The Decline of Made-in-China

A weel ago I went to the city of Yi Wu, the international trade center of small commodities, and the city of Dong Guan, the heart of export-oriented made-in-China manufacturing center. Everyone I talked to, from entrepreneurs to workers, feel afflicted by the recession. But there is something puzzling about it, if the western consumers are tightening their belts, shouldn't the cheap made-in-China goods become more attractive to them? My conversations with many entrepreneurs suggest that the current demise of Made-in-China is caused by domestic factors as much as international factors.

Many entrepreneurs admitted that there are still orders from their customers from the West, but often they can no longer meet the needs or compete with suppliers from other developing countries. In the past, it was easy for them to just take advantage of the cheap labor and the lack of environmental regulation. So they didn't make much effort to improve their technology and design, expand their distribution network or build their own brand. Now that they've reached the limit of squeezing labor and environment, they suddenly cannot retain their competativeness.

Insteading of trying to built upon the success of their manufacturing business, many entrepreneurs went to pursue the high profit of financial investment from real estate, stocks to raw commodities (oil, gold, copper, iron ore etc.) In the past several years, the profit margin of all the shoes or toys they produce is often lower than 5%, but speculative investment on real estate, for example, can often bring 100% profit and make them rich immediately. Now that all those bubbles of assets are bursting, they find themselves short of fund to sustain their manufacturing business.

You cannot put the blame entirely on such entrepreneurs. The bureaucrat class also has made the business environment particular tough for entrepreneurs. Many government officials, usually free of public oversight, takes every opportunity to participate in anything profitable. Since they are the gatekeeper of the market place and controls a lot of public resources, few entrepreneurs can succeed without buying their collaboration. Many entrepreneurs felt so frustrated with this corrupted system, that once they get rich, they try to send their children to countries like the US, Canada and Australia and get green cards for the whole family. Actually, the corrupted officials do the same, they also don't want their children to live in a country that they are damaging.

Now the government has made raising domestic consumption a top priority. If the demand from China's large population can indeed be raised, all things made-in-China will find a market, China and even the world's economy can be lifted out of the recession. But there is a reason Chinese economy became so export oriented. The entrepreneurs I talked with has little confidence selling enough goods to Chinese consumers. They know that their workers cannot afford, given the low way, what themselves produce. They know that the tax they paid was squandered by officials rather than spent on the welfare of people. And they know how much they need to pay to the local officials if they want to distribute their goods in local markets. Foreign distributors, like Wal-Mart squeezed these entrepreneurs pretty hard, giving them only a small percentage of the profit from the goods they produce. But such exploitation seems benign compared to the unreasonable demands of local officials.

So this is the situation. Even if you are an honest and creative entrepreneur who tries to change made-in-China's image of bad quality, you will have to face the declining foreign demand, the weak domestic demand, the exploitation of corrupted officials, the strained environment and the temptation to just escape to a more comfortable foreign country. A recession for China's manufacturing sector seems inevitable. But let's hope this recession at least exposes the problems, and force the Chinese society to create a better economic environment.