The World’s Factory – A Challenge and Opportunity for China

COVID-19-related PPE and the US-China Trade War have drawn many people’s attention to the supply chain and manufacturing capability of China. Over the last 30 years, China has become the world’s factory, and it continues to expand its territory into the more premium part of the value chain. Will China’s dominance continue? Will the manufacturing industry ever return to the US?

Current State of Manufacturing in China

China has the biggest, longest, and most comprehensive manufacturing value chain at the moment.

The World Bank publishes the total value of manufacturing in US dollars for each year. China accounts for roughly 30% of the world’s total value. China’s total value is about two times larger than that of the US.

Among 500 major industrial product items, China has the top market share for more than 220 items. China has been the top manufacturer for steel since 1996. At this point, China accounts for 53.3% of the world’s production capacity. In the chemical industry, China accounts for roughly 40% of the world’s production capacity. Roughly 75% of the world’s smartphone production capacity is in China.

Because China has the biggest value chain and one of the biggest markets, Chinese hardware manufacturers enjoy a huge advantage. TCL is now the number-one TV brand in the US. Huawei is the number-one telecommunications equipment manufacturer, despite US sanctions. Xiaomi and its eco-system have defeated pretty much every single US-based hardware start-up.

Challenges

The biggest challenge is the lack of high-end value chain items—more specifically, high-value-added products and high-value-added services.

None of the high-end semiconductor production capacity is in Mainland China. That’s the main reason why US sanctions on ZTE and Huawei are effective. Many mechanical manufacturing products are controlled by European or Japanese companies.

High-value-added service might be a bigger issue for China. RMB is nowhere near a global currency. No Chinese investment bank has expanded beyond China. China’s presence in the entertainment industry is almost zero, with the only exception being TikTok. Most of the high-end software (e.g., MATLAB) is controlled by non-Chinese companies.

China is focusing on the product category which requires labor intensive manufacturing and complete value chain as its beachhead market. A good example is the electric car. Currently, over 50% of electric cars are sold in China. This has attracted a big player such as Tesla to build a factory and transfer technology to China. When Tesla builds a factory, it also brings its supply chain with it. By the end of this year, over 70% of Tesla parts will be manufactured in China.

Will the manufacturing industry return to the US?

Before we look into the data, I’d like to play this video. American Factory shows the biggest challenge to bringing manufacturing jobs to the US: people. Not many US workers are willing to work in the manufacturing industry, especially as compared to workers in China.

The growth of the US manufacturing industry has been slower than 2% and the rest of the country. As a result, manufacturing’s share of employment and share of GDP have been declining. It’s hard to believe that anyone can reverse this trend in the near future.

I am not sure that acquiring these manufacturing jobs is a very good thing for the US. Many manufacturing jobs are moving from China to Southeast Asian countries now. Can the US compete with these countries and maintain a good amount of profit?

Summary

China is the largest manufacturer and largest market for over half of products. Because of this huge advantage, China can develop the largest supply chain to meet its demand. The challenge is that China doesn’t own high-value-added products and services. Also, low-end manufacturing jobs are moving from China to other low-cost countries.

For people who want to know the future of the manufacturing industry in China, I recommend checking out the New Infrastructure Creation policy that was announced in 2019. 5G, UHV transmission, high-speed railroad, inter-city rail, charging stations for electric cars, big data centers, AI, and industrial Internet: It all shows China’s aspiration to gain its share in the high-value-added product market.

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