China to surpass USA as World Leader in manufacturing?

The headline in a June 2010 Financial Times article was bothersome. It chronicled “US Manufacturing Crown Slips”.

In summary, the article reported:

“The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.”

“Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.”

 

“If the figures are calculated in inflation-adjusted, constant price terms, then….the US will keep its top role in manufacturing…. On an inflation-adjusted basis….China is forecast to take over the number one position in manufacturing….”

In this article, population is a primary factor impacting the prediction. China is four times as large as the USA in terms of population. This size, coupled with a lower wage rate, estimated at one tenth of the average cost in the United States, makes it reasonable to expect China will surpass the USA in manufacturing production.

However, in my opinion, there are sincere problems with this premise. The USA is superior in several manufacturing categories, particularly in the innovative capability to create new products, technologies, and industries. A properly focused, capitalized USA manufacturing industry, can remain the world leader in output.

After having a number of business experiences within China, I now believe the Chinese will not retain the leadership in manufacturing in the world. I predict a pendulum will swing eventually. China will most likely stumble, similar to the historic decline of Japan’s edge in business.

I believe there are a number of problems which will challenge China in the future, mentioned in a previous posting, titled:“China – Its Past, Present, Future”. Here are a few examples:

1. Cost increases from unfavorable currency changes, productivity declines, wage increases, and social unrest as noted in a New York Times July 2010 article titled: “Supply Chain for iPhone Highlights Costs in China”:

“Wages in China have risen by more than 50 percent since 2005….this year many factories, under pressure from local governments ….have raised wages by an extra 20 to 30 percent.

 

China’s currency has also appreciated sharply against the United States dollar since 2005, and after a two-year pause by Beijing, economists expect the renminbi to rise about 3 to 5 percent a year for the next several years.”

2. China’s low birth rate and aging population will negatively affect economic growth eventually.

3. Capital will be diverted from infrastructure and commercial investments, in an attempt to solve intractable environmental conditions.

4. Poor manufacturing planning, particularly for productivity, will prove problematic. China’s manufacturing knowledge is not advanced, and is perhaps equal to the level within the United States in the 1970’s.

5. There is a reluctance for moving operations to China’s Western provinces. Many owners prefer the heavily populated, higher wage, land restricted East Coast, for all manufacturing facility locations. Simply because many reside in nearby Hong Kong – a preferred living location – which is a short ferry ride from China’s Mainland. Further complicating locating in the West is that it is difficult and expensive to recruit quality management to live far from the conveniences found in the major Eastern cities.

6. Another major obstacle to maintaining growth, is the real lack of freight forwarding capability within the country. China does not have the trucking capability to deliver components in an economical manner. Using the Chinese Railroad for product shipment is a problem, because of the exorbitant charges, uncertain train schedules, and costly damage rates.

However, every Country faces many challenges in their future. Especially the United States. The USA faces sizeable problems, which need to be addressed to be able to continue to compete, or to be considered the world leader in manufacturing.

For example, the quality of the management is a constant issue for any Country, especially within the USA today. In my personal experience, a number of Chief Executive Officers encountered are not the best, they simply lack the competence, vision, and discipline for the job. Having qualified ‘A – Level’ CEOs are necessary for any Country to remain a world leader.

Mr. David Farr, Emerson Electric Co.’s Chief Executive Officer published an excellent non-partisan analysis of the many difficulties facing business in the USA titled: “An Op-Ed on Federal Spending and Legislation”. Some of the issues he referenced are truly concerning:

The Federal debt level leaves the USA with a weak balance sheet, weak dollar and not fully capable of funding its capital requirements which will affect global competitiveness and investment in manufacturing businesses.

The new Healthcare legislation will significantly raise costs for operating companies which will reduce competitiveness, cash flow and earnings.

USA tax rates are higher than competitors in many European and Asian countries diminishing our ability to compete and maintain the cash flows needed for capital expenditures and other investments.

For further answers on the USA maintaining its world leadership role in manufacturing, see: “Can Manufacturing Return to the USA?

 

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