land from residential to industrial when plants were needed to be built. That China could do these things faster and cheaper than its neighbours has been key to its competitive advantage.

This is where disruptive manufacturing technologies come in. The term ‘disruptive’ is overused. Something is truly disruptive when it changes the traditional sources of competitive advantage in a significant way. For example, improving the outsourcing of parts using new software is ‘innovative’ but not ‘disruptive’.

In contrast, robotics and 3D printing are genuinely disruptive.

Robotics drastically reduces the number of human workers needed. For example, in Toyota’s Motomachi plant in Yokohama, Japan, some 760 robots have replaced 96 per cent of human workers, which means that labour costs have become an insignificant factor in deciding where to locate manufacturing plants. Additionally, the kind of human workers needed in robotic manufacturing are highly skilled mechanical and software engineers, which play to the strengths of advanced economies.

3D printing is also genuinely disruptive, with potentially huge negative ramifications for China’s manufacturing sector. China has benefitted from the fact that the production of goods has generally been driven by the logic of large, centralised plants that enhance economies of scale. But 3D printing allows on-demand production, meaning that a large number of products will be produced locally or in close vicinity of the end-user. Even if the per-unit production cost is higher, this will be more than offset by the elimination of shipping costs and holding onto inventories.

Moreover, because the physical space needed for production in 3D printing is much smaller, huge availability of industrial land in industrial zones is less of a factor. Urban buildings in New York, Sydney or Tokyo will be able to easily house many 3D printing facilities.

Take the potential effect of 3D printing technology on car production. Currently, cars are made in just a few factories around the world, but the new technology means that they can be produced efficiently in every metropolitan area. Parts could even be made at dealerships and repair shops rather than in a massive factory in China.

These two technologies are disruptive because they change the trend away from large-scale manufacturing in a few giant centres defined by superior economies of scale toward small-scale, widely dispersed and tailored local manufacturing driven by a real-time demand basis.

Note that the top 50 companies in the world in both robotics and 3D printing are from advanced economy firms. It is no surprise that China is fighting to try and ensure that a highly virtuous ‘cluster’ of robotic firms and capabilities is to be based in China. In 2013, one in five manufacturing robots sold globally was bought by a China-based firm according to the International Federation of Robotics.

It could be that China emerges as a major centre for robotic manufacturing. But the point remains that its traditional advantages are being significantly eroded by these disruptive technologies.

China’s position in this new manufacturing world is also not helped by the fact that advanced economy firms — still the major drivers of global manufacturing — are seeking alternatives to basing plants in China because of fears about intellectual property theft and a number of political risk factors. In other words, the global advanced economies’ demand to hedge against over-reliance on China as the ‘factory of the world’ is high.

More generally, genuinely disruptive technologies tend to come from advanced economy firms. Japan, South Korea and Taiwan, in addition to North America and Europe, are leading the charge in these technologies. Not only China, but developing economies such as Vietnam, Cambodia, Indonesia and Bangladesh are seeking to emulate the export-manufacturing model of growth that high-income Asian countries such as Japan, South Korea and Taiwan (and Malaysia and Thailand, to a lesser extent) have done successfully. The trouble for these countries is that the world is changing so rapidly that they will need to adjust their strategies.

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