How Chinese Industry Got Too Good, Too Fast

for the last 40 years the global economic status quo has been that technological advancements are made by well funded companies in Europe and especially the US those advancements are then made into commercially viable products that get manufactured in centers with lower labor costs which of course is primarily meant China those products were then exported all over the world flooding markets with cheap stuff the West's got all the high-tech jobs designing marketing and Manufacturing all of those products Global multinationals made a lot of money consumers got lower cost goods and the country's facilitating all the lowcost

labor got a source of income to develop domestic industry and provide their populations with a better standard of living than they could have got with basic agriculture alone it was theoretically a win-win but even if the parties involved in this process remained best of friends which spoiler alert they did not there was still the motivation for the lowcost export centers to want to claim some of those high value roles for themselves by whatever means necessary and well that's exactly what has happened in certain areas of manufacturing China is now just as advanced if not further

ahead than centers in the west and it's not just disposable consumer junk anymore sure they still make a lot of the plastic land fillers found on Alibaba or wish or teu or Sheen or whatever platform is popular in the given week you're watching this video but that's in many ways just distracting from the fact that the country has become a global Powerhouse in some of the most important fields in the world a rate that's taking a lot of economists by surprise now this is all happening while China is dealing with its worst economic conditions in

decades so the question for them becomes is this a vital Lifeline that could get their economy back on track or is it too little too late the question for governments and companies in the west is what are they going to do in either case so has Chinese manufacturing really become a world leader can the country continue to function if Western companies pull their operations from its Shores and finally are heightened trade restrictions going to be enough to hold these industries back running a business means managing various tasks customer relationships inventory accounting and more the last

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by unlockers until the mid1 1980s this first step allowed more foreign Capital to enter the country and help develop Regional economies dere regulating pricing and profit retention in special economic zones to a degree where businesses were allowed to set up their own respective wage structures the experiment paid off and the country entered the most intense period of economic growth in history it also increased the pace of urbanization as workers were drawn from the countryside into high paying jobs in the cities there was enough liberalization to bring China into the world trade as a notable export

competitor fast forward today and mostly China is not just a manufacturer but the manufacturer on the world stage this had a profound impact on our own economies before rise of China something as simple as a toaster was a major appliance purchase that people would shop around for with as much thought as we do a computer today but Chinese manufacturing allowed people to purchase far more consumer durables at a far lower cost for decades the maiden China label was analgous with poor quality sites like Alibaba wish Teo or Sheen certainly don't help those stereotypes but with

efforts in the realm of quality control following outside pressure as well as their own growing understanding of how competition is changing Chinese manufacturers especially larger players have led some members of the press to claim that once you I quitous old shy Chinese manufacturing is a thing of the past so has Chinese manufacturing really become a world leader both in quality and quantity well yes and no when looking at cheap items online China is still almost always behind it and that has a lot to do with financial viability the international labor organization found that Chinese unit

labor costs are about 20 to 40% of us labor costs they are also low relative to costs in the EU Japan Mexico Korea and most other newly industrialized countries let alone those that are already established for another way making $5 portable speakers just doesn't make sense in places like the USA where blind workers make $25 an hour this was also due to a long-standing dynamic one that at least for a while meant that not everything was made in China typical Advanced manufacturing has been safer from Chinese Outsourcing because labor is a smaller component of the

total cost of manufacturing something like an aircraft which is highly technical requires a huge amount of research and development and places a high emphasis on how much people inherently trust to the product these jobs require a lot more sophisticated manufacturing equip with fewer more skilled technicians than something like an iPhone in which labor is a much larger share of the total end cost of the product it was easy to keep this kind of advanced Manufacturing in places like the USA and Europe because that's where the skilled workers and Technical knowhow was but if China can

make these Advanced products just as good or better then even the small cost saving on labor starts to look compelling regular old human nature and Global perception plays a strong role in this as well I was used to joke that I wasn't ready to fly on a plane manufactured in China just yet but the recent news about Boeing means that people might even prefer the Chinese plane these days the point is that for decades China relied on foreign Outsourcing and intellectual property to gain this reputation as a global manufacturer so can the country function if

Western companies pull their operations from its Shores the answer to this question can be found by observing China's climb up the services pyramid it's to made clear that the country is the factory floor of the world but now it's recently promoted itself into more senior roles now China is doing more advanced work like designing research and development marketing and managing inhouse where those jobs used to be kept in the west while the country just focused on making things this is no laughing matter for Western economic superpowers as for a long time the USA and to

a lesser extent large Western European countries have effectively had the Monopoly on global companies but China has grown a lot in recent decades up until about 10 years ago it would be hard to name any of their companies that operated outside of the nation's borders and that's starting to change perhaps one of the best examples of a Chinese product that breached these barriers is Huawei a Chinese multinational technology company that provides information and Communications techn infrastructure and smart devices the telecommunication company's growth has been so staggering to competitors that a number of Western Nations have

passed legislation to curb growth based on security risks now a lot of these concerns were very well-founded which is another problem that Chinese manufacturing needs to address if it's going to push its own companies onto the global market rather than just being an assembly shop for other brands Britain in 2020 decided to ban Huawei and other vendors it deemed high security risk from 5G networks Danish lawmakers in 2021 passed legislation to allow the screening of foreign investments to ensure they do not POS a threat to National Security and French authorities in 2020 told telecoms operators

planning to buy Huawei 5G equipment that they would not be able to renew licenses for the gear once they expire effectively phasing Huawei out of mobile networks of course making the argument for Chinese products and services potential as a national security risk might be valid but it also has the convenience side effect of protecting Western companies without calling it trade restrictions so how exactly are these new up-and-comers brute forcing their way onto Global markets well it at least in part has a lot to do with government subsidies organizations like Stanford's Center on China's economy and

institutions have been tracking this development for quite some time their findings show that since 2007 China has required listed firms to publicly report direct government subsidies between 2008 and 2018 these subsidies increased from $4 billion to about $29 billion according to the disclosures subsidies were distributed for R&D Innovation industrial and Equipment upgrading employment stabilization and promotion Environmental Protection and general business operations it should be know however that this is by no means a perfect system as the most significant determinant of receiving direct subsidies is a larger firm size and the receipt of subsidies is linked

with lower firm productivity growth and only modest growth in R&D spending in subsequent years additionally higher employment levels appear to be mostly temporary so China has to essentially keep feeding money into the machine to sustain this form of growth another element worth acknowledging though is that China possesses a very well educated population with a system that places a strong emphasis on industrial skills at all levels and lots of students are seeking education abroad bring that knowledge back to China this ongoing adaptation has been a top priority for China's government and just 5 years ago they

issued a rather optimistic blueprint for further development in the coming decade focusing on establishing a modern high quality and balanced system for equal and competitive education and marking a shift from capacity to quality of course there's also the tactic that's given China a pretty bad reputation one that's been applied fairly blatantly in almost every industry straight up stealing if a company manufactures its products in China the conditions are that they have to work with a Chinese company and in many cases the products that those Chinese companies are making are reverse engineered and re-released as their

own products with a significant cost reduction there's actually a case involving Huawei and Aken semiconductor a us-based company that had developed near indestructible glass which was promoted as the next great material to make smartphone screens more resilient they've sent a prototype in the hopes of gaining Huawei as a customer but the contract terms were broken when Huawei allegedly attempted to reverse engineer the product during testing phases thus violating export control laws and this isn't an isolated incident There is almost an endless list of scandals where Chinese companies only collaborated with Western companies to make something

of their own a lot of Tesla's manufacturing went to China and now there are claims that the Chinese made model 3s Are Better Built than the American and european-made Teslas in fact China's byd is now the biggest EV manufacturer in the world here in Australia for example byd cards are already massively cutting into the market share of Tesla because Australia doesn't have a local auto industry so it doesn't care where it gets its cars from the company started off just making batteries for other companies but they built the rest of the company around it and

now they have the good jobs in addition to the manufacturing capabilities and they're bringing the profits back to China not Western shareholders now all of this is impressive given where China was a few decades ago but there are areas that make the China success story a bit misleading for example a lot of China's growth has been predicated not on genuine value adding manufacturing but rather on building more houses than they need to use as Investments this is great for headline economic figures because it employs a lot of of people and adds a lot of value

because average people are willing to spend a lot of money on building a house however it's unsustainable the property Market has imploded causing a huge pullback in economic growth and economic issues like youth unemployment got so bad that the government just stopped reporting those figures but with so much growth in these other Industries the former improvements could theoretically make up for that speculative Mania and give the second largest economy in the world a way to grow in a more sustainable manner if this dream of Chinese economic advancement does come true it could be really bad

for us companies in particular in response to this the US can and already has put significant trade barriers in place to protect local jobs but the US is the most powerful economy in the world because of the global reach of its companies and it can't really Force other countries to also block Chinese exports what makes this even crazier is that even with trade barriers this export strategy is kind of working China has the largest Trade Surplus right now of any country in history during June of 2024 alone the trade surplus in China amounted to approximately

99 billion this for now is in fact offsetting the losses from the crippled real estate sector but it's also making other countries angry furthering calls for trade restrictions of course one of the major arguments is that China's AFF forementioned subsidies are more political in nature than economical with some even claiming that the Chinese skew markets which leads to over production and The Dumping of cheap products in the global market trading hard earned money for junk and this by no means as stated earlier is a recent development in fact some of these Concepts go back almost

10 years an example of an ongoing battle can be found in Renewables energy specifically solar panels again a very technical and highly valuating modern industry at the Forefront of global attention about 7 years ago the European Union had extended anti-dumping and anti-subsidy measures for Chinese solar panels Wafers and cells but pass forward to the present day and it doesn't look like this made much of a difference between 2022 and 2023 exports in this sector to Europe only dropped by about 9% in terms of annual growth rates Saudi Arabia South Africa Malaysia and Pakistan all imports

from China increase by well over 100% in 23 from 2022 totals and All Join the ranks of major markets for China's panels and modules this really makes that 9% seem less like a massive Victory and more like a drop in the buckets at least for now the Western resistance to the country's Evolution may slow this progress but it doesn't seem to prove that it can stop it entirely the fact of the matter is that good enough and cheap for many consumers around the world is often preferable to something slightly better and considerably more expensive but

there are key domestic obstacles that China still needs to deal with in addition to the real estate bubble the country also has an aging population and an expensive one at that even with the rise in wages many Chinese residents can barely afford to live in places like Beijing the cost of living just continues to rise in other words this complicated sociopolitical Arrangement that the Chinese people have with their government only works if things remain affordable and the people can continue to make good money something that's becoming a growing concern in recent years if China can

manage to sustain its growth eventually making products that match the quality of other competitors with their reputation for quantity and get pricing under control there's nothing at the moment in terms of economic resistance that can stand in its way that is except itself whether or not China will be able to fully pull this off depends on if these new developments can pay off if they can manage that and regain the faith of its people China might not just break even but it could very well emerge stronger than ever before now we made an entire video

last year detailing the extent of the challenges that this industrial boom has to overcome we didn't want to repeat too much in this video but as always you should be able to click to that on your screen now thanks for watching mate bye