How’s the Chinese economy?

[note: re-post from Feb. 2015, but conclusions still relevant.]

I get asked this question a lot when I come back from China. I think the best answers are found in The Economist’s economic indicators, but I can offer some specialist insight into the manufacturing economy from my trip last month.

The biggest difference that I saw in factory operations between this year and years previous is that the Chinese New Year vacation is starting earlier. In the hey-day of Chinese manufacturing, factories would be humming late into the night in the weeks leading up to the New Year to rush out last minute orders. This year, many factories I am working with shipped their last orders two weeks before the official start of the holiday.

chinaeconomicsIn light of decreasing growth rates in China, the obvious explanation for the early holiday would be slowing orders (see above graph based on World Bank forecasts). However, based on my conversations with factory owners, traders and agents in China, volume is steady. I think that the reason for the early holiday is wrapped up in three trends:

  1. decreasing profitability
  2. increasing power of labor
  3. complacency/incumbency

One, profit margins for manufacturers in China have decreased significantly in recent years. The lower the margins, the less incentive for owners to fill marginal orders, like the ones that come before a holiday.

Two, the interests of factory laborers in China are now a force to be reckoned with. The scarcity of workers, the support of the government and the labor compliance requirements of overseas customers mean that when the workers say they can only get plane tickets home (yes, you read that right) two weeks before the holiday, the owners can do little to change their mind.

Three, there is little fear of customers taking their orders elsewhere. Domestically, all factory owners are facing the same headwinds and their interest in low-margin, last minute orders is tepid at best. Abroad, there is no competition.China is still the only game in town for accessible, economical mass production.

All this adds up to an early vacation for the workshop of the world in 2015. I figure they deserve it.

DISAGREE? QUESTIONS? REFERRALS?

My point about China’s domination of “accessible, economical mass production” is highly debatable and I’m happy to elaborate, just shoot me an email.

And, of course, please let me know if you or anyone you know could use some insight into sourcing or producing goods in China.

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