Is China unstoppable? Will the United States become an economic backwater—saddled with anti-business hassles like labor and environmental regulations?
I'm not so sure, and a steady stream of data has been building up over the past few years. China's long term, and even medium term, prospects, might not be so rosy.
Consider China's present near monopoly on rare earth metals (like those used to manufacture advanced electric motors, touchscreens, windmills and other high tech items). China, at present, mines approximately 95% of the world's supply, and has been increasingly willing to gouge and abuse the power from this position.
Like many of the strategic advantages currently held by China, this one has been bought at enormous human and environmental cost—propped up by a greed motive that is now unraveling. Rare earth elements are almost always co-located with radioactive elements, like Thorium. Vast pools of radioactive waste are generated as a byproduct of the cheap, dirty mining techniques used in China to refine the elements. As prices have skyrocketed, it is now more competitive to build a modern ore refineries elsewhere—that do not endanger workers, nor leave wastelands behind. The monopoly, and advantage, is unraveling.
Even Chinese manufacturing is quickly becoming less competitive. Labor costs are rising. Quality is declining. Shipping costs are skyrocketing with oil's rise.
Arstechinca ran a must-read piece on the challenges of being a small or moderate sized company attempting to manufacture goods in China:
Today, a year since Krywko’s decision to go against the offshoring tide, Sleek Audio has a full-scale manufacturing operation that can be reached via a 15-minute car ride rather than a 24-hour flight. Each earphone costs roughly 50 percent more to produce in Florida than in China. But Krywko is more than happy to pay the premium to know that botched orders and shipping delays won’t ruin his company. And so far, the gambit appears to be paying off: Based on enthusiastic customer response, Sleek Audio is now projecting 2011 to be its most profitable year ever.
Once they do, these businesses often realize something profound: China isn’t the great deal they expected. A January 2010 survey by the consulting firm Grant Thornton found that 44 percent of responders felt they got no benefit from going overseas, while another 7 percent believed that offshoring had actually caused them harm.
One big reason for this growing dissatisfaction is quality. Like Sleek Audio, countless US firms have received long-awaited shipments only to discover that the products are too flawed to sell. This problem is due largely to China’s success: Factories are so overbooked that they have no choice but to favor their biggest clients. The smaller customers can end up facing long delays or hastily assembled products (or both).
“If you’re a huge company like Apple, you can get the whole factory to work for you,” says Paul King, founder of Hercules Networks, a New York company that makes charging kiosks for mobile devices. “You can put your own process in place, you can have your own quality control. But without that kind of power, you’re just another customer, and they don’t really care.” King cycled through three Chinese factories from 2008 to 2010 before giving up on offshoring due to persistent manufacturing errors—LCDs that winked out after six months, lights that broke when tapped even gently. The quality woes have disappeared now that Hercules is making its kiosks in the US, King says, and the company is thriving.
To deal with their production backlogs, many Chinese factories have started subcontracting work to facilities located in the center and western areas of the country, where labor costs are cheaper than on the industrialized coasts. But this usually makes the problems even worse. “They’ll subcontract your work without providing the subcontractor with the same training that you provided to them,” says George T. Haley, a professor of industrial and international marketing at the University of New Haven who specializes in Chinese business. “Then all of a sudden, your quality assurance goes all to hell.”
In addition to quality issues, subcontracting also exacerbates a second major problem with Chinese manufacturing: the lack of safeguards on intellectual property.
Keep a skeptical eye out, as you hear more about China's unstoppable rise.