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How China Became the Factory of the World

8 November 2019

China’s Secrets to becoming the Global Factory

 

If you check the tag of any number of products, chances are high that you’ll find the words “made in China.” It seems like everything is made in China, including iPhones, Nikes, Barbie Dolls, Levi’s jeans, Dell computers, and so much more. But how did China become the factory of the world?

The answer’s a little complicated, but we’re going to lay it all out for you today. By the end of this article, you’ll understand how China expanded their economy so quickly, why everyone wants to make their products there, and what challenges they face in the future, but first a little background.

Let’s take a look now at the factors that have made this possible.

 

If you are one of those Aluxers who would rather watch visuals over boring text, here’s the whole article but in a form of our YouTube video:

With that out of the way, let’s get started with the article and discuss the facts that made China, the factory of the world:

Introduction

The People’s Republic of China was formed in 1949 under the leadership of Mao Zedung. Chairman Mao is credited with modernizing the country and helping to elevate it to a world power in part by improving education, promoting women’s rights, developing a better health care system, and laying the groundwork for a more industrialized economy.

However, in the later years of his rule in the 1970s, China was still primarily an impoverished nation, partially as a result of political turmoil and the government’s mismanagement of the economy. Yet today, only 40 years later, China is the world’s second biggest economy, the top manufacturing and trading nation, and one of the most influential investors in countries throughout the world.

China has replaced America as the world’s top factory producer, and they are on pace to potentially surpass the economy of the United States to take the top economic position in the world. China is truly the factory of the world with over 47 percent of its exports going to Asian countries, 22 percent being sent to America, 19 percent to Europe, and about 4 percent to both Africa and Latin America.

Economic Reforms

In 1978, two years after the death of Mao Zedung, Deng Xiaopin [Ding Sh-ow-ping] became the paramount leader of the People’s Republic of China. Under this new era of leadership, economic reforms were put in place that took China in a completely new direction. They helped shift China from a more agricultural-based society to a market-oriented economy with a major focus on foreign trade.

One of the most significant reforms was the Law on Chinese Foreign Equity Joint Ventures, which was introduced in 1979. This opened up the country to foreign investments and allowed for individuals in China to start businesses that weren’t owned by the state.

This was the beginning of a number of important trade relationships, including their number one future trade partner, the United States.

US and China Trade Relations

Around this time, diplomatic relations between China and the United States began to improve. In 1972, the US imported only 4.7 million dollars’ worth of goods from China. By 1984, the US was China’s third largest trading partner, but China still only represented less than two percent of all American imports.

In the mid-1980s, the Chinese government began to give companies greater freedoms by easing pricing restrictions and allowing them to retain their own profits and set their own wages. They also offered tax incentives to both domestic and foreign investors. All of these reforms combined helped establish China as a major global exporter.

Since 1985, America’s trade with China has increased well over 7,000 percent, and in 2015 China passed Canada as America’s largest trade partner. This trade relationship with the US, which has been a hot topic in the news lately, has been an important part of establishing China as an economic powerhouse, but it is only one of several factors that have helped make China the indisputable factory of the world. Let’s take a look at another one.

Low Wages

China has the largest workforce in the world with about 775 million of the total population of 1.4 billion actively working. The abundance of workers competing for factory jobs has historically enabled Chinese manufacturers to keep wages low.

However, as China’s factory workers age, it is getting more challenging to attract skilled factory laborers since the younger generation of Chinese are drawn to other more advanced occupations that don’t involve long hours of labor on a hot production floor. This has helped encourage a steady increase of wages.

Those who are willing to do the work and do it well realize their value, and employers are forced to pay them competitive rates or risk them leaving and decreasing production. The highest wages are found in Beijing and Shanghai, but even there workers are making less than three dollars and fifty cents per hour in US dollars.

The wages in other Chinese cities are as low as 11.6 yuan or $1.65 in US dollars per hour. Obviously these lower wages help contribute to higher profits, which is a primary reason why so many companies look to China for their manufacturing needs. But there is another reason why production costs have been historically low in China.

