The Hollowing Out Of Chinese Manufacturing

Wolf Richter's picture

Wolf Richter

The great American manufacturing renaissance? Maybe not. But China is losing the low-wage edge. With manufacturing already in the doldrums, dizzying wage increases, long a reality on the factory floor, have become government policy last fall: the new leadership of the Communist Party wants disposable per-capita income to double by 2020.

Regional governments, authorized to set their own minimum wages, responded. In April, Shanghai raised its minimum wage by 12% to 1,620 yuan ($260) per month, the fourth year in a row of steep increases. Shenzhen raised it to 1,600 yuan. In 2012, minimum wages were boosted in 23 provinces and large cities. So far this year, 14 provinces and cities have already made the move. Wages above minimum have jumped as well.

In the Pearl River Delta, overall manufacturing wages jumped 9.2% this year, up from last year’s 7.6% increase, according to the annual survey by Standard Chartered. Three quarters of the companies expect wages to rise 10% over the next 12 months. And an analysis by the Japanese business daily Nikkei determined that China now has the highest per-capita labor costs among emerging Asian countries, after they climbed 60% from 2009 through 2012!

Results: price increases, particularly in coastal regions, that may be even steeper than wage increases; and manufacturers that are seeking to cut their exposure to these ballooning wages.

Every major automaker in the world has been investing billions every year in China to build new plants and increase production capacity as China has moved from an automotive backwater to the largest market in the world. Hence, a daily litany of announcements by Ford, VW, Nissan, BMW, even gasping PSA Peugeot-Citroën, that they’d build another plant. Bailed-out GM is among the leaders of the pack, plowing US taxpayer billions into plant, equipment, and jobs in China. They’re all frantically producing for the Chinese market – stimulated by rising wages and a flood of money. Exports come later, once Chinese demand stalls, and when “overcapacity,” already a dreadful word in the auto business, will take on new shades of meaning.

But they all have to deal with rising labor costs. So strategies are shifting. Companies are using more of what they’d been using for decades in developed countries: automation. Hardly anyone welds manually at assembly plants in high-wage countries. But they do in China. And it’s getting expensive. Nissan for example. About 65% of the welding at its Dongfeng Nissan No. 1 plant, which came on line in 2004, is done by hand. At its No. 2 plant, which began operating last year, only half of the welding is done by hand; the rest by robots. A reaction to the annual 10% wage increases.

Manufacturers in the Pearl River Delta told Standard Chartered that wage increases have been absorbed by higher productivity as output per worker has risen faster than wages, thanks to investments in technology. And they’re planning to increase these investments – to replace workers with automation. The hollowing out of manufacturing. Now even in China.

Other companies in the survey plan to move manufacturing inland, where wages are lower. And many plan to offshore production to cheaper countries. This trend is particularly strong among companies producing for export.

Ito-Yokado, which operates 175 superstores in Japan and is part of Japan’s largest retail group Seven & i Holdings, is shifting its production of clothing from China to Myanmar, among other low-wage countries, to cut its reliance on China from 80% in 2011 to 30% this year. Consumer electronics company Funai Electric – the main supplier of electronics to Wal-Mart and Sam’s Club – expects to shift 90% of its production in China to cheaper countries.

A trend confirmed by a friend of mine, an executive at a US company. They manufacture big-ticket consumer products with plenty of unique technologies that get pilfered in China, where they’d set up shop a few years ago, under pressure to bring down costs. But they pulled up their stakes in 2012 and shifted production to North America – well, Mexico.

Companies are always searching for the greener grass, and offshoring by companies in China will continue. It shows up in the numbers. Manufacturing has been growing at anemic rates, or not at all – despite the booming auto industry – while other sectors, such as the property sector, are in the middle of a powerful bubble. But companies with a good reason to stay in China, like automakers, are plowing fortunes into technology and automation to cut down on workers.

Robots are the great equalizers. They’ve become outright cheap, and unlike wages, they cost the same everywhere. A Chinese company investing in automation in order to overcome rising wages, ironically, loses is low-wage advantage over competitors in developed countries – and will have to compete eye-to-eye. Meanwhile, jobs will be lost to robots or will migrate to cheaper countries. Ultimately, it conforms to the goals of the Chinese leadership to push production and wages up the pyramid, away from the curse of low-wage manual work that any robot can do for less. But hollowing out manufacturing, as it has been done so successfully for decades in America, comes at a price.

In America, aircraft maintenance was a highly paid blue-collar job that required education, training, manual skills, and brains. It was one of the perfect middle-class jobs with generous healthcare, retirement, and vacation benefits; and free flights! They were working for icons like Delta, American Airlines, Continental, TWA, or Pan Am. Icons indeed! Read.... When Flight Safety Gets Outsourced To China

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moneybots's picture

" Corporate profits have no allegiance, as well as no borders."


Apple is borrowing money as corporate profits do have borders.

moneybots's picture

"The only question is, what wil we all do when there are no manufacturing jobs left around the world?"


