How Chinese Industry Got Too Good, Too Fast

For the last 40 years the global economic status  quo has been that technological advancements are  

made by well funded companies in Europe and  especially the US those advancements are then  

made into commercially viable products that get  manufactured in centers with lower labor costs  

which of course is primarily meant China those  products were then exported all over the world  

flooding markets with cheap stuff the West's  got all the high-tech jobs designing marketing  

and Manufacturing all of those products Global  multinationals made a lot of money consumers got  

lower cost goods and the country's facilitating  all the lowcost labor got a source of income to  

develop domestic industry and provide their  populations with a better standard of living  

than they could have got with basic agriculture  alone it was theoretically a win-win but even  

if the parties involved in this process remained  best of friends which spoiler alert they did not  

there was still the motivation for the lowcost  export centers to want to claim some of those  

high value roles for themselves by whatever  means necessary and well that's exactly what has  

happened in certain areas of manufacturing China  is now just as advanced if not further ahead than  

centers in the west and it's not just disposable  consumer junk anymore sure they still make a lot  

of the plastic land fillers found on Alibaba  or wish or teu or Sheen or whatever platform is  

popular in the given week you're watching this  video but that's in many ways just distracting  

from the fact that the country has become a global  Powerhouse in some of the most important fields in  

the world a rate that's taking a lot of economists  by surprise now this is all happening while China  

is dealing with its worst economic conditions in  decades so the question for them becomes is this  

a vital Lifeline that could get their economy  back on track or is it too little too late the  

question for governments and companies in the west  is what are they going to do in either case so has  

Chinese manufacturing really become a world leader  can the country continue to function if Western  

companies pull their operations from its Shores  and finally are heightened trade restrictions  

going to be enough to hold these industries back  in 1978  China introduced a new law on Chinese foreign  

Equity joint ventures although progress was slow  and not fully recognized by unlockers until the  

mid1 1980s this first step allowed more foreign  Capital to enter the country and help develop  

Regional economies dere regulating pricing and  profit retention in special economic zones to  

a degree where businesses were allowed to set  up their own respective wage structures the  

experiment paid off and the country entered the  most intense period of economic growth in history  

it also increased the pace of urbanization as  workers were drawn from the countryside into  

high paying jobs in the cities there was enough  liberalization to bring China into the world  

trade as a notable export competitor fast forward  today and mostly China is not just a manufacturer  

but the manufacturer on the world stage this had  a profound impact on our own economies before  

rise of China something as simple as a toaster  was a major appliance purchase that people would  

shop around for with as much thought as we do a  computer today but Chinese manufacturing allowed  

people to purchase far more consumer durables  at a far lower cost for decades the maiden China  

label was analgous with poor quality sites like  Alibaba wish Teo or Sheen certainly don't help  

those stereotypes but with efforts in the realm  of quality control following outside pressure as  

well as their own growing understanding of how  competition is changing Chinese manufacturers  

especially larger players have led some members of  the press to claim that once you I quitous old shy  

Chinese manufacturing is a thing of the past so  has Chinese manufacturing really become a world  

leader both in quality and quantity well yes and  no when looking at cheap items online China is  

still almost always behind it and that has a lot  to do with financial viability the international  

labor organization found that Chinese unit labor  costs are about 20 to 40% of us labor costs they  

are also low relative to costs in the EU Japan  Mexico Korea and most other newly industrialized  

countries let alone those that are already  established for another way making $5 portable  

speakers just doesn't make sense in places like  the USA where blind workers make $25 an hour this  

was also due to a long-standing dynamic one that  at least for a while meant that not everything  

was made in China typical Advanced manufacturing  has been safer from Chinese Outsourcing because  

labor is a smaller component of the total cost of  manufacturing something like an aircraft which is  

highly technical requires a huge amount of  research and development and places a high  

emphasis on how much people inherently trust  to the product these jobs require a lot more  

sophisticated manufacturing equip with fewer more  skilled technicians than something like an iPhone  

in which labor is a much larger share of the total  end cost of the product it was easy to keep this  

kind of advanced Manufacturing in places like the  USA and Europe because that's where the skilled  

workers and Technical knowhow was but if China  can make these Advanced products just as good  

or better then even the small cost saving on labor  starts to look compelling regular old human nature  

and Global perception plays a strong role in this  as well I was used to joke that I wasn't ready to  

fly on a plane manufactured in China just yet but  the recent news about Boeing means that people  

might even prefer the Chinese plane these days the  point is that for decades China relied on foreign  

