Report Review: Manufacturing and Innovation: A Third Industrial Revolution
Intensifying forces of economic globalisation have facilitated the shift of production from highly developed countries such as the US and European countries to emerging superpowers like China, India, and Vietnam during the last several decades (Jacques, 2012). However, there is an argument that a set of technological breakthroughs such as introduction of 3D printing may reverse this shift.
This article represents a critical analysis of the boomerang effect of competitive advantage in manufacturing in relation to developed countries as discussed in The Economist Special Report entitled Manufacturing and Innovation: A Third Industrial Revolution by Paul Markillie (2012).
The article starts with a brief discussion about the rise of China as a world’s largest manufacturer. This is followed by discussing the likelihood of boomerang effect, i.e. shift of production back to rich countries. Moreover, the article contains a discussion of an alternative scenario analysing the chances for China to retain its current manufacturing leadership position in the global scale.
Rise of China as a World’s Largest Manufacturer
Cheap costs of human resources are widely believed to be one of the main reasons behind the emergence of China as the largest manufacturer in the world. According to the US Bureau of Labour Statistics only several years ago the cost of labour in Chinese factories was as low as 64 cent per hour whereas, hourly pay rate in the US factories amounted to $21.11 (Businessweek Magazine, 2004).
Accordingly, this vast difference in employee pay rates has motivated many multinational businesses based in the US and Europe to outsource and offshore their manufacturing to China in an attempt to gain cost advantages.
Moreover, highly increasing level of effectiveness of human resources in China can be specified as another factor that has contributed to its status of the largest manufacturer in the world. It has been estimated that although setting up and maintaining production in other developing countries such as Sri Lanka and Vietnam may be 20-30 per cent cheaper than manufacturing in China the level of human resource skills and competencies in former countries is much lower compared to Chinese workers (Orlik and Davis, 2012).
The Boomerang Effect: The Shift of Production Back to Rich Countries
Currently, there are two tendencies taking place that may cause the shift of production back to rich countries. Firstly, manufacturing workers in China along with workers in other sectors are demanding higher pay, less working hours and more benefits causing the human resource expenses to spiral.
For example “labour costs (including benefits) for blue-collar workers in Guandong rose by 12% a year in dollar terms, from 2002 to 2009; in Shanghai, 14% a year” (Economist, 2012, online).
According to estimations of AlixPartners, a consultancy firm, if annual rise of 5% of currency and shipping costs continues coupled with 30% rise of human resources expenses, the costs of manufacturing goods and shipping them to the US will equal to the costs of maintaining production in the US by 2015 (Economist, 2012, online).
Secondly, a series of technological breakthroughs such as the advent of 3D printing are diminishing the extent of physical involvement of people in manufacturing processes. Specifically, set to revolutionise the area of manufacturing, 3D printing technologies enable the construction of items of any shape and their manufacturing in any quantity with minimum human intervention.
Combined together, these two tendencies possess considerable threat to the role of China as the largest manufacturer in the world. To put it simply, with more extensive integration of innovative technologies such as 3D printing in manufacturing processes it can become more cost effective to set up operations locally in the US or Europe rather than outsourcing to China.
Moreover, by observing the nature and extent of technological developments during the last several decades it can be argued that there are many technological breakthrough yet to come to further diminish the role of people in production processes with negative implications on China’s competitive advantage.
At the same time, it is important to note that there is no guarantee that enhancing level of integration of technology into manufacturing processes is going to shift the production back to rich countries for sure.
There is a convincing argument that given its increasing amount of financial resources in private and public sectors, China can succeed in catching up or even surprises the US and European countries within specific period of time in terms of achieving cost effectiveness in manufacturing through greater integration of technology (Chang-Tai and Klenow, 2009).
Moreover, the importance of systematic investment in research and development and facilitating innovation is recognised as a priority in governments 12th five-year plan that covers the period of 2011-15 (Zhang, 2011).
Resource cost advantages, especially in relation to human resources have enabled China to become the largest manufacturer in the world. At the same time, rapid technological developments are impacting production processes in a way that the extent of physical involvement of employees is being diminished. On top of that increasing level of foreign direct investment into the country are rising the local wages in China in manufacturing sector, as well as, all other sectors.
To summarise the discussion, today there is a significant threat to Chinese economy to experience downturn due to the production shift back to highly developed countries in general and the US in particular. In order to address this challenge in a successful manner more intensive collaboration needs to be achieved between the Chinese government and the private sector so that the country’s competitive advantage can move beyond cheap human resources to include effective and highly innovative technological infrastructure.
Chang-Tai, H. & Klenow, P.J. (2009) “Misallocation and manufacturing TFP in China and India” Quarterly Journal of Economics, 124(4)
Just How Cheap is Chinese Labour? (2004) Bloomberg Businessweek Magazine, Available at: http://www.businessweek.com/stories/2004-12-12/just-how-cheap-is-chinese-labor Accessed January 21, 2013
Jacques, M. (2012) “When China Rules the World: The End of the Western World and the Birth of a New Global Order” Penguin Books
Markillie, P. (2012) “A third industrial revolution: Special report: Manufacturing and Innovation” The Economist, April 21st 2012 issue
Orlik T. & Davis, B. (2012) “Wage Rises in China May Ease Slowdown” Wall Street Journal, July 15 Issue
The End of Cheap China (2012) Economist, Available at: http://www.economist.com/node/21549956
Zhang, Y. (2011) “The successor’s dilemma in China’s single party political system” European Journal of Political Economy, Vol. (27), Issue 4, December 2011