Once a poverty-stricken country with a large population, China was transformed into a “socialist market economy,” by a series of economic reforms initiated by Deng Xiaoping in 1978. Since then, unprecedented GDP growth, currency manipulation, and development of skilled human resources have resulted in China becoming the factory of the world. Foreign investment, attractive consumer prices due to economies of scale, and lower goods transport costs have accelerated this phenomenon. It is especially true for technology products.
It is evident that China is a technology manufacturing, assembling, and raw materials supplying powerhouse from its top 10 exports that all fall in the technology category: broadcasting equipment, computers, office machine parts, integrated circuits, telephones, electrical transformers, semiconductor devices, video displays, insulated wire, and electric heaters.
Despite its standing as the major trade partner of countries across all continents, supplying technology goods that flood markets worldwide, the ongoing COVID-19 pandemic will result in one fundamental seismic shift in the global economy — our technology products will no longer be primarily made in China. Some trends predating the virus outbreak, compounded by political and national security reactions in a post-pandemic world will be responsible for such transformation.
Rising Labor Costs in China
It’s natural for wages of factory workers in China to rise as the country develops. Chinese citizens’ consumption of goods and services is on the rise, resulting in aspiration for higher wages. According to Euromonitor, average hourly wages in China rose 64% in just five years to reach $3.6/hour in 2016. In contrast, the average hourly wages in countries like India and Sri Lanka are one-fifth. This gulf in fixed cost incentivizes flight of technology manufacturing from China.
In fact, technology companies have already begun relocating plants of devices made in China until now. The homegrown consumer electronics giant, Huawei, is investing in smartphone production in India. Foxconn, Apple Inc.’s iPhone manufacturer is also on the brink of launching smartphone production in India and Vietnam.
The trickle of production lines opening up elsewhere may turn into a flood as China’s consumerism and urbanization start to drive up salaries and wages.
US Goods Trade Deficit with China
Due to its position as a high-tech manufacturer, raw materials and parts supplier, China has built up massive foreign currency exchange reserves. Save recently, China has attained trade surpluses due to skewed relationships with its partners. China exports high tech devices and equipment to other countries far more than it imports.
US President Donald Trump has expressed concern over the US goods trade deficit with China totaling $419.2 billion in 2018. You may have noticed that everything from toys to smartphones to kitchen appliances are made in China. Large retail chains in the United States, such as Walmart, and online portals like Amazon, carry colossal inventories of made in China technology products. While American services industries, such as Spectrum internet remain unaffected by the US-China trade relationship, tens of thousands of US manufacturing jobs have evaporated over the decades.
As the United States recovers from the damaging effects of COVID-19 lockdowns, expect the world’s largest economy to use tax cuts, tariffs, and reduced regulation for American businesses in order to get the assembly lines whirring again on the US soil. The goal will be to make high-tech consumer products right here in order to get people back to work as unemployment claims jumped to 3.3 million in March 2020.
Advances in Factory Automation
Offshore production of technology products designed in developed countries, such as the US, Japan, or Germany, became viable due to the cost savings resulting from lower wages of human workers on the assembly lines in developing countries.
The supply chains of high-tech products are designed to save not only on worker wages and salaries, but on taxes as well. The renegotiation of trade agreements is a significant factor in making offshore production less attractive, but a much bigger driver of change in production of technology will be technology itself.
Automation in factories will enable US and European companies to manufacture technology products locally. A robotic arm can achieve the highest-quality intricate work that would take considerable resources for a human to master. Machines do not call in sick nor do they ask for paid leave, or resign to leave the production supervisor with a shift-scheduling problem.
With ever-decreasing operating costs and high reliability of robots to achieve production tasks, expect the comparative advantage of China in the technology manufacturing industry to end.
Death of “Just-in-Time” Production Model
Most high-tech industries have been using the “Just-in-Time” inventory system for production. A manufacturer receives raw materials, such as Cobalt, Germanium, or Silicon just as is needed for manufacturing a particular batch of units. Many internet and TV devices sold in the United States use such raw materials.
After the COVID-19 pandemic is brought under control, expect technology companies to bring back some aspects of the outdated just-in-case manufacturing process. Buffer levels for stock reordering will be raised to have more raw material on hand for production. This will be to minimize the impact of supply shocks on a high-tech company’s own production volumes.
Raw materials suppliers will be diversified and the production facilities brought home in order to drastically will reduce goods’ time to market. As technology companies move to ensure supply-chain resiliency with contingency planning, China will lose out on tech production. The Asian giant may continue to be a raw materials or parts supplier for the technology industry, but the bulk of production will move closer to consumers.
While the technology industry will remain interdependent on trade with China, the COVID-19 pandemic as well as prior economic trends will hasten the decline of technology production in China. With the biggest markets hoping to achieve economic self-sufficiency, political realities will bring about policies encouraging companies to produce high-tech products at home. Moreover, the supply chain will be brought closer to home, and the raw materials or parts suppliers will be diversified to avoid supply shocks. Automation will remove China’s comparative advantage of a highly skilled, low cost labor force. US technology production looks set to take advantage in 2020 and beyond.