Can U.S. Manufacturing Outcompete China?

Chinese companies have been taking larger shares of the global manufacturing market, outpacing many of their U.S. counterparts primarily due to lower operating expenses and favorable labor costs. Yet many of China’s advantages are eroding while U.S. manufacturing is becoming more competitive, meaning that the scales may soon tip in favor of American industry.


For over a century, the United States manufacturing sector was the largest and most advanced in the world. While it remains technologically sophisticated, U.S. manufacturing has ceded much of its market share to Chinese companies in recent years and, according to some reports, China’s manufacturing sector outgrew that of the U.S. for the first time in 2010.

But the conditions that have made China factory-friendly have begun to fade, while U.S. competitiveness is on the upswing. Is the momentum of industrial growth shifting back to the U.S.?

China is a Giant…

China’s rapid rebound from the global economic downturn was largely driven by its manufacturing sector, which has expanded at a record pace in recent years. Between 2008 and 2010, Chinese manufacturing grew at an average rate of 20.2 percent per year. In 2010, Chinese manufacturing output climbed to 19.8 percent of the global total, surpassing the U.S.’s 19.4 percent and dropping U.S. manufacturing from the top spot in global rankings for the first time in 110 years, according to the Financial Times.

Moreover, China’s manufacturing production totaled $1.96 trillion in 2010, up 9.3 percent from 2009, while U.S. production was valued at $1.95 trillion, a gain of only 6.6 percent from the prior year. Chinese growth has been astronomical in the 21st century. In 2000, Chinese industrial output accounted for just 6.9 percent of the world total, but grew to nearly 20 percent 10 years later.

“Between 2000 and 2010, the number of jobs in American manufacturing fell by 34 percent; it was, in all, a loss of six million jobs,” MIT’s Technology Review explains. “Much of that labor was not eliminated by declining demand for goods, or by automation of production, so much as it moved. The United States is no longer the largest manufacturer in the world; that honor now belongs to China…”

The pace of expansion can be seen across a range of industry groups. According to Business Insider, today China exports more than twice as many high-tech goods as the U.S. and is also the world’s top energy consumer. In 2010, China produced more than twice as many cars as the U.S., as well as 627 million metric tons of steel, compared to the U.S.’s 80 million metric tons. America’s trade deficit with China, which is currently the largest trade gap between any two countries in history, is expected to cost roughly half a million U.S. jobs each year.

Much of the strength of Chinese competitiveness derives from the fact that it’s cheaper to do business there. The combination of a large manufacturing base, relatively low labor costs and numerous support policies have made China an extremely attractive option for international business.

“Based on research regarding the actual conditions in China, we believe that the main drivers of competitiveness in China’s manufacturing industry are labor resources conformed to the structural transformation of [the] manufacturing industry, quality of infrastructure, the government’s scheme for sustainable support to technical research and local business dynamics,” according to a recent Deloitte report.

The low cost of labor, large workforce and economies of scale have drawn major brands to Chinese manufacturers, particularly in the textiles and electronics industries. The advantages conferred from government support are also a major advantage, as low-interest loans from China’s state-owned banks have lured many companies, including U.S.-based firms, to shift their operations overseas.

“Over the last 10 years, China has mounted the biggest challenge to the U.S. manufacturing sector ever seen, threatening producers of steel, chemicals, glass, paper, drugs and any number of other items with prices they cannot match,” Forbes.com warns. “China’s intensely mercantilist government is engaged in a global campaign to become the world’s dominant manufacturing nation, and no U.S. company on its own can hope to compete against state-subsidized Chinese enterprises.”

…But the Tide is Turning

Despite its rapid growth over the past decade, many of the advantages that have fueled the expansion of Chinese manufacturing are beginning to deteriorate, and the exponential gains made by Chinese manufacturers seem increasingly unsustainable.

“[T]he era of cheap China may be drawing to a close,” the Economist explains. “Costs are soaring, starting in the coastal provinces where factories have historically clustered. Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labor.”

