Sep 22nd 2016

Why China won’t own next-generation manufacturing

After three decades of dramatic growth, China’s manufacturing engine has largely stalled. With rising salaries, labor unrest, environmental devastation, and intellectual property theft, China is no longer an attractive place for Western companies to move their manufacturing to. Technology has also eliminated the labor cost advantage, so companies are looking for ways to bring their high-value manufacturing back to the U.S. and Europe.

China is well aware that it has lost its advantage; it wants to use the same technologies that have leveled the playing field to give it a strategic edge. In May 2015, it launched a 10-year plan, Made in China 2025, to modernize its factories with advanced manufacturing technologies such as robots, 3D printing and the Industrial Internet. And then, in July 2015, it launched another national plan, Internet Plus, “to integrate mobile Internet, cloud computing, big data and the Internet of Things with modern manufacturing”.

China has made this a national priority and is planning massive investments. Just one province, Guangdong, committed to spending $150 billion to equip its factories with industrial robots and create two centers dedicated to advanced automation. But no matter how much money it spends, China simply can’t win with next-generation manufacturing. It built its dominance in manufacturing by offering massive subsidies, cheap labor, and lax regulations; with technologies such robotics and 3D printing, it has no edge.

American robots work as hard as Chinese robots do, after all. And they also don’t complain or join labor unions. They all consume the same electricity and do exactly what they are told. It doesn’t make economