China to overtake US as biggest manufacturer next year. What to make of it?

This article from the Financial Times indicates that China is set to overtake the US as the world’s biggest manufacturer, in terms of valued-added output, next year. This comes four years earlier than expected, due to the current US economic weakness. The great leap is revealed in forecasts for the Financial Times by Global Insight, a US economics consultancy. According to the estimates, next year China will account for 17 per cent of manufacturing value-added output of $11,783bn and the US will make 16 per cent.

John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of the projections. It was “inevitable” that China would take over on account of its size, he said. “This should be a wholesome development for the US, for it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest-growing economy.”

Engler is right. By itself, the growth of China in manufacturing should be good for the world economy. That means we are seeing the development of a new viable market for goods coming from the rest of the world. But as more and more manufacturing jobs come to China at the expense of previously vibrant manufacturing centers across the globe, how are we to really make of its rapid and persistent development? Do we all applaud in appreciation, and look at it as proof positive of the beneficial effects of globalizing free market capitalism?

The article knowingly or unknowingly nailed it in the bud when it said of China: Manufacturing accounted for just 17.5 per cent of global gross domestic product in 2007, but much activity in the considerably larger area of services, for instance in retailing, distribution, transport and communications, depends on it.

Manufacturing is a central function of business. Whoever controls a significant proportion of this crucial activity will tend to become influential in other processes across the value chain spectrum, including those mentioned above. It is naïve to say that it is okay for China to be the factory of the world, because it allows the rest of the other nations to focus their energies on becoming its transport and logistics hub, or its back office support center, or the marketing front lines, etc. We also have to look at how much of these crucial activities will turn out to be better directed from where the great economies of scale are being achieved in terms of production. After all, business is a collection of processes forming a value chain. These processes do not by themselves stand alone. If more and more manufacturing becomes centered in China, then it makes more sense to do many of these other things in China.

How long before China will manage to get many of these other jobs?

The article goes on to say: The expected change will end more than a 100 years of US dominance. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world’s biggest manufacturer after its Industrial Revolution.

While it may be true that China, due to its size and reach, had for much of the last two millennia dominated production, we need to remember that the other parts of the world had, for all that time, enjoyed thriving local industries, unfettered by a global manufacturing machine, which China has now become.

Nevertheless, we could still find the silver lining in all this.

Global Insight counts manufacturing production for countries – including the activity of foreign-owned companies and local ones – as value-added output. Value-added data are arrived at by subtracting “inputs” – such as purchases of materials, parts and services – from raw “gross output” as measured by the sales of individual companies. The data also use current-year figures.

In arriving at its figures, Global Insight combines figures from both foreign-owned and local Chinese firms. It is true that many foreign companies come to China looking to capitalize both its local market, and its low cost labor inputs. In the process, they crowd into a market that also thrives with many local competitors, many of whom are individually trying to get from out of the shadows of these multinationals. Eventually, this growth within China should plateau, and many of these competitors will eventually find it more profitable to get out of China, in search of opportunities elsewhere.

It is to be hoped, that somewhere down the line, these Chinese competitors will do one over their foreign competitors, and bring their businesses, and along with them their thriving manufacturing processes, back to the countries from where they are now being uprooted.

That can’t happen too soon.