Can China compete with American manufacturing?

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No, the headline is not a mistake. I know we’re usually worried about the opposite – whether or not U.S. manufacturers can compete with a rising China. But today I’m turning that question around. What doesn’t get enough attention in today’s discussions about America’s economic competitiveness is that the U.S. remains a robust manufacturing power, despite what is going on in China. And it has some clear competitive advantages over its emerging-market rival. So not only is American manufacturing alive, but kicking pretty aggressively as well.

Just take a quick look at the numbers. According to United Nations data, the U.S. is still the largest manufacturing country in the world. In 2009, American manufacturing output (in real terms) was nearly $2.2 trillion. That’s about 45% larger than China’s, at just under $1.5 trillion. (For statistical reasons, I chose to use figures that include mining and utilities as part of manufacturing.) Though China, of course, is growing very quickly, the U.S. has also maintained its global share of manufacturing, at 20% in 2009 compared to just over 22% in 1980. What’s more, American manufacturing is becoming more productive. In 2009, productivity in U.S. manufacturing increased by 7.7%, more than any other country followed by the Bureau of Labor Statistics.

So why do so many Americans think the U.S. doesn’t make anything anymore? Part of the reason is that we’re deceived by what we see everyday. Shopping through your local Target, you’re going to see a lot of “Made in China” labels on things like clothing or electronics. The U.S. tends to make stuff that requires more technology and engineering know-how, like planes, semiconductors and machinery. Basic economics tells us that is exactly how things should be. Since China has so many, low-wage laborers, there is no way high-wage America can possibly compete in products that require teams of workers to manufacture, like toys, apparel, consumer electronics, and a lot of other stuff you’ll find on Wal-Mart shelves. Making such products in the U.S. would simply be too expensive; companies that did so would not be able to compete with cheaper imports made in lower-cost economies. But the U.S. still is very competitive in the types of products that demand a high level of technology, engineering and capital to produce. In such industries, wages don’t matter quite as much, and the U.S. can capitalize on its clear advantage over emerging markets like China in expertise, technology and innovation. That’s why the U.S. sells Boeing aircraft to China, and the Chinese sell blue jeans to Americans.

And it is here where we find the big challenge for China as a manufacturer going forward. China has so far gobbled up the low-hanging fruit of the global manufacturing sector – the low-end, labor-intensive goods in which China has a clear advantage. A big part of Chinese manufacturing is the simple assembly of products designed elsewhere with components produced elsewhere, which means China is some cases is not adding very much value to the products it produces in factories. But China wants to make the cars, planes and chips that Americans manufacture – in other words, China intends to move “up the value chain,” into heavier industries or tech-based manufacturing that require the kind of skill and experience Americans already have. That’s not an easy leap to make. Though there are some Chinese companies that are able to successfully compete in these more complicated industries – telecom equipment maker Huawei, for example, which has gone head-to-head with European makers – but generally speaking Chinese manufacturing is lagging in technology, quality control, managerial and engineering expertise, and other very important aspects of high-end manufacturing. That’s why you don’t see Chinese cars on American roads, for example. Despite the great growth of Chinese automobile manufacturing, the product they’re churning out simply isn’t good enough to compete in major markets. That’s also why China’s leadership is always talking about the need to upgrade Chinese industry and improve R&D capabilities.

Making that leap isn’t just good business, it’s absolutely crucial. As Chinese wages increase, China will become less and less competitive in many low-end products, like toys, apparel and footwear. That process is already underway. Some factories for such goods are already opening up in lower-cost environments, like Vietnam, instead of China. And rising wages are inevitable, not only because the country is becoming wealthier, but also because improving the welfare of the average Chinese worker has become a policy priority for the government in its latest five-year plan. So in order for China’s manufacturing miracle to continue, Chinese industry will have to become more competitive in the types of manufacturing in which the U.S. still holds a clear edge.

Can China do it? History tells us the answer is yes. Back in the 1950s, Japan was the China of the world, making a bunch of cheap stuff with cheap workers, but in a relatively short period of time, Japan was selling Sony high-tech gadgets, Honda motorcycles and Toyota cars in the U.S. There is no reason to believe China can’t follow in Japan’s footsteps. The challenge for the U.S. is to stay one step ahead, to continue to innovative, become more productive and improve quality. There is reason for hope. What American manufacturing needs to do to remain competitive plays into America’s strengths.

That’s especially because of the direction in which manufacturing is headed. I had an interesting email exchange with Robert Judge, a professor at the College of Business Administration at San Diego State University. He’s the expert who got me thinking about this subject and this post (thanks, Dr. Judge). His view is that manufacturing is going to become more and more technology-driven over time. Here’s what he wrote:

Inexpensive manufacturing labor will not be a factor for long with the acceleration of technology in manufacturing processes. Our manufacturing is moving to a technology driven operation rather than a labor one. The skills required by manufacturing are changing. It won’t be long until IBM’s Watson will be directing the manufacturing with robots doing the work.

In other words, manufacturing competitiveness will increasingly be based on American, not Chinese, advantages.

That, however, has serious implications for the American workforce. Many Americans equate manufacturing with jobs, but as industry progresses, that link will become more and more tenuous. As manufacturing becomes more high-tech and automated, it will become a smaller source of new employment. In other words, even if American manufacturing can maintain its competitiveness versus China, it could very well be the case that fewer and fewer people will be working in factories anyway. That would especially be the case with poorly skilled workers, as manufacturing will increasingly depend on a higher level of training and engineering and IT knowledge.

So America’s manufacturing future will depend on continued innovation, and the future of the American manufacturing worker will depend on improved education to support that innovation. Such advancement is imperative. China won’t be far behind.