Outsourcing and intellectual property to gain  this reputation as a global manufacturer so can  

the country function if Western companies pull  their operations from its Shores the answer to  

this question can be found by observing China's  climb up the services pyramid it's to made clear  

that the country is the factory floor of the world  but now it's recently promoted itself into more  

senior roles now China is doing more advanced work  like designing research and development marketing  

and managing inhouse where those jobs used to be  kept in the west while the country just focused  

on making things this is no laughing matter for  Western economic superpowers as for a long time  

the USA and to a lesser extent large Western  European countries have effectively had the  

Monopoly on global companies but China has grown a  lot in recent decades up until about 10 years ago  

it would be hard to name any of their companies  that operated outside of the nation's borders  

and that's starting to change perhaps one of the  best examples of a Chinese product that breached  

these barriers is Huawei a Chinese multinational  technology company that provides information and  

Communications techn infrastructure and smart  devices the telecommunication company's growth  

has been so staggering to competitors that a  number of Western Nations have passed legislation  

to curb growth based on security risks now a lot  of these concerns were very well-founded which  

is another problem that Chinese manufacturing  needs to address if it's going to push its own  

companies onto the global market rather than just  being an assembly shop for other brands Britain  

in 2020 decided to ban Huawei and other vendors it  deemed high security risk from 5G networks Danish  

lawmakers in 2021 passed legislation to allow  the screening of foreign investments to ensure  

they do not POS a threat to National Security  and French authorities in 2020 told telecoms  

operators planning to buy Huawei 5G equipment  that they would not be able to renew licenses  

for the gear once they expire effectively phasing  Huawei out of mobile networks of course making the  

argument for Chinese products and services  potential as a national security risk might  

be valid but it also has the convenience side  effect of protecting Western companies without  

calling it trade restrictions so how exactly  are these new up-and-comers brute forcing their  

way onto Global markets well it at least  in part has a lot to do with government  

subsidies organizations like Stanford's Center  on China's economy and institutions have been  

tracking this development for quite some time  their findings show that since 2007 China has  

required listed firms to publicly report direct  government subsidies between 2008 and 2018 these  

subsidies increased from $4 billion to about $29  billion according to the disclosures subsidies  

were distributed for R&D Innovation industrial  and Equipment upgrading employment stabilization  

and promotion Environmental Protection and  general business operations it should be know  

however that this is by no means a perfect system  as the most significant determinant of receiving  

direct subsidies is a larger firm size and the  receipt of subsidies is linked with lower firm  

productivity growth and only modest growth in R&D  spending in subsequent years additionally higher  

employment levels appear to be mostly temporary so  China has to essentially keep feeding money into  

the machine to sustain this form of growth another  element worth acknowledging though is that China  

possesses a very well educated population with a  system that places a strong emphasis on industrial  

skills at all levels and lots of students are  seeking education abroad bring that knowledge back  

to China this ongoing adaptation has been a top  priority for China's government and just 5 years  

ago they issued a rather optimistic blueprint for  further development in the coming decade focusing  

on establishing a modern high quality and balanced  system for equal and competitive education and  

marking a shift from capacity to quality of  course there's also the tactic that's given  

China a pretty bad reputation one that's been  applied fairly blatantly in almost every industry  

straight up stealing if a company manufactures  its products in China the conditions are that they  

have to work with a Chinese company and in many  cases the products that those Chinese companies  

are making are reverse engineered and re-released  as their own products with a significant cost  

reduction there's actually a case involving Huawei  and Aken semiconductor a us-based company that had  

developed near indestructible glass which was  promoted as the next great material to make  

smartphone screens more resilient they've sent  a prototype in the hopes of gaining Huawei as a  

customer but the contract terms were broken when  Huawei allegedly attempted to reverse engineer  

the product during testing phases thus violating  export control laws and this isn't an isolated  

incident There is almost an endless list of  scandals where Chinese companies only collaborated  

with Western companies to make something of their  own a lot of Tesla's manufacturing went to China  

and now there are claims that the Chinese made  model 3s Are Better Built than the American and  

european-made Teslas in fact China's byd is now  the biggest EV manufacturer in the world here in  

