China Gains on U.S. Manufacturing

We often forget that the US is still the largest manufacturer in the world even though the percentage of people working in manufacturing has shrunk. It's made possible by leveraging each manufacturing worker with tons of high tech capital equipment (i.e. machines). And just to quell the people who bemoan more efficient manufacturing as a threat to jobs, it actually means that our manufacturing workers can earn substantially more than, say, China because each man can create much more value due to the higher amount of machinery leveraged to his manual labor.

If you want manufacturing workers to earn high salaries, they will need to have lots of machinery backing them up. Physical strength only creates so much value (almost none) without the help of machines. Anyhow, it appears that the recent downturn in US manufacturing plus the effects of Chinese government stimulus (it's growing employment at all costs to avoid social unrest), means that China could overtake the US as the world's largest manufacturer sooner than expected.

Anyone who walks the aisles of a U.S. retailer might think China already is the world's largest manufacturer. But, in fact, the U.S. retains that distinction by a wide margin. In 2007, the latest year for which data are available, the U.S. accounted for 20% of global manufacturing; China was 12%. The gap, though, is closing rapidly. According to IHS/Global Insight, an economic-forecasting firm in Lexington, Mass., China will produce more in terms of real value-added by 2015. Using value-added as a measure avoids the problem of double-counting by tallying the value created at each step of an extended production process.

As recently as two years ago, Global Insight's estimate was that China would surpass the U.S. as the world's top manufacturer by 2020. Last year, it pulled the date forward to 2016 or 2017.

"The recent deep recession in U.S. manufacturing does mean that China's catch-up is occurring a few years earlier than would have been the case if there had been no recession," says Nariman Behravesh, the group's chief economist. U.S. manufacturing is shrinking, shedding jobs and, in the wake of this deep recession, producing and exporting far fewer goods, while China's factories keep expanding.

I'll just add that perhaps what we are seeing is a more flexible economy (the US) readjusting during a downturn vs. a less flexible one (China) simply expanding due to government support for a lot of inefficient companies (for fear of rising unemployment and the social unrest which could result from it). Longer term, as the US economy reallocates workers and investment into new productive manufacturing ventures, the forecasts for China overtaking the US could be adjusted back into more future years. The goal is not lots of manufacturing, but lots of sustainably profitable manufacturing. Hopefully right now the US is shedding the inefficient bits and freeing up people and capital for investment in better ventures.

Comments

[ed233:]

What is your point for this article? Machinery is not necessarily the answer it generally displaces workers. The USA unimployment figures are expected to exceed 10% adjusted in the next few months. The real figure could be as great as 15%. You seem to be suggesting that's okay because compared to China their job situation although better in terms of quanity of workers employed contains lower paying unworthy jobs. Give me a break. Convince the millions of US unemployed lining up for food stamps and hand-outs. A job not only puts money into your pockets for food on the table but it also has a huge psychological effect that represents a man's worth. Try going out and do some physical work and you'll understand the other side. LOL Looking after your money.

Aug 03 09:49 AM

[Tony Petroski:]

Very good article.

From the author: "I'll just add that perhaps what we are seeing is a more flexible economy (the US) readjusting during a downturn vs. a less flexible one (China) simply expanding due to government support for a lot of inefficient companies (for fear of rising unemployment and the social unrest which could result from it)."

Precisely. The Chinese situation reminds me of something I read in the autobiography of Albert Speer, Hitler's architect. Speer lamented the fact that during the war, as he was in charge of coordinating defense materials, he was unable to shut down the lipstick factory as Hitler was worried that it would hurt morale even as in the U.S. and Great Britain, they were on a war footing with no frills. The Chinese political problem will bite them at some point. In the meantime, all is well, just as Hitler slept reasonably well in the fall of 1944.

Aug 03 09:53 AM

[Billy Gee:]

The author's hope for freeing up people and capital for new ventures is coming true -- statistical unemployment nearing 10% and real unemployment at probably 16%. Let us hope that these new ventures arn't more gift shops but rather export oriented to free markets so that the permanent loss from home equity loan sourced consumption is made up for.,.

Aug 03 12:28 PM

[Billy Gee:]

Apologies to ed223 for repeating the uneployment figures but I was so incesned with the delusional author I had to write a comment before reading the other comments!

Aug 03 12:33 PM

[Dave Wrixon:]

What a load of tosh!

Yes, you economic advantage has been built on the premium and productivity derived from past Capital Investment. But this is not a reason to herald the success of the US. The current problems result from the fact that in recent years the Lions Share of that crucial investment has been channeled overseas are your cutting edge industries have gradually been decaying into rust belt.

