Competing With China
The playing field levels.


Jim Lacey

There are few things more American than the hula hoop and the Frisbee. But for years, these icons of Americana have been made in China. That is ending, as their producer, Wham-O Inc., brought 50 percent of its production back to the United States last year. Wham-O is just the first sign of a developing trend, as firms such as NCR, General Electric, and Caterpillar are bringing jobs home from China. Moreover, many other firms are opting to expand production in the United States, rather than build new facilities in China.

According to a new report from the Boston Consulting Group (BCG), rising manufacturing costs in China are reducing that country’s allure as a location for transplanted American industry. Average Chinese wages remain only 31 percent of what American workers earn, but that figure is expected to rise to 44 percent by 2015. Moreover, the more expensive workers along coastal China will close the gap to an estimated 69 percent by mid-decade. And although Chinese labor remains much cheaper than American labor, it is also less productive. According to BCG senior partner Harold L. Sirkin, once productivity is factored in, Chinese and American labor costs will converge by 2015.

Similar predictions have been made in the past, but this time there is reason for optimism. The average Chinese salary increased by almost 70 percent in the last five years, and continues to rise at 17 percent a year. China’s economy may be growing by leaps and bounds, but its wages are increasing almost twice as fast. No country can long sustain such increases without risking runaway inflation, and unfortunately for the Chinese, increasing labor costs are only one of the factors driving inflation. Despite having increased interest rates four times this year, and raising the bank reserve requirement to over 20 percent, the Chinese central bank has failed to bring inflation under control.

Even China’s current export success is working in America’s favor. The government is having problems removing foreign currency from the system, and as a result, the value of the Yuan is increasing. Such increases make American exports to China cheaper while raising the cost of everything China sells to us. As inflation and other causes drive the Yuan ever higher, fewer firms will be tempted to look at China as a low-cost producer.

China’s problems do not end there. Rising transportation costs are a disaster for low-cost producers, sometimes more than doubling the cost of production. For instance, Wham-O’s Frisbees are bulky, so a container may hold only $5,000 worth of product and cost almost as much to ship from Shanghai to Los Angeles.

In addition, China’s one-child policy began 30 years ago, meaning that the number of workers between the ages of 18 and 64 peaked this year. With every passing year, the pool of Chinese workers will simultaneously shrink and age. These older workers are already demanding more as they prepare for an old age in a country with few social safety nets. This might explain the fact that over 100 major strikes have plagued manufacturers in just the past few months.

As if all this were not enough, China is suffering a serious power deficiency. To combat the rolling brownouts that are expected to increase throughout the summer, many factories are installing expensive private generators. Some estimates place China’s power deficit as high as 40 gigawatts and increasing. In other words, China’s energy deficit is almost equal to the entire power output of Taiwan. Many firms are going to be very reluctant to establish expensive factories in a country that cannot guarantee reliable power.

China is a hard competitor and will not fold up overnight. But for the first time in decades, the playing field is leveling. American businesses will soon discover that the best place to establish new factories is at home — that is, as long as our own government does not get in the way. That is why there is still reason to worry. For as the BCG report pointed out, the United States’ future competitive position rests on the regulatory situation’s remaining stable or even easing.