Is China a Bubble about to Burst?

All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor. We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”-Harold L. Sirkin, a BCG senior partner

That is the conclusion of none other than The Boston Consulting Group after a recent comparative study of China and American relative competitive positions.  It’s good news for America since a combination of forces have virtually stripped our country of its strategic manufacturing capacity while demographics drain our craft and mechanical skills as a generation of workers retire with few replacements being trained.

My wife is a high school teacher.  At her school there has been a steady series of budget cuts over the past few years with nothing left of arts or music or any “industrial arts” as shop and woodworking were called when I went to high school.  Gone!  We only seem to want college prep classes and every kid is expected to go to college.

But there is a place in our country and every country for electricians, plumbers, welders, mechanics and a hundred other skilled craft careers. We are losing our sense of pride in such craftsmanship even though we need those skills more than ever.

One of the great fears of my utility clients is the tsunami of retirements washing over them over the next five years where as many as 40% of skilled craftsman will retire.

What does this have to do with China and its bubble?

China is not immune from demographic change.  In fact, it has a worse problem than we do in the US because its one child policy is setting up a profound change in China’s productive work force for the future.  But before that crisis hits China faces a bigger economic threat in the erosion of its export base as rising costs and rising expectations reduce its competitive position.  That is the basis for BCG thinking and it seems right on the money.

Will American manufacturing prowess roar back to life?

Hey, Happy Days was cancelled and Richie Cunningham went off to college too.  This isn’t the 1950’s all over again, but America’s competitive advantage future is to produce more of the products from our own advanced technology R&D here at home rather than risk a bleeding of intellectual property and risk of piracy offshore.

China has built its export powerhouse out of low cost manufacturing of products invented elsewhere.  Commoditizing old technology to drive down the cost is good for business, but China must now focus on R&D and domestic consumption of the goods it produces in order to offset the drain of its manufacturing cost advantage as China takes its place in the Darwinian cycle of having market share taken off-shore by lower cost producers.

Producing more of our own products at home is a good thing.  That it can again be done competitively with offshore competitors like China is delicious irony.

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