On the Future of Chinese Manufacturing

Any time you look at the back or the bottom of any product in your home you’re going to find the words “Made in China” on it. These three words have become synonymous with manufacturing. When you see the words “Made in China” the image that comes to mind is cheap affordable goods. One thing that does not come to mind is quality. Since the restoration of capitalism in China, production for foreign purchase has been dominated by what are known as OEMs, or “original equipment manufacturers”. Meaning they manufacture parts for foreign brands. Doing this concentrates the profits not even really in the hands of the bourgeoisie in China, but in the hands of the First World bourgeoisie. They can be from anywhere, American, European or Japanese.

As the RMB (Chinese currency) appreciates it increases the cost of manufacturing causing a decrease in demand from foreign businesses. This often causes them to seek out an even cheaper source of labour like Vietnam. The necessity here to preserve jobs and the economy (within the context of capitalism) is to develop brand names to sell to the world. Each nation in some form or another has some kind of well known brand name. America has Apple, Japan has Sony and South Korea has Samsung. To date no such major brand name has emerged from China to compete in the global market.

There are some good reasons why this has happened. One reason is that China has built its capitalism on being a cheap labour pool. This price advantage in labour has attracted other capitalists in China to do the same. Being a cheap pool of labour, as opposed to being an innovator, has more of an incentive to manufacturers. The instant gains with little setting up costs to just pump out cheap goods for immediate demand has been more attractive to capitalists than brand building domestically for foreign purchase. Doing so would require a great deal more investment capital, hiring and giving time to designers to create new innovative products, there would be no immediate return as it would be a new product and building a brand name alone is a massive undertaking. The market in this case has not been an engine of innovation, in fact it has been a tremendous hindrance.

Another major hurdle for the establishment of a Chinese brand would be overcoming a suspicion of quality. The term “Made in China”, as I said earlier, is synonymous with frugality in manufacture. Here it is important to remember the history of the rise of Japanese manufacturing. Forty to fifty years ago when Japanese products first arrived in the Western markets their quality was suspect. Recognizing that suspicion the Japanese manufacturers spent day and night sparing little cost in quality control. This tremendous emphasis on quality is what gave rise to Japanese imports of everything in the 1980s. The Japanese themselves became synonymous with quality. This mentality gave rise to the brands we have now well established like Honda and Sony. We have to remember at this time in the 80s the Japanese were innovating in products and in the very operation of business itself. I can even remember statements by corporate elites in the US in those days talking about making it mandatory for their CEOs and partners to learn Japanese because there was this pervading feeling that the Japanese were going to take over the business world.

Of course we know in hindsight that is not what happened. I have little doubt that the Chinese will not learn from these mistakes. Westerners may say many bad things about the Chinese, but stupid is not one of them.

Domestically Chinese brands can be competitive in the local market, there’s no shortage of labour, innovative thinkers, or managers who can put things into motion. The international market however is a completely different situation. In terms of experience China has very little in brand building internationally. China has a great deal of experience in other fields when doing business overseas. Giving out cheap loans to businesses and governments is one. But really that’s relatively easy, “hey here’s cheap loans, you want it?” They’re also quite experienced in getting contracts from foreign firms to produce a single or multiple components for a foreign brand. Again an easy sell, “Hey want the same thing you have now at one tenth the cost?” Chinese businesses have little or no experience in selling their own goods in the international market. Chinese are good at selling their products to foreign firms, not foreign consumers.

The beginnings here is for China to build its own brands domestically first. It has great potential to do so as there is a huge domestic market, an advantage that many now international brands has during their inception. The process of doing so will educate those in the branding business community on how to do so. At least it will give them a education of the fundamentals. Once a domestic national has been established and solidified with a few years experience, the profits from those years can be put towards establishing brand recognition in foreign, even international markets. This would itself be a tremendously expensive endeavour, one that would have to be undertaken by a brand that had capital built up domestically first. This development would not only provide the funds necessary, it would also provide the necessary experience to those responsible for its future foreign undertaking.

Establishing brands internationally and increasing them domestically will end up being an absolute necessity. Right now China is the world’s pool of cheap labour, the world’s factory. However this position in the world’s economy cannot and will not last. Capitalism always strives to find a cheaper source of labour in order to extract greater and greater profits, they have to do so in order to compete with other capitalists. Vietnam is already a good source for labour cheaper than China, not to mention what is going to happen when Africa finally gets caught up in the world market of labour.

When this inevitability occurs the Chinese economy will have to re-orientate itself in a new direction if it is not to fall into disaster. It will be imperative that they begin investing in a “knowledge economy”. the major focus of investment dollars, as it pertains to manufacturing, will have to be in the research and development sector. A this point the true potential of Chinese developers and innovative thinkers can finally step forward as the market will make it necessary for them to do so. Ironically the same market stifles creativity and innovation in favour of the more profitable investment in manufacturing cheap components.