Australia for example byd cards are already  massively cutting into the market share of  

Tesla because Australia doesn't have a local auto  industry so it doesn't care where it gets its cars  

from the company started off just making batteries  for other companies but they built the rest of the  

company around it and now they have the good jobs  in addition to the manufacturing capabilities and  

they're bringing the profits back to China not  Western shareholders now all of this is impressive  

given where China was a few decades ago but there  are areas that make the China success story a bit  

misleading for example a lot of China's growth  has been predicated not on genuine value adding  

manufacturing but rather on building more houses  than they need to use as Investments this is  

great for headline economic figures because it  employs a lot of of people and adds a lot of  

value because average people are willing to spend  a lot of money on building a house however it's  

unsustainable the property Market has imploded  causing a huge pullback in economic growth and  

economic issues like youth unemployment got so  bad that the government just stopped reporting  

those figures but with so much growth in these  other Industries the former improvements could  

theoretically make up for that speculative Mania  and give the second largest economy in the world  

a way to grow in a more sustainable manner if  this dream of Chinese economic advancement does  

come true it could be really bad for us companies  in particular in response to this the US can and  

already has put significant trade barriers in  place to protect local jobs but the US is the  

most powerful economy in the world because of the  global reach of its companies and it can't really  

Force other countries to also block Chinese  exports what makes this even crazier is that  

even with trade barriers this export strategy  is kind of working China has the largest Trade  

Surplus right now of any country in history  during June of 2024 alone the trade surplus  

in China amounted to approximately 99 billion this  for now is in fact offsetting the losses from the  

crippled real estate sector but it's also making  other countries angry furthering calls for trade  

restrictions of course one of the major arguments  is that China's AFF forementioned subsidies are  

more political in nature than economical with some  even claiming that the Chinese skew markets which  

leads to over production and The Dumping of cheap  products in the global market trading hard earned  

money for junk and this by no means as stated  earlier is a recent development in fact some of  

these Concepts go back almost 10 years an example  of an ongoing battle can be found in Renewables  

energy specifically solar panels again a very  technical and highly valuating modern industry  

at the Forefront of global attention about 7 years  ago the European Union had extended anti-dumping  

and anti-subsidy measures for Chinese solar  panels Wafers and cells but pass forward to  

the present day and it doesn't look like this  made much of a difference between 2022 and 2023  

exports in this sector to Europe only dropped by  about 9% in terms of annual growth rates Saudi  

Arabia South Africa Malaysia and Pakistan all  imports from China increase by well over 100% in  

23 from 2022 totals and All Join the ranks of  major markets for China's panels and modules this  

really makes that 9% seem less like a massive  Victory and more like a drop in the buckets  

at least for now the Western resistance to the  country's Evolution may slow this progress but  

it doesn't seem to prove that it can stop it  entirely the fact of the matter is that good  

enough and cheap for many consumers around the  world is often preferable to something slightly  

better and considerably more expensive but there  are key domestic obstacles that China still needs  

to deal with in addition to the real estate bubble  the country also has an aging population and an  

expensive one at that even with the rise in wages  many Chinese residents can barely afford to live  

in places like Beijing the cost of living  just continues to rise in other words this  

complicated sociopolitical Arrangement that the  Chinese people have with their government only  

works if things remain affordable and the people  can continue to make good money something that's  

becoming a growing concern in recent years if  China can manage to sustain its growth eventually  

making products that match the quality of other  competitors with their reputation for quantity  

and get pricing under control there's nothing  at the moment in terms of economic resistance  

that can stand in its way that is except itself  whether or not China will be able to fully pull  

this off depends on if these new developments  can pay off if they can manage that and regain  

the faith of its people China might not just break  even but it could very well emerge stronger than  

ever before now we made an entire video last  year detailing the extent of the challenges  

that this industrial boom has to overcome we  didn't want to repeat too