Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why China is likely to remain the ‘world’s factory’ for some time to come

Economics / China Economy Nov 13, 2019 - 11:04 AM GMT

By: Submissions


US tariffs have hit the manufacturing giant to the tune of $35 billion, says a recent UN report. But companies have found that China’s rivals are a poor replacement.

In December 2018, about five months after US President Donald Trump imposed tariffs on China to correct the US trade deficit with Beijing that stood at $419 billion (2018), analysts at the Boston Consulting Group said that despite challenges such as rising wages and escalating trade tensions with its trading partners such as the US and Japan, “it is reasonable to assume that China will remain manufacturing’s center of gravity for the foreseeable future”.

It was easy to be sceptical of this assessment given the number of companies that announced plans to move manufacturing out of China following the imposition of Trump’s tariffs. One of them was the world’s largest bicycle manufacturer, Giant.  “We started moving before he [Trump] shut his mouth,” said its chairwoman in an interview to Bloomberg in June 2019.

As the tariff war escalated over the next few months, with Beijing retaliating by imposing tit-for-tat tariffs,several other companies were forced to shift US-bound production out of China.

Vietnam, Thailand, India and Mexico were seen as alternatives.

But slowly, a realisation dawned. Companies found it was certainly possible to move manufacturing out of China, but it wouldn’t be easy and it certainly wouldn’t come cheap.

Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible, announced a Wall Street Journal news report in August 2019. The article detailed how Vietnam was a poor substitute for China because it didn’t have the ability to manufacture to scale and neither did it have a skilled labour force of the kind taken for granted in China. “The reordering of supply chains is likely to leave China with a diminished but still significant share of the pie,” the article said.

On November 5, a report by the UN trade agency, UNCTAD (United Nations Conference on Trade and Development), said though US tariffs resulted in a $35 billion hit for China, US-bound trade doesn’t seem to have completely moved out of that country. Chinese firms have “maintained 75 per cent of their exports to the US, despite the substantial tariffs imposed”, it said.

The report also found that the business that China lost because of the US tariffs had not moved to America. The biggest beneficiaries were Taiwan ($4.2 billion), Mexico ($3.5 billion), the European Union ($2.7 billion) and Vietnam ($2.6 billion).

Most of the costs of higher US tariffs on Chinese goods had been passed down to American consumers and companies, the report found, citing data from January-June 2019.

So was the Boston Consulting Group’s China forecast right after all? Punitive tariffs or not, is China likely to remain the world’s factory for a few more years? Here’s why that is quite the possibility.

Pic 1: The inside of a factory in China. Photo credit:Cory M Grenier/Flickr (Licensed under: CC BY-SA 2.0).

China’s cost competitiveness

China has a manufacturing output of around $2 trillion – the world’s largest – according to a Brookings Institution report of July 2018. The US followed with $1.867 trillion, Japan ($1.063 trillion), Germany ($700 billion), and South Korea ($372 billion).

China has a 15-year head start – whatever you want, someone’s doing it…You can’t just shift your business to Vietnam and expect to find what you’re looking for,” the operations director of a company that had moved some US-bound production to Vietnam following the trade war told the WSJ. The company, which makes large pumps, was facing problems in Vietnam such as finding qualified foundries and raw material.

The WSJ’s report focused on Vietnam, but the stories of production problems companies faced there could well be narrated by foreign manufacturers parked in any other developing nation looking to fill China’s shoes.

China sourcing is popular for manufacturers because China is cheap. Your injection mold or die cast component can also be manufactured in your home country, but China offers competitive prices, which businesses and end customers always find attractive.

It is a common misconception that Chinese manufacturing is competitive because of cheap labour. That may have been true when the country started its journey to become the world’s factory about 15 years ago, but as economic growth has pulled more and more Chinese citizens out of poverty, and the standard of living has increased, labour costs in China have gone up steadily.

Despite this, China has managed to retain its manufacturing competitiveness mainly due to its supply chain efficiency, which lowers costs. There are two main factors that facilitate this efficiency.

1.      China’s industrial clusters.

2.      Its export-oriented transport infrastructure.

Pic 2: Workers in a Chinese factory. Photo credit: Robert Scoble/Flickr (Licensed under: CC BY 2.0)

China’s industrial clusters

Let’s take a quick look at China’s industrial clusters through the example of an assembly line.

In an assembly line, the production process is broken into many small steps that each worker, trained specifically for that task, completes in a particular sequence. It allows factories to hire lower-skilled workers who are cheaper, and because all inputs are within arm’s reach, the product is assembled faster. Increased productivity and lower wages lead to increased profits or cost competitiveness.

This is how Henry T Ford did it.

The pioneering American industrialist’s decision to introduce the moving assembly line in his Ford factories in 1913 revolutionised the automobile industry. In doing so, Ford managed to cut the price of his Model T from $850 to less than $300. It paid off. By 1927, Ford had sold more than 15 million cars worldwide; they accounted for 50% of all automobiles sold.

China has perfected the assembly line on a massive scale in its industrial clusters. These are huge zones that operate as giant assembly lines that feed one particular industry. The clusters contain an array of linked factories each of which contribute one component to that industry.

Factories in China’s Socks City, for instance, offer everything to do with socks – from machines to threads and packaging material. Located in Zhejiang Province, it makes 30% of the world’s socks.

There are similar industrial clusters for shoes, toys, plastics, electronics and so on. The clusters give these industries a supply-chain related efficiency that other countries are yet to match.

At the micro level, the massive production capacity of Chinese factories allow them to achieve economies of scale that factories in other countries find it difficult to match.

All this gives China a cost competitiveness over its competitors.

Pic 3: An elevated expressway in Shanghai, China. Photo credit: David Leo Veksler/Flickr (Licensed under: CC BY 2.0).

Export-oriented transport infrastructure

The other advantage China has over its potential competitors in South Asia is its massive export-oriented logistics infrastructure. A web of highways and ports allow raw materials to reach factories, and completed goods to be ferried out swiftly. All this leads to production efficiency and lower costs.

The infrastructure of countries such as India and Vietnam are yet to catch up even as Beijing continues to spend on infrastructure and China has started investing in higher-end manufacturing. Their factories do not have the production capability, skilled labour force or logistics infrastructure that companies take for granted with Chinese manufacturers.Bottlenecks in logistics lead to costly delays, which is why their manufactured goods struggle to match the price competitiveness that China offers.

This is why though it is not impossible for these countries to challenge China’s dominance in manufacturing, it may be a few years and a lot of effort before they can do so.

By Alizay Mark

© 2019 Copyright Alizay Mark - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in