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China and the WTO
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backCHINAtalk May, 2012

Aging population, oil prices will make China more expensive

Cheap labor in China helped make Apple Inc. the richest company in the world. But those days are nearing an end, says Marshall Mayer, veteran Wharton School management professor and regular visitor to America’s top competitor.

“Things are happening to drive up manufacturing costs in China,” Mayer tells me. One, there’s the “incipient labor shortage.” China (like Mexico, Brazil, and other fast-growing economies) temporarily benefited from the shift to small families, with more workers and fewer dependent seniors and babies.

“But, beginning about now, China’s population begins to age. This will throw a huge burden on everyone in China. In the countryside, they can’t get enough cotton-pickers. Tomatoes are rotting on the vine.”

Won’t other Asian nations take up the slack?

Clothing manufacturers “are migrating to Vietnam, to Indonesia. But those countries are [no larger than] a single province of China.” And their birthrates are falling, too. “So yes, you could see some of the manufacturing migrate back to the U.S. The cost advantages are considerable.”

And not just because of labor: ”Logistics” — transportation and scheduling — “are going to be a huge factor.”

But isn’t this a global economy, a flat world?

“We’ve underestimated the true cost of the global supply chain. In 2008, we saw that lengthy supply chains are vulnerable to collapse.” That year, it was the sudden inavailability of bank letters of credit, basic finance for exports, that stalled contracts, shipping, and plants down the line.

Resurgent oil prices will make global trade more expensive, Mayer predicts. That will help revive local manufacturing; it will be cheaper to build locally than ship around the world. Factories in expensive cities like Shanghai will close, and “China will become a normal economy quicker than anybody thought, as a consequence of labor and logistic pressures.”

A smooth transition? Not assured: China’s Communist Party remains locked in a debate over whether to open the economy further or extend central planning. “We don’t know where the new government stands,” Mayer concludes. “It will have enormous consequences for us. My sources say, ‘Don’t do anything for 18 months.’ There could be a wave or reform. Or a cultural revolution, again.”

To read the entire article, please click here.

Source: Philadelphia Inquirer - GAI

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