Because China has been receiving massive amounts of Capital Investment both from internal and external sources the balance of power has been shifting ever fast to the stage where it is now beyond the Point of No Return. And there is no indication that the investment environment in the US is improving. Indeed, it is getting worse by the day because Government Debt means that companies are about to get taxed out of existence. Even if the tax burden falls on the employees the wage pressures are going to rise.

By contrast there is a super abundance of investment capital in China and as the financial regulation is eased this is only likely to accelerate.

Aug 03 12:58 PM

[HaavBline:]

The author is clearly thinking wishfully without presenting any evidence to support his optimisim. Though it is more important to be lucky than to be right, and I sure hope he is lucky.

Our retiring babyboomer generation surely need to hope that their childrens will be much more flexible and adaptable then they did themselves in the 2nd half of last century. Given that we will be very heavily in debt, young Americans will need to be flexible about who they work for. (Those with money to invest.) Given that our education achievement has been quite mediocre, young Americans will need too be flesible about their job options. Given that we have huge unfunded social programs, we will need to be very flexible about shouldereing a much heavier tax load.

So, I wish the author will be lucky.

Aug 03 04:10 PM

[expat in China:]

Machinery is not as flexible as a human and an investment in capital equipment is mostly when labor cost get out of hand!

Look at (OEE) Over all Equipment Efficiencies and yes America is productive but if you look at (OFE) Over all Factory Efficiency then China is winning hands down.

GE states buy America but is spending in Asia, look at GE's job opportunities. At this very moment GM is looking for 30 billion in value added assemblies from Asia/India (not the mid west).

Aug 04 02:56 AM

[Road Runner:]

I agree with "expat in China", and disagree with the author's statement that US manufacturing is more flexible than China manufacturing. I believe the opposite.

The US is heavily dependant on machines for manufacturing, whereas the Chinese are heavily dependant on manual labor. It is much easier to retrain people to do relatively simple assembly-line functions than it is to retool, or replace, machines that perform the same function. Also, there is often a long lead time to acquire new machines. And, there is an upfront expense to buy manufacturing machines that make them expensive to replace leading to a resistant of manufactures to quickly replace them when a new and better manufacturing process or product comes along.

An example of this is the Chinese battery and auto manufacturer BYD. They have determined how to manufacture Li-ion batteries using low tech machinery and lots of manual labor. The conventional wisdom was that battery manufacturing had to be automated in order to maintain quality. That is why the US has done well in manufacturing batteries. But, apparently, BYD is proving this conventional wisdom wrong.

A big outcome of BYD’s high-labor, low-technology battery manufacturing is the company’s ability to grow very rapidly. There is no long lead times waiting for manufacturing equipment to be delivered. There is less financial demands put on the company to buy and/or finance this new equipment.

Aug 04 12:48 PM

[Vincent Fer...:]

Road Runner, my flexibility I am referring to the economy. The US is more able to let companies go bust, let go workers, and then have new companies, with new jobs get created. China has tons of state run companies that it won't let collapse even if they are uncompetitive because it fears the social unrest that the resulting unemployment could cause. That's what is meant by flexibility, it's in regards to the country's overall economy. In the same vein, the US is a more flexible economy than that in most European countries. Hope that clarifies the matter.

Aug 04 12:54 PM

[coreopsis:]

Care to clarify?


On Aug 04 12:54 PM Vincent Fernando wrote:

> Road Runner, my flexibility I am referring to the economy. The US
> is more able to let companies go bust

Like Citibank, AIG, General Motors?

let go workers, and then have
> new companies, with new jobs get created.

Such as?

Aug 05 10:27 AM

[Vincent Fer...:]

Yeah the US isn't perfect. And it has shown itself to be far less flexible than once believed given the bailouts for companies during this crisis. But come on, it is still far from being china with its huge, government-supported state owned enterprises.

In terms of new companies, and new jobs: you don't think new companies will start, or successful ones will expand over the next few years? This would fly in the face of 200+ years of US economic history. You want a smart upstart autoplayer: Tesla motors. Healthy banks are also now expanding into the vaccuum left by failed banks. There are tons of smallcap companies doing well, especially in tech and healthcare. New ideas will continue to flourish in the US as long as our government doesn't make it too onerous to experiment with a new business idea. Realize that in early 20th century 60% of americans were working in agriculture. A lot of agriculture jobs were lost when compared with today. But they were replaced by manufacturing and services of increasingly higher value. At the time a lot of people might have bemoaned the loss of agriculture jobs, but in the end the nation was far better for it. The key is to help displaced workers retrain and re-allocate. That's where the money should be spend by government. Rather than bailing out weak companies.

Aug 05 10:42 AM