China’s Manufacturing in 2008: A Rollercoaster that Shows No Signs of Stopping?


Looking back over the developments of 2008 in China's manufacturing base, they are quite astounding.  The signs of change began before 2008–probably the most notable being the Central Govt.'s elimination of VAT tax rebates in the summer of '07.  Consider this the long, first ascent of the rollercoaster.   Hope you have your seatbelt on.

began the '08 with rapidly increasing costs across the board in most
sectors: new labor laws, repealed VAT rebates in effect, increasing commodity
prices, unprecedented growth in shipping, rising energy and material
prices–a slew of factors raising the cost, and the perception of cost,
of manufacturing products in China.  It is estimated that 10,000+
factories in southern China alone shut down due to an inability to
compete amidst the changing conditions.  There were powerful winter storms blocking tens of millions of workers timely return home during the Chinese New Year Holiday.  Many workers returned late, and many more never returned at all.  Also, the mounting preparations and excitement over the Olympics also caused a lot of frenzy in manufacturing and logistics circles.  This affected the Shanghai and Beijing regions far more than the southern regions.

Now, with the mounting slump
in demand becoming apparent in the second half of 2008, material and
commodity costs have dropped, VAT rebates have been reinstated for a
number of product categories, and capacity in shipping has quickly
opened up.

I recently heard the claim (haven't been able to verify yet) that Dongguan, a
region in Southern China long known as a manufacturing hub of the area,
has had it's population (previously ~12 million people) cut in half
over the last year.  Comprised largely of migrant workers from regions
further west in China, approximately 6 million of these workers have
returned home and not come back.  If the claim is true, which I believe there is at least a lot of truth to it, it's quite remarkable!  I think it's hard for Westerners to fully grasp
the kind of challenges a shift like this can present to local governments,
economies, etc.  Imagine if half the population of Los Angeles, New
York, London, or Paris, simply up and left in a matter of a year! 

The challenge of retaining skilled workers in China is well known, but some are now questioning whether retaining unskilled workers in some key manufacturing areas like Guangdong, is going to heat up.

World demand for Chinese exports drop–and many of the short-term effects we've seen aren't hard to predict.  See my post here.  But they will no doubt have longer term effects–and there is a lot of talk, but no consensus, on what exactly they might be.  Elliot Ng, of, has written a good summation of the challenges China's economy now faces amidst the world financial crises.  In the article, Elliot's Hong Kong Uncle summed up things rather concisely:

Uncle’s simple but powerful framework:  China is supported by a three-legged stool, but two legs are now broken

China’s economic growth is supported by three primary legs:

export-led growth
real property growth
government spending

The first and second legs are now broken.  Ng goes on to write:

Nouriel Roubini, the NYU economics professor that predicted many elements of this global meltdown, writes (at RGEMonitor, reprinted with commentary at JapanFocus)
that there is strong evidence that China is facing a hard landing. 
Roubini points out that a hard landing actually still means a 5-6%
growth rate.  9-10% growth is needed to absorb 24 mm new entrants into
the labor market, including 12-14 mm poor rural farmers.  A 5-6% growth
rate means a significant risk to social stability and continued
political control, so its clear that Chinese leaders are in a tough

China's growth model necessitated their domestic consumer market pick up the  burden of the export sector–basically meaning that the hope was Chinese manufacturers would be serving their own consumers as much or more than foreigners.  But for a number of reasons (maintaining an undervalued currency, very high savings rates, and maybe just not enough time), China hasn't reached this point.

Now, the government is forced to make up for the lack in spending through economic stimulus packages.  Whether this will be enough, no one knows.  Many bloggers and economists are speculating on the impacts of all of this on the next year or two: possible increased social unrest, a tougher stance by Beijing on social unrest, currency revaluation, export subsidies, and the list goes on.

I prefer to error on the side of "no one really has any clue what's going to happen", and to not make hasty judgments.  Some are predicting China will be just fine this year.  One thing is certain, if you're manufacturing in China, change is in the air.  I know–that's not rocket science.  The rollercoaster ride may have just begun, but this doesn't mean you can't find opportunities to thrive in this environment.  If you have time to tend to more than your challenges here, pay
attention to your sources, pricing, shipping, and govt. policy in China.   New prices, better sources, more attention, faster shipping…  All worth looking into.