The question is what are we going to do when artificial intelligence and robotics replaces all jobs, including the CEO?



moneybots's picture

"A Chinese company investing in automation in order to overcome rising wages, ironically, loses is low-wage advantage over competitors in developed countries – and will have to compete eye-to-eye"


They will have to compete robotic eye to robotic eye.



shovelhead's picture

I always thought the Chinese were missing out on a great marketing deal.

Instead on making Nikes and Adidas, they could market their own brand called 'Running Dog Imperialist' sneakers with little pictures of Mao on them and a snappy quote from his book.

They only come in red.

They would be a big hit in both Cambridges.

MrBoompi's picture

China is also engaged in a race to the bottom. At least some of their inflation is making its way to manufacturing jobs, unlike the US, but as a result they will lose jobs to countries like Bangladesh and Vietnam. Corporate profits have no allegiance, as well as no borders.

SmittyinLA's picture

Robots are the great equalizers. They’ve become outright cheap, and unlike wages, they cost the same everywhere.

Not with CO2 taxes, with CO2 taxes robots cost less everywhere else  and those same taxes divert pollution to the 3rd world

Shizzmoney's picture


Robots are the great equalizers. They’ve become outright cheap, and unlike wages, they cost the same everywhere.

And they don't complain, need vacations, bathroom breaks, etc.

Indonesia, Vietnam, and India are the countries that China is losing workers to (at least from my experience).

Element's picture

If so, the golden-age of Chinese manufacturing was a short-period ... frankly I'd never buy a Chinese anything if I could buy a Japanese version of the same item at a significantly higher price, because I'm confident the Jap stuff will be refined design, great materials, engineering and work reliably for years, and have a parts and maintenance system that also is reliable.

For that reason I've always considered Chinese manufacturing to be hollow.

malek's picture

So now even local automation counts as "hollowing out", not just exporting the whole production to a different country?

An Orwellian redefinition of terms really.

Mark123's picture

As a child, we were told the world's biggest problem was over-population.  We did not need all those people working on farms anymore....and in the west our population began to shrink.  That was good in my opinion....less stupid suburbs, highways, shopping malls, condos, crap etc etc.


So what did we do?  Opened our borders to a bulging 3rd world population to keep the economy going (housing, malls, highways, fast food etc).


Dumb and dumber.

Herd Redirection Committee's picture

It was good for big business, because it put downward pressure on the wages of lowest earners.  "Think your special?  We can get Jose here to do the work for $14/day!"

And it was good for gov't.  More people to take care of, more people that are dependent on the gov't, means bigger gov't.  Bigger gov't means more power and more money.  A sociopath's dream.

Stuck on Zero's picture

I would feel more secure flying a plane that had been maintained by my own countrymen.  They have a stake in the game as there may be some of their own relatives aboard.


Aegelis's picture

Once they pass the Robot Equal Rights Amendment, robots will get paid and taxed.  Problem solved.

ZeroPoint's picture

The race to the bottom picks up steam. Soon, there will be only robots, with no one to buy the products they produce.


Aegelis's picture

Robots will be programed to buy the products based on supply-demand algorhythms.  Problem solved.

longwind's picture

Informative as usual, thanks Wolf. How long before their economy principally produces authentic Communist Party Capitalist Roaders, Rentiers, Running Dogs and Real Magic Renminbis?

Encroaching Darkness's picture

Adapt, reposition and create new ways of earning a living. It's what the buggy-whip makers, 8mm camera companies and bias-ply tire companies did, and what endless companies have done for centuries.

New paradigm, same as the old paradigm: adapt or perish.

Bankers R Wankers's picture

Good post, high wages and 3-D printing will be the end of low wage manufacturing, I was at home depot on Sunday looking for a replacement piece for my vaccumm breaker and the OEM piece from the manufacturer was $35 and made in China, right next to it there was an exact replacement made here locally (Denver) with a 3-D printer for $24, after comparing and installing I must say the 3-D piece is not only a perfect fit but the plastic pieces seem to be of higher quality than the chinese crap. The only question is, what wil we all do when there are no manufacturing jobs left around the world?

Ghordius's picture

bloodthirsty, BattlegroundEurope2011?

BigJim's picture

Shift from taxing income to taxing the monopolisation of natural resources (land, electro-magentic spectrum, oil, coal, etc) and put everyone on a low allowance to stop them revolting.

Herd Redirection Committee's picture

The world has so much wealth its unbelievable.  Look at a satellite image some time.  So much farm land has been plowed, rice paddies,  orchards planted, infrastructure built, its astounding.  The problem is that wealth is VERY tightly concentrated, in only a few hands. 

The wealth gap is the real problem.  And its not even the gap that is the problem so much how the wealth was acquired (fraudulently, and via theft, predominantly). These people have more money than they could ever spend.  How can their fortunes affect the economy?  In general, they can't, it can only affect real estate prices, bonds, equities, precious metals, etc.