Chinese labor costs have surged 20 percent per year for the past four years, and its most productive industrial centers are increasingly losing the ability to draw cheaper labor from inland China, while corruption and piracy are also degrading profitability. Labor costs for blue-collar workers in Guangdong, a key manufacturing region, rose by 12 percent a year from 2002 to 2009, while in Shanghai costs rose by 14 percent.

According to a study from consultancy AlixPartners, if China’s currency and shipping costs were to rise by 5 percent annually and wages were to go up by 30 percent a year (both within range of current growth rates), by 2015 it would be just as cost-effective to produce goods in North America as it would be to manufacture them in China and have them shipped overseas.

“[S]tamping out products in Guangdong Province is no longer the bargain it once was, and U.S. manufacturing is no longer as expensive,” Wired Magazine reports. “As the labor equation has balanced out, companies — particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry — are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet.”

Apart from China becoming less cost-effective for business, recent economic conditions in the U.S. have also boosted manufacturing competitiveness. A May report from the Boston Company identified several key factors that have strengthened American industry, including:

  • A depreciated dollar that has reduced the relative costs of manufacturing in the U.S. and made U.S. exports more globally competitive;
  • Lower natural gas prices that have reduced input costs for many manufacturing activities, particularly in energy-based industries like petrochemicals and steel;
  • A slowdown in global supply chains, which has made offshoring less effective due to longer transport times;
  • A rise in global volatility, which has made management teams less likely to view transportation, wages and currency as predictable factors, and consequently driven them to reduce their exposure to risk by operating within the U.S.; and
  • Concerns over intellectual property violations and quality control that have greatly boosted the “nearsourcing” movement.

In addition, the U.S. remains one of the most advanced manufacturing nations in the world, with technological capabilities and expertise that enable the production of extremely sophisticated products, as well as an entrepreneurial culture that actively generates new ideas and inventions.

“[T]he U.S. still is very competitive in the types of products that demand a high level of technology, engineering and capital to produce. In such industries, wages don’t matter quite as much, and the U.S. can capitalize on its clear advantage over emerging markets like China in expertise, technology and innovation,” TIME Magazine notes. “That’s why the U.S. sells Boeing aircraft to China, and the Chinese sell blue jeans to Americans.”

 

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Resources:
Emerging Economies Flex Manufacturing Muscle
by The Financial Times, March 14, 2011
Building the Future
by MIT Technology Review, February 2012
47 Signs That China is Absolutely Destroying America
by Business Insider, Feb. 1, 2012
Click for more
Comments:
  • July 10, 2012

    Three decades ago, the U.S., Western Europe and Japan thought that China would be a huge market for their products. They soon realized that they could make money by taking advantage of China’s low-labor costs, its eagerness to learn and to sacrifice the environment for the pursuit of wealth. Now, the “teachers” have become aware that the former “student” may become a rival. Money makes the world go round indeed.


  • Richard Williams
    July 10, 2012

    With all the technological advances the US has along with some other European countries, you would think that by now we would have been able to breech the barriers of greed. I guess not and so we pay the price for allowing modern Benedict Arnolds from giving away US jobs to China. Our fault for sure. But our Fed Gov., shares in the blame by making it almost a hostile environment to do any manufacturing here. I am all for safety on the job but some things are in the extreme and cost the owners heavily. We might do better by getting rid of Washington


    • Boris KHutoretsky
      November 27, 2012

      I remember in the 80s how my company (Control Data) engaged in this short term thinking, and believed that they will sell millions of our equipment to China.
      We know it did not happened and we know why, but many sales organiusatios got screwed by this mentality, forfeiting patent protection alarms from the engineers, who were worried about Chinese customers prying proprietary information that was not available to local customers, but was given to Chinese in the name of the expected huge sales.

      Well hopefully we have learned the lesson, we really have nobody to blame but ourselves. It is time to start raising our yong generation in the tradition of what America once was and can be again. WE need to teach them work ethics, job skills and such rather then give them education that is for the most part useless and leaves them unfit for any real jobs.


    • Dave
      November 27, 2012

      I for one second that! Local and state governments have a better grip on what they are capable of in the manufacturing world then the Fed Gov. Washington is now just a quagmire of ineffective policies and grown men that act like 3year old\’s fighting over toys.


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