Automation and the Future of Chinese Manufacturing

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In a recent op-ed published in the Washington Post, Vivek Wadhwa speculates that “over the next five to 10 years, manufacturing will return, en masse, to the United States” because “China is no longer an attractive place for Western companies to move their manufacturing.” Wadhwa attributes this development to the rise of high technology in manufacturing. “After all,” continues Wadhwa, “American robots work as hard as Chinese robots.” Why move production to China when the cost of doing business domestically is now the same?

Well, in short, we disagree with this point of view. Here’s why.

First of all, anybody who’s been in the sourcing business for more than a day can plainly see that Chinese manufacturing is still much cheaper than in the U.S. Wages in China remain significantly lower and, while we would never begrudge anybody their right to a little editorial exaggeration, this point of Wadhwa’s is just plain false.

But from an importer’s point of view, China brings three distinct advantages to the table. Wadhwa names two of them: cheap labor and lax regulations. However, the massive size of its productive forces, China’s most significant advantage, is entirely glossed over. China is home to the world’s largest workforce — more than 770 million people are employed in China. And from the late 1970s forward, China’s government has enacted policies aimed at making this workforce as attractive as possible to foreign investors.

The continuous flow of foreign capital into the Chinese manufacturing industry has resulted in the building of more and more factories, and the hiring of more and more manufacturing workers. From 2003 to 2014, manufacturing employment in urban China has risen both in raw numbers and as percent of the total workforce: from 32.4 million workers employed, or 15 percent of the total workforce, to 52.4 million workers in 2014, or 20 percent of the total workforce. And as the workforce grows, so does the domestic Chinese demand for consumer goods. This only further encourages growth in manufacturing.

No other country in the world is capable of producing as much industrial output as China. And these numbers have been rising for over a decade. Compare this to the U.S., where the manufacturing workforce shrunk from almost 15 million workers to about 12 million during the same period.

Even if the U.S. acquired China’s “advanced manufacturing technologies, such as robotics, 3-D printing and the Industrial Internet,” could it also develop the raw materials processing and importing infrastructure to handle the same volume as China? And within five to ten years?

To be clear, a low-cost manufacturing infrastructure in the U.S. that’s capable of producing at such economies of scale as China would certainly be a welcome development. However there is absolutely no indication that something like this could happen within the next five to ten years, as Wadhwa suggests, or even the next fifteen or twenty. On the contrary, every indication is that U.S. manufacturing will continue its slow climb out of the 2008 recession, while China continues to develop at breakneck speed.

But what about automation?

Wadhwa’s op-ed speculates that China’s turn towards automation and robotics will actually eliminate their competitive edge. If China is using the same machinery at the same cost as factories in the U.S., why pay to ship production off to China? Again, we have to look at the economies of scale at play here.

Take Walmart for example. Its undoubtable supremacy in the brick-and-mortar retail industry is due to its ability buy and sell at higher quantities than any other retailer. It isn’t as though Walmart has access to technology that other retailers lack; it’s their size that gives them their biggest advantage.

The same is true of China. China’s huge share of the global manufacturing market is decisive here. If automation ever is introduced into China on a wide scale, it’ll result in increased productivity on top of its already huge productive capacity. To put it simply, if the technological playing field were leveled between China and the U.S., China would still have the advantage of its size.

So what’s the outlook on China?

The introduction of robotics and automation into Chinese factories does have the potential to create a stir. One the one hand, it could result in a drastic rise in the productivity of Chinese manufacturing. But the Chinese government’s focus over the past three decades has been both developing industry and maintaining job creation. If automation really threatened China’s huge manufacturing workforce, as Wadhwa’s op-ed suggests, China’s government would react swiftly to crush the threat and maintain their manufacturing dominance.

Chinese manufacturing isn’t going anywhere, and in fact has the potential to continue growing.

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