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OM in the News: Why China Still Thrives as a Global Manufacturer

March 22, 2015

china outputA small factory near Shanghai, churning out widgets you never see but probably use, provides a perfect snapshot of the state of global manufacturing today. Some workers at the Integrated Micro-Electronics (IMI) facility affix pieces by hand to circuit boards bound for digital displays on European stoves. Others stand at computers, guiding machines that press together components for cars’ steering systems. But IMI is important less for what it makes than for what it represents. A cog in long supply chains, it produces parts for brand-name consumer goods.

Cheap Chinese labor has been crucial to the building of “Factory Asia”, the name given to the region’s complex of cross-border supply chains, writes The Economist (March 14, 2015). Asia first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods. China’s opening up was the gamechanger. The region’s share of the global trade in parts rose from 14% in 2000 to 50% in 2012, 1/2 of which comes from China.  By hosting more of the supply chain, China boosts its manufacturing competitiveness and attracts more investment. IMI, for instance, is headquartered in the Philippines and would have preferred to scale up its manufacturing there, where wages and worker turnover are lower.

Yet China’s factories are still far cheaper than western rivals (despite wages rising 12% a year for a decade). Many pay their employees just above the minimum wage, which at $270 a month in China is less than a 1/4 that in the U.S. And they are more efficient than many rivals. With Chinese factories just starting to pour money into automation, there is scope to improve productivity further. China became the biggest market for robots in 2013. Foxconn, which has more than a million employees in China, says that it wants robots to complete 70% of its assembly-line work within 3 years.

Our discussion of the theory of comparative advantage (Chapter 2) says that countries with lots of cheap workers should produce labor-intensive goods; rich countries should focus on those requiring plenty of capital. But as supply chains spread across borders, regional comparative advantage matters even more. With its bounty of both labor and capital, Asia has built up a huge lead in manufacturing.

Classroom discussion questions:

1. Why is China still the global manufacturing leader?

2. Why is it introducing robots at an accelerated pace?

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Supply Chain Management Research

Andreas Wieland’s supply chain management blog for academics and managers

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