Is the Chinese manufacturing engine waning?

A recent post in the UCLA blog features an interview with the former COO of Walmart-China, who makes some very interesting observations on the state of manufacturing in China.

Edwin Keh notes that “Net export from the Pearl River Delta has declined over the last few years. The number of foreign-owned factories, the pool of migrant labor, and materials suppliers upstream and downstream from manufacturers have all slowed or have been significantly reduced. On the other hand, anecdotal evidence leads one to believe that there is some corresponding growth in manufacturing activities for the domestic marketplace. These are dominated by domestic investments in less concentrated and lower labor cost areas in Western and Northern China. Consequently, it is evident that the two export deltas (i.e., Pearl River Delta, Guangzhou area, and Yangtze River Delta, Shanghai area) are bearing the brunt of the declines. However, the domestic manufacturers in the Western and Northern parts of China are smaller in net volume and value relative to the exporters they replace, and their future success is too early to tell!”

Keh goes on to emphasize that Chinese manufacturers are investing more in automated technologies, and that the reliance on Chinese workers as the primary vehicle for low-cost manufacturing is on the wane.  He notes that export manufacturing in China is dependent on whether “(1) the United States and Europe experience their recoveries; (2) the consumption habits of Americans and Europeans do not change; and (3) China improves its manufacturing efficiencies with automation.”

Keh also points out that Chinese youth are less willing to work in harsh manufacturing environments, unlike their parents.  This is a singularly large demographic difference, that is driving many manufacturers to lower cost regions such as Malaysia, Vietnam, and even North Africa.  There is good reason to believe that this trend will continue.

Does this mean Chinese manufacturing prowess is on the decline?  Hardly.  But it does suggest that China is hoping to promote more designers, brand managers, and entrepreneurs in their supply chains, which is much more difficult to “engineer” into the economy.

My own opinion is that this is going to be very difficult to do for China.  Given my observations on the weaknesses of the education system and the lack of talent-producing universities for supply chain management, combined with the logistical infrastructure difficulties, this is going to be a tough task indeed.