China has been playing a dangerous game since the end of the Mao Dynasty, and the advent of the reformers.

Not that they had a choice.  The stark reality of China today, like all nations, is a culmination of Geography, Climate, and Politics.

China has been trying to limit population growth, while transforming a largely agrarian society into a modern technological one.

The problem is that they have many decades of work left ahead of them, and time is running short due to the aging of the population, and the costs that will incur to society.

China had 153 million people aged 60 or over by the end of last year, accounting for 11.6 percent of the country’s 1.3 billion population, said Vice-Premier Hui Liangyu at a plenary meeting of the China National Committee on Aging (CNCA) Friday.

While Industrialization has been beneficial for some regions, the workforce is shrinking, with many workers leaving rural provinces to work in Special Economic Zones.  These workers typically leave the parents behind – though they send money back home to support the elders.  This is leading to “aging villages”, where most of the inhabitants subsist off of remittances sent back from their children, and government benefits.

Many smaller factories have moved inland as the government, aiming to spread development more evenly, uses tax breaks and looser pollution
controls to lure enterprises to poorer central provinces from the traditional manufacturing heartland near Hong Kong.

This, in turn, is creating a nascent labor shortage, and increasing the cost of labor for manufacturers.  And while China still enjoys a wage advantage over Mexico, and Latin America in general, that will evaporate over the next few years.

But even as China tries to spread Industry, the shortcuts that made them a manufacturing giant are coming Ho-ome, as Rev. Wright says, To Roost!

Two years of disastrous quality-control breakdowns, from foul fish and lead-tainted toys to poisoned drugs and dairy products, are taking their toll on China’s allure as a manufacturing platform. A new study by supply-chain consulting firm AMR Research found that quality concerns are among the chief reasons U.S. manufacturers are scaling back plans to source more goods from China.

Instead, U.S. companies are looking harder at Mexico and other locales closer to home when exploring where to put new capacity.

China was an attractive place to manufacture because of the tax advantages of the Special Economic Zones, coupled with a low wage work force, and inexpensive transportation costs. 

Today, though, with Transport costs fluctuating wildly, and a steady rise in wages, other issues are accumulating to lessen China’s desirability as a manufacturing locale.

Now, the biggest concerns over China are quality and theft of intellectual property (BusinessWeek.com, 4/27/06). Half of respondents to the survey cited China as the biggest source of “risk” for product quality failure. Fifty-seven percent rated China as the biggest risk of
intellectual-property infringement.

“China is in a league of its own in terms of risks associated with intellectual property and quality,” says Kevin O’Marah, AMR’s chief strategist.

In fact, China ranked highest in 9 of the 15 risk factors. Rising labor costs are still an important factor for businesses, with 35% citing China as the leading source of concern. Other risk categories where China ranked highest included regulatory compliance, commodity price volatility, supply-chain security breaches.

And china has not effectively dealt with issues that are damaging to the image of companies manufacturing there:

Quality problems, rampant piracy (BusinessWeek, 10/2/08), allegations of sweatshop abuses, worker protests, and other factors not only drive up costs but also harm the value of brands and corporate reputations. “Companies are realizing that the fully loaded costs of importing from China are a lot higher than they imagined,” says O’Marah.

But China is running out of time, and skilled manpower to get a handle on these problems.  By encouraging unchecked growth with a near total lack of oversight, they have been left with a nation of factory workers, and a rapidly aging agricultural workforce.  They have serious environmental pollution issues to deal with, and a serious lack of quality controls on food production, piracy, and a myriad of other ills that other societies, with longer transition periods, have dealt with.

Now, with the prospect of a dwindling foreign investment, the question becomes whether China can build up a Middle Class (read: Consumer Class), to support the existing Manufacturing base; while converting from family/village based agriculture to large scale automated agriculture (to feed that middle class); while caring for the increasing number of aged (and no longer productive) citizens.  If not, they are looking at more than just an economic crisis…  The chance that the Communist Party that still runs the country can solve these problems in time is slim to non-existent.

Tags: China