(average wages in Chinese Yuan Renminbi)

Resource: Richest People in China

Less Regulation

The manufacturing boom in China was amplified by the lack of restrictions and regulations that were common in the West. These included lax standards in regards to child labor, health and safety, environmental protections, and wage and hour laws.

Not putting an emphasis on these types of regulations helps lower costs and boosts the bottom line. However, it meant that for many years, factory workers, including children, were working 16 hours or more a day, 28 days a month in unsafe circumstances. Some employers even withheld paychecks until the end of the year to ensure their workers didn’t quit.

There were environmental consequences as well. As of 2018, 22 of the world’s top 50 polluted cities are located in China. It’s true that in recent years, China has taken major steps in increasing necessary regulations such as banning child labor for those under the age of 15.

However, the inconsistent enforcement of these new regulations means many companies are still able to get around them. This is just one of several challenges China faces in the coming years.

Resource: The 15 Richest Lawyers in the World

The Future

The state of manufacturing is close to a tipping point in China due to a combination of factors. We mentioned earlier that wages are increasing, which has caused many companies to explore other lower-cost options outside of China, such as Sri Lanka, where workers make an average of 50 cents per hour.

At the same time, factories are compensating for the decrease in skilled laborers by automating as much as possible. This means that robots are rapidly taking the place of Chinese factory workers, and there are minimal efforts to teach these workers new skills that could be valuable in the shifting economy. This is why many experts have stated that unemployment will be a significant problem in the coming years in China, with the biggest cities being hit the hardest.

For these reasons and others, China is beginning to take steps towards restructuring into a service-based economy with a greater focus on e-commerce and technology. In 2018, 52.2 percent of China’s GDP came from the service sector, while 40.7 percent came from industry.

2011 was the first year that the service industry surpassed manufacturing in terms of GDP, and the percentage has slowly but steadily increased every year since then. As long as this trend is supported by workforce training and government policies, China’s economy should continue to grow despite its challenges.

Source: StatSoft

Conclusion

China has achieved unprecedented growth over the past forty years to become the undisputed factory of the world thanks to economic reforms, limited regulations, low wages, a massive workforce, and strategic trade relationships.

In 2010, China became the world’s second largest economy behind the United States. The U.S. has held the top spot since 1871; however, China’s economy is consistently expanding at about three times the pace of that of the United States.

In 2018, China was the world’s largest exporter by value with about 2.3 trillion dollars’ worth of products being sent around the globe, but there are signs that this trend may not continue so strongly in the years to come as emerging economies are able to offer cheaper labor and increased profits. Yet China appears ready to face the challenges of the future head on and adjust as necessary to maintain their status as an economic powerhouse.

To get even more insights on how China was able to achieve this massive economic growth, check out China’s Economy: What Everyone Needs to Know by Arthur Kroeber. This book includes important details about how China got to where it is today and discusses how China will need to adjust in the future to maintain its success and the implications for a wide range of industries.

If you’re looking to start or grow a business, you will definitely want to understand the role China plays in the global economy and how it could impact you as well. Normally this book costs 25 dollars, but no need to part with your hard-earned money. Just go to alux.com/freebook and sign up so that you can get the audiobook version for free thanks to our partnership with Audible!

Resource: These 40+ Amazing Photos Will Make You Want to Visit China

Question

Now that we’re wrapping up this story, we’d like to know: Do you think companies should respect China’s increased regulations and accept the potential decrease in profit, or should they just move to whichever country offers them the best bottom line? Let us know what you think in the comments.

Bonus

Here’s a bonus fact to thank you for sticking with us until the end:

In 2018, the US imported over 479 billion dollars’ worth of Chinese exports, which makes the US the leading trade partner with China.

A total of 72 percent of shoes and 49 percent of toys in the US were manufactured in China. Globally, China manufactures 70 percent of the world’s umbrellas and 60 percent of the world’s buttons among millions of other products.