SHIP BETTER PRODUCTS #17 Apr 20th 2022

OPINION

Will China remain the world factory in 2030?

A unique model

14 years ago, in November 2008 I was visiting China for the first time, as a part of a team to build and open a new factory for a French auto parts maker. It was a journey to unknown territories, i had no expectations so far. My plan was to go there, do the job and go back to France, where I studied, 6 months later with an international experience.

In many parts of the world, the Lehman Brothers bankruptcy was kicking off the 2008 financial crisis and the recession that followed.

Meanwhile China was growing at full speed after the Beijing Olympics and factories were popping up all over the country to keep up with the domestic and international manufacturing demand.

Every month, millions of Chinese were being lifted out of poverty joining the virtuous circle of middle-class expansion and economic growth.

Economists and International manufacturing experts from all over the world were already predicting the newly rich China would quickly loose its low cost manufacturing capabilities. Following the same path, other developed countries that were still not rich enough, but had abundance of young and cheap workforce would be replacing it gradually as the new "World factories".

But things did not happen as the experts planned:

10 years later China was still the world manufacturing powerhouse producing?28% of the world’s manufacturing output . The USA about half of that and India only 1/10th of it.

The simplistic rationale correlating middle class average income and availability of workforce to China’s manufacturing miracle proved wrong.

Source Statista

How did we get there?

China has reached its status of factory of the world thanks to different things that it is really good at and that will be hard to replicate.

Culture of Quantity and scale:

A country and a culture of 1.4 Billion people that thinks in scale by default. A major difference with the West and traditional manufacturing economies like Japan or South Korea. Economy of scale allows Chinese manufacturer to be good at what every Purchasing Manager loves, low prices.

Strategic supply of Raw Material:

As China’s economy has developed over the last several decades, its leaders have sought to transform the country into a key player in strategically important industries.

China became the dominant global supplier of rare earths, a collection of 17 minerals that are indispensable to the manufacturing of smartphones, electric vehicles, military weapon systems, and countless other advanced technologies.

Very interesting article about rare earths?here

China is the largest cotton spinner in the world. Its textile industry is also at the top globally in terms of overall production and exports.

China is also the largest Nylon 6 producer with 4.01 million tons installed capacity, followed by APAC (1.28 million tons), Europe (1 million tons) and North America (0.55 million tons).

Highly-efficient ecosystems of interdependence and pool of talents.

China's business ecosystem of networked suppliers, component manufacturers, and distributors has evolved to make it a more efficient and cost-effective place to manufacture products.

Production is organized into industrial clusters. Multiple parts of the supply chain are located close to one another, wrapped up in dense nodes of efficiency. There are entire Chinese towns that manufacture only ceramic products, microwaves or shoes.

The concentrated supply chain and high efficiency helps factories mass produce large orders in very short lead-times.

Moreover, industrial clusters benefit from huge a labor pool, reaching deeper and deeper into the country for more workers as wages gradually rose.

Lack of regulatory and corporate social compliance

While Western manufacturers comply with various health, safety, employment, and environmental regulations, Chinese manufacturers generally operate under a much more unrestricted regulatory environment. Despite new reforms being implemented by the Chinese government, operating factories remains relatively flexible for businesses.

Independent unions are illegal and a six-day workweek is common in most industries in China. One of the most recurrent social compliance issue I have witnessed visiting 1200+ factories is definitely the long working hours and over-time (sometimes paid sometimes not).

This allows manufacturer to have an unparalleled competitiveness for prices and speed in comparison with other low cost countries.

Supply chain infrastructures

In 2006, only 3 of the 10 ports were located in China. In 2020, it was 7 (including Hong Kong). For years, Singapore was the largest seaport in the world, settling for the 2nd place since Shanghai became the world’s largest and busiest container port in 2010. In 2020, Shanghai port handled over 43 million TEUs, increasing its container turnover by 17 percent compared to 4 years before, in 2016.

China now has the world’s largest network of high-speed rails, and the most highways in the world, adding more than 10.000 kilometers of highway each year since 2011.

These channels and infrastructure are the backbone of its economical growth. Without it, there won’t be efficiency, speed and capacity to support its economy, elements that are so difficult to replicate by China’s neighbors like Vietnam or India.

Without the current high-speed rails network, covering all industrial areas of China for inspections and factory audits would have been impossible for us at QCADVISOR, or at least not as affordable as it is today. An inspector based in Hangzhou can cover the whole Zhejiang province, Shanghai and major cities in Jiangsu province and Anhui for a one-day round trip.

Alibaba

Another major tool, is the access to suppliers, namely, Alibaba. The world leading platform for wholesale trade is unique to China. With very few or no alternative with same offer and level of service all over Asia and the world, Alibaba helps Chinese suppliers connects with buyers across the globe on a single marketplace platform. The platform eases connection between the factories and buyers from all over the world and is also one of the reason many choose a Chinese supplier over an Indian or a Vietnamese one.

A cargo ship navigates its way into Shenzhen on Nov. 28, 2010. (Daniel Berehulak/Getty Images)

Who to replace China?

Let’s be clear, there is no country at the moment that is able to replicate what China did during the last 20 years. There are too many factors to take into consideration to reach that level and China might simply ending replacing itself.

Labor intensive industries like garments have already switched partially from China to Vietnam or Bangladesh, or closer to customers like Morocco for Europe or Central America for the USA. But these remain niches in comparison with the wide range of industries and consumer goods categories covered by China.

India, might be a strong and in my opinion the most serious alternative to China, firstly because of its size and massive labor pool, as well as closer ties with the west and current geopolitical urge to move supply chains out of China. But will this be enough?

Moreover, China is already preparing for the future of manufacturing with its richer and aging population, with more automation, more robots and more AI.

So despite buyers and importers actively looking for alternative beyond China and industries such as fashion exploring the possibility of producing items closer to their end consumers, it is still difficult to leave China.

The manufacturing infrastructure and the pragmatic business mindset remain unmatched and the quality for the price extremely competitive. Additionally, countries like?Vietnam are also getting richer very quick.

As more and more consumers all over the world buy more and more products that only China can make at the price they want, we will likely have China still be?the World Factory,?as 2.0 version, for one more decade (at least).

But one thing is certain, the coming years will be of high instability. Current geopolitical tensions and environmental issues in addition to China’s Zero Covid obstinacy might create more complex supply chains, higher prices for the consumers and important disruptions.

And imagine just one second how far this can go if China invades Taiwan...

COMPLIANCE

Never compromise on Quality

The unstable travel conditions in China in some provinces require flexible and efficient solutions for your Quality Control.

QCADVISOR Team can deliver remote inspections designed to provide you with the same level of technical expertise to help you ensure defect free products on arrival.

Contact us to learn more about how we can help you navigate the current supply chain disruptions without compromising on Quality.

NEWS

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With our new platform shortcut, you can now download your report easier and faster. Go to "Orders" to view all the list of inspections and audits and simply click on the report icon to get the report you need.

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Habib