The news is full of data about China’s uptick in economic performance. Figures for the most recent quarter  show GDP, exports, and manufacturing output up more than expected. While the news may have brought cheer to the third plenum in Beijing, longer-range trends paint a gloomier picture. China is headed for economic upheaval.
China’s factories have made so much so cheaply for so long, that they are by far the world’s biggest producer. Currently China’s manufacturing value added exceeds U.S. producers  by more than 20%. But it looks like the party is coming to an end. Industrial experts and economists see dark clouds on the horizon threatening China’ global dominance. The International Monetary Funds already forecasts working-age population  will peak in a couple of years and then sharply decline, ushering in widespread labor shortages and higher-cost workers.
Wage escalation has already begun in the coastal industrial provinces. Manufacturing Trends and News reports Chinese labor costs going up  15% to 20% per year, compared to only 2% for U.S. industries. Since Chicago-based Prince Industries opened its plant in Shanghai a decade ago, wages have gone up  by an average of 12% annually, says its CEO, Mark Miller. An American firm with contract factories on China’s southern coast complains that labor costs have been rising  by 12% annually.
But the pricing problem for China goes beyond hourly wages. China’s productivity growth is running out of steam, concludes the Ernst and Young global consultancy from a survey of managers  at 1,700 Chinese companies. Further, China’s currency has appreciated  25% against the U.S. dollar over the last decade. A knock-on effect has been to make shipping Chinese goods to overseas customers more expensive.
Ernst and Young expects the Chinese government in the coming years to increase pressure on companies to raise productivity. Mainland manufacturers’ responses will have to go beyond simple cost cutting. Investment in technology and innovation will be needed. But Chinese producers will also have to compete on new and unfamiliar ground. As Ernst and Young puts it, factories “will need to make much deeper and longer lasting improvements in their management and operational practices.”
This is bad news for Chinese companies with their fossilized cultures. It is good news for American manufacturers. Factory managers in the U.S. are innovating production systems that take advantage of unique features of workplace cultures to dramatically improve manufacturing productivity—which result in powerful and unmatchable competitive advantages. I will talk about those singular American advantages in a future blog.
Fred Stahl is the author of Worker Leadership: America’s Secret Weapon in the Battle for Industrial Competitiveness (MIT Press, Fall 2013). He can be reached at email@example.com.