Made in China seems to appear on nearly all products global consumers buy. Why is everything made in China? The simple answer is low labor cost. China has more than 1.4 billion people living within its borders. In less than forty years – 1980 to 2020 – China went from a farming economy to a manufacturing economy. Then, how did China become a manufacturing giant?
By: Brad Nakase, Attorney
By 1000 AD, the country of China had unsurpassed global power. The technology in China was far more advanced, over 1/3 of the globe lived between its borders, and China accounted for 50% of our world’s GDP. Although China was considered far superior to the West at this point, it was not long before Europe emerged from The Dark Ages, surpassed Chinese ingenuity, and emerged as the new leader of the world. In 2022, the West is still considered on top. However, it is a definitive fact that China is on the rise again.
By 1978 China’s GDP was estimated at $200 billion, accounting for merely four percent of world GDP. Presently China’s GDP approaches $200 billion, and 15% of economic activities across the globe involve China. This economic rebirth over 40 years can be attributed to Chinese manufacturing. Across the world, China is now considered a global factory. However, this was not always the case.
By the first part of the 20th century, the majority of goods were produced where they would be sold or close by. As such, Europeans created European goods, Americans made goods for the USA, South Americans made good for South America, and so on. What changed this was the availability of affordable worldwide shipping. Suddenly, a company was able to produce goods in one part of the planet and get it into the hands of consumers who lived on the other. The question is: why was China the country that emerged as a manufacturing giant that superseded all others?
Deng Xiaoping assumed power in China in 1978. The ambitious new leader traveled to Singapore and Bangkok as well as other thriving Asian cities, growing quickly convinced that China’s greater success depended on availing itself to the rest of the world. Xiaoping worked to privatize businesses give farmers control over their properties and businesses. Most vitally, he allowed foreign investments to be made in China. Foreign investment had not been allowed in China for many decades.
Deng Xiaoping continued his quest to improve China’s economy by opening up four unique economic zones in the country. These new zones featured tax incentives, as well as exclusion from the strict oversight on investments, as well as the trade that existed in most of China at the time. One of the most profitable of these zones was Shenzhen, located in the Province of Guangdong.
Shenzhen began as a small town consisting of approximately 30,000 people. Today, Shenzhen has close to 18 million inhabitants, rivaling cities such as New York or London. Shenzhen’s meteoric rise made it arguably the quickest growing city through all human history, as it went from a small town to a bustling, productive city.
Shenzhen is unique because the other economic zones were already in established areas, while Shenzhen was not. However, Xiaoping knew that Shenzhen was located slightly north of Hong Kong’s border, which was a territory of the U.K. Therefore, Shenzhen was China’s new key to the commerce and markets of the West.
Not unsurprisingly, Shenzhen is now the world leader in the manufacturing of electronics. The busy city is known for its two key traits. The first is its capability for manufacturing electronics products for consumers. The second is its reputation as a hotbed of talent in product development and product research. Industry-leading companies like Canon, Apple, Samsung, and Sony now manufacture products in Shenzhen.
Contributing to Shenzhen’s booming manufacturing industry is the fact that labor costs in China are much lower than in the rest of the world. In the U.S., we pay factory workers about $10-15 per hour, Chinese laborers in Shenzhen make about $3-4 per hour.
Based on this, up to 90% of global consumer electronics are created in Shenzhen. Additionally, China’s currency has been artificially depressed. Until 2005, China estimated its exchange rate at 8.27 yuan/dollar. Over the next few years, they allowed the value to increase marginally. However, during the U.S. financial crisis of 2008, China lowered the value of the Chinese yuan to make exports even more attractive. Presently, the Chinese government chooses a daily exchange rate and then allows it to fluctuate 2%, allowing Western companies to purchase it for less.
Although manufacturing has played a significant part in vastly increasing China’s GDP over 30 years, simply making goods is not sustainable over the long term. This is because labor prices have risen, making manufacturing less competitive. Ironically, this price increase is derived from China’s economic growth, which was based on the growth of manufacturing.
In the days before manufacturing took over, China was made up of poor farmers. However, the manufacturing boom created a solid middle class, as well as cities with a high cost of living. In the past, young workers moved to cities to earn money. Now, young people move to the city and stay there in search of joining the middle class and living urban lives.
In central Shenzhen now, the average real estate cost nears $1,200 for each square foot, higher than New York or even San Francisco. Higher earnings are needed so that workers can pay for their housing, even if they live outside of the city center. Conversely, each day automation becomes more advanced and less costly, making manufacturing less reliant on labor.
By 2015, China had launched an initiative to spend billions annually in order to upgrade factories. However, automating factories will probably not stop companies from leaving China. As manufacturing becomes increasingly automated in China, companies will return to the U.S. and the West. This is because the cost of robots is the same, regardless of whether they are in the U.S. or China.
U.S. companies want to save money on the cost of shipping, as well as also enjoy the PR boost that the “made in the USA” tag brings to their businesses. The result of this for China is that their once prosperous labor jobs are being shipped out to less costly and less developed countries like India, Vietnam, and Bangladesh.
A decade ago, it would be difficult for a company and brand to prosper in Shenzhen. The retailer created a blockade between the consumer and the actual manufacturing trade. However, the influence of e-commerce websites such as Amazon has made it possible for companies from the East to sell to consumers in the West. The current system emphasizes quality of goods overprice, making this the right time for Chinese free enterprise to flourish. Yes, Silicon Valley, California, is the top area for startups in the software industry, but Shenzhen deserves credit for its remarkable contribution to Chinese hardware manufacturing and development. If the city of Shenzhen continues to adapt to the changes of the global economy, it will continue to succeed.