China to Assume Leadership Role in Global Manufacturing- Is This Cause for Concern?

Of little surprise to supply chain managers, a recent article published by The Financial Times indicates that China is positioned to overtake the US in 2009 as the world’s largest producer of manufactured goods, four years earlier than expected. This article cites forecasts conducted by Global Insight for the Financial Times, and concludes that in 2009, China will account for 17 percent of manufacturing value-added output vs. the forecasted US output of 16 percent.  More revealing though is that Global Insight forecasters had previously predicted that the US would retain the top position until 2013, but a large downward revision and current economic factors has caused the US to slip more quickly than expected. This article’s sobering conclusion that the expected change will end more than a 100 years of US dominance in world manufacturing output.  The question I raise for Supply Chain Matters readers is ‘Should this be a major concern?’

A separate FT article indicates the pessimistic view held by many Americans that the US lost the dominant position years ago. A somewhat informal poll of 326 people selected at random across four major US cities uncovered the general perception that the US ranked far lower in global manufacturing output, with a perceived rank of 20^th. Jim Womack, chairmen of the Lean Enterprise Institute is quoted – “Americans have watched for more than a generation as the US fraction of total world manufacturing has fallen. And it’s easy to confuse the country’s absolute level of domestic output, which has in most cases gone up, with the US’s share of the whole world pie, which was bound to go down no matter how good American-based plants were.” 

I’ll weigh in on these observations from a dual bias, one of supply chain management strategy, and second as a concerned citizen of the US.  First, the fact that the US would ultimately lose its leadership role was inevitable; the question was always in the timing and the economics. Consumer and industrial markets such as China have far larger scope than that of the US, and have economic growth cycles that are far more positive than that of the US. In today’s new era of expensive energy and transportation, the shorter the supply chain, the more opportunity for overall supply chain cost efficiency.  Large US global companies such as IBM, Caterpillar, Hewlett Packard, General Electric and others have already concluded this fact and have expanded their manufacturing capabilities beyond the US.

But on the other hand, as a citizen of the US who is significantly concerned about the prosperity of coming generations, I remain concerned.  If the US is to sustain its position as one of the world’s economic leaders, it must be in the leadership position of innovation.  I often point out that innovation comes from many broad areas- products, emerging technology, as well as process capability. I include overall manufacturing capability and value-added in the innovation category. 

To this point, global economic factors have made US exports and products attractive in foreign markets, but that will eventually change.  This new era of expensive energy adds new realities to supply chain value-added flows.    In my view, leadership is in jeopardy when innovation moves offshore.

So the real concern for Americans should be where does the US stand on the innovation scale.  If the current growth forecasts for China are played out to 2013, than manufacturing innovation leadership is a foregone conclusion.  The concern for and the challenge to US based companies and legislative leaders is the recognition and action plans that insure that US based manufacturing is world-class in terms of innovation and global cost competitiveness. That includes innovative supply chain suppliers that are innovative in products, process, and technology.

 Bob Ferrari

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1. Randy Littleson says:

   August 21, 2008 at 7:30 am

   Bob – I agree with your views. First, I think it’s inevitable that China would surpass the US in total manufacturing given their size and recent track record of growth. Their domestic market alone is enormous and I think we’ve all seen how global everything has become and we know the potential for them to export. I know my kids already think everything in the world is manufactured in China! As these articles point out, that is hardly the case.

   As you suggest, I don’t think that should be a core concern of the US. What we are seeing is not a unique situation. For generations products have moved to different regions of the world to be produced, following markets, skilled labor, lower costs, etc. Certainly we’re seeing this on a broader scale given China’s size, but the core issue is not unique.

   What is critical for the US is, as you suggest, being the leader in innovation. What are the next generation products that only the US can produce because of its unique assets (capital markets, skilled labor, R&D, etc.)? That is the key for the US. The standard of living for the US will continue to climb if we continue to be the innovators for new, high-end products in demand by the rest of the world. In this area, the US is still doing exceptionally well and still has ample opportunity in front of it to lead.

   All boats rising is not the challenge for the US. The challenge is to develop innovative products in demand by the world, to train its people to manufacture them and to establish market leadership in these evolving markets.
2. Bruce E. Spurgeon says:

   August 22, 2008 at 1:06 pm

   I agree with Bob and Randy, innovation is the key for the US manufacturing sector and our overall economy. While I feel that this has been most true for the high tech industry, I believe it applies across the board. When I was with York International (now owned by JCI), we were focused on both innovative/efficient/green products and efficient manufacturing. This combination boosted strong growth in the commercial sector against both US and foreign competitors.

   Innovation in the total supply chain (not just manufacturing) is a current strength and must remain a core competency. This has been noted also on many fronts including the JDA acquisition of i2. Some companies are now expanding their Lean/Sigma and other high performance methodologies to the entire supply chain not just the 4 walls of manufacturing. This has also been a strategy of some consultants/best of breed companies, most notably Demand Point.

   One small disagreement I have would be with Bob’s comment: “insure that US based manufacturing is world-class in terms of innovation and global cost competitiveness”. Innovative products are, by their nature, less cost sensitive. They must have reasonable costs to be viable for consumers, but need not be “lowest cost items”. In my opinion the focus on lowest cost has hurt many a manufacturer. This can also be a “Wall Street trap”. US companies will probably need to spend more than the “typical” percentage on innovation, which may cause Wall Street to hammer them instead of seeing it as leadership