China has long been seen as a bogeyman in the United States. Chinese firms have flooded the US market with cheap mass-produced goods for decades. While the quality of those goods is often lacking, the sheer volume of those goods and their low prices have helped Chinese imports gain a strong foothold in the US. Much of that was due to low labor costs, but that is starting to change.
The Move From Labor to Capital
Chinese industry took advantage of the country’s vast population to build its export industry on the basis of cheap labor. At the beginning of China’s economic boom, most of the population still lived in rural areas. As urban industrial centers began to build up their industries, more and more Chinese flocked to big cities, attracted by the prospect of jobs that paid more than the farm work to which they were accustomed.
This influx of cheap labor enabled Chinese factories to outcompete Western companies in producing low-end, labor-intensive goods. Many Western companies began to move their factories to China, enticed by labor costs that were significantly lower than what they would have to pay back home. A common complaint, however, was that the quality of goods produced by low-cost labor couldn’t compare to that produced by higher-cost labor in the West.
As Chinese industry began to mature, workers began to gain more experience and the quality of Chinese-made goods began to increase. The number of Chinese moving from the countryside also began to slow down, as most Chinese who wanted to move from the country to the city already had. While China had a large population, it was not unlimited. The government also saw the strain of a migrant workforce on social services and began to place restrictions on internal migration.
As the supply of labor began to reach its peak, salaries began to increase. China now saw itself faced with the same problem that had faced its Western competitors, a labor force that began to demand more pay as it became accustomed to a more affluent way of life. So how did they cope?
Chinese Companies Following the Western Pattern
In some industries, Chinese companies followed a similar strategy to that taken by Western firms: outsourcing. They began to move their factories to countries such as Vietnam that offered lower labor costs. But that strategy can only go so far, as there are only so many times that a company can outsource before it finds itself unable to find a source of cheap, dependable labor.
Thus many Chinese companies have begun to move from labor to capital, investing in robots to reduce their production costs. While robots very often incur a high up-front cost, their recurring costs over a longer period of time are lower, allowing companies to produce goods faster and more efficiently than with human workers. Just like in the West, where rising labor costs are contributing to an increase in workforce automation, Chinese industry is also slowly moving towards replacing people with robots.
Just because workers are being replaced with robots doesn’t mean that robots will completely replace human workers. There will still need to be people who design the robots, program their functions, repair and maintain them, etc. Quality and speed of production will increase, as robots will be able to work faster and with fewer mistakes than human workers.
But most important from the perspective of US firms is that rising Chinese labor costs mean that China’s competitive advantage against the United States is disappearing. Rising labor costs in China will squeeze Chinese profit margins, making Chinese goods more expensive and thus not nearly the bargain that they used to be. Companies that may have thought about outsourcing to China will take a second look, as more expensive Chinese labor makes it more attractive to keep factories in the US.
While Chinese factories will look to automation to reduce labor costs and become more competitive, they will face American factories with experienced and highly-skilled laborers and greater experience with automated production lines. That’s good news for Americans companies and American workers who will now be able to compete on a more level playing field.