For years we had to listen to the same sermon: The United States is not competitive and China is going to take over the world.
For years, this was true. But it seems China’s spell of manufacturing dominance has run its course because rising wages and a chronic lack of innovation are putting a limit to its centrally planned and corrupt economy.
As usual, this tidal shift is first noticed by a few people who actually do the numbers, this time the Boston Consulting Group (BCG).
In a very comprehensive study released this year, BCG finds total manufacturing costs in China, including labor, electricity, natural gas, and others are now as high as 96 percent of costs in the United States. And that doesn’t include shipping and handling.
In fact, the dynamic has progressed so far that 54 percent of more than 252 U.S. manufacturing executives surveyed said they are considering onshoring production again—to the heartland. A full 16 percent said they are already in the process of doing this, as BCG said Thursday.
One of the biggest factors is indeed cost. China was once a place of abundance. Abundantly cheap labor, abundantly cheap land. Not anymore. Wages have risen five times over the last 10 years according to BCG as land prices have multiplied, depending on the region.
China reaped the benefit of a huge pool of underutilized labor through education and urbanization. As of 2014, however, the working age population is shrinking again and communist-style education, as in indoctrination and memorization, doesn’t cut it anymore when you want to move past making plastic trinkets and compete with the big boys.
The fundamentally flawed education system and mentality of cutting corners has put a limit on productivity growth, which depends on innovation and creativity. So while costs went up to 96 percent of the U.S. standard, productivity is still only 40 percent.
U.S. executives confirm this, as 74 percent cite the access to skilled labor and talent as a reason to move back. They will find many Chinese people who came here to study and don’t want to return to China among their applicants.
In addition, if costs aren’t decisive anymore, moving manufacturing back to the United States gets you added benefits of shortening the supply chain, better quality products, less corruption, and better protection of intellectual property.
Companies, which already have moved operations back to the United States include Sleek Audio, Peerless Industries, and Outdoor Greatroom Company.
As for China, it seems all of its Potemkin village economy is starting to unravel. It was never a miracle to create GDP by using low-skilled and low-paid labor as well as cheap land. It was never a miracle to pump trillions of dollars of credit into the economy to fuel an investment bubble, while destroying the country’s environment at a run rate of 3 percent of GDP per year.
Instead, the severe constraints on productivity and wasteful capital allocation are inevitably coming to the surface. Economics in reality has nothing to do with miracles.