This change that will be taking place sooner or later, probably within the next 15 to 20 years, will give China what will be a First World-Type economy. Meaning the shift will gradually move away from domestic manufacturing. Truly, manufacturing simply could not cease in China the way it has here in the West, the shear population density would make it impossible for any collection of nations to keep the supply of goods up with the demand of China. Even with that lesser degree of a shift away from manufacturing, a First World “mall economy” as described by the Maoist-Third-Worldists will begin to take form. This “mall” aspect of the Chinese economy will have the same negative repercussions that they have had here. Only time will tell to what degree they will.

Some economists in China are saying that it is necessary for China to start opening up their economy to the luxury brands of goods from foreign sources. The idea is that this would help balance out trade while at the same time teaching the Chinese consumers to consume. The fact is Chinese consumers still have some of the anti-materialistic consciousness left over from communism still lingering around, this has a tendency to manifest itself in a kind of “inner shame” that discourages many from purchasing the higher end luxury goods.

I personally don’t find this to be all that effective in levelling out trade imbalances. Purchasing a dozen or so Boeing747s or tons of precious metals and electrical machinery. Luxury brands in my opinion would do little in terms of balancing out trade with Europe and the United States. I think having a domestic manufacturing of luxury goods filling a domestic demand is a far wiser move. For example as I previously said it would help brand establishment in China, building up enough capital to begin marketing itself overseas.

One thing that a few economist in China and internationally have noted is that China has a chance to really get into the air frame manufacturing market internationally. Right now large scale commercial plane manufacturing is dominated by Airbus and Boeing. Manufacturers of smaller aircraft like Embraer in Brazil and Bombardier in Canada. Bombardier produces a large range of regional and business aircraft including the Learjet. Bombardier found its niche market with those types of air frames. What is possible for China to do is find its own niche market, produce something that is in demand, or innovate something thing creating a new niche. For China this task would have to be original, superior and good value for the customer. This niche, whatever it would end up being, would have to be sustainable as well.

Despite all of this, right now the main thing to do would be to develop brands domestically to increase not only consumption of these goods in anticipation of the day when China is no longer the world’s cheap factory labour. The problem right now in doing so is that those with enough money now seeking to purchase higher end brands of products tend heavily towards foreign brands. The reason being is that the Chinese know the stuff they make is of much lower quality. As a result of this, there have been many Chinese manufactures domestically that have given their products similar names and appearances to well established products known to be of high quality. While we here in the West don’t see those products as much, people in China are far more familiar with them.

On a personal note I’ve always found this phenomenon to be quite humorous, essentially capitalists ripping off capitalists while screaming free markets how they create originality.

Here I see a tremendous irony: companies here in the West have goods manufactured China and find all kinds of loopholes to make it seem like the product was made here. Some examples of this are how anything made in Saipan can legally be called “Made in America”. China created a manufacturing town called Usa. Of course this is spelled U S A, so where the product is required to label its point of manufacture, it appears as though it was made in USA. My favourite example of this was a Canadian company making apple juice with Chinese apples but labelled “Product of Canada”. Legally 51% of the manufacturing cost must be domestic in order for the product to be labelled “Product of Canada”. The cost of the apples in the juice was less than the cost of the bottle and the label.

In China they do the opposite, domestic manufacturers go to good lengths to make it appear as though their products come from outside the country. This is so perfectly ironic coming from capitalism. Markets always supposedly equate freedom, the freedom to choose and that a free market will create an informed consumer to make choices. Yet we see in practise the exact opposite, the capitalist is always trying to portray their product as something it is not. Essentially they’re being dishonest when the market dictates that such behaviour is not only counter to the concept of a free market, but that it would be eliminated by the market. Its only when the state intervenes that we get laws that force these companies to reveal where they come from, despite all the loopholes these manufacturers demand.

To build domestic brands that can compete with the international brands which now dominate the Chinese market, there are a few things the manufactures need to do. First they must overcome the perception of the domestic brands being of low quality. It is of the utmost imperative right now that they hype focus on quality control following the experience of Japanese companies in the past.

Next would be a brand image, building up how the consumer public sees the product. The immediate easy thing to do would be to play to patriotic sentiment. China is a very nationalist place, the identity of the nation is a very strong image in their minds. I do not thinking it would be that difficult to establish such a brand with blatant flag waving. Such a nationalist branding has been extraordinarily successful in the West as well as Europe and Japan. All three regions have their iconic beer that is tied to their national identity. Molson Canadian is a good example, even though its actually jointly owned by an American company and a Brazilian company. General Motors is an iconically American brand of automobiles, and has been so for decades. In the UK you have Admiral Sportswear and Bentley for example.

This greater building of brands inside China is of the utmost importance when considering the future of Chinese manufacturing. It has to grab a hold of the domestic market and take away at least some of the grip the foreign brands have if they are to remain stable and profitable through all the changes that will be taking place in the next 20 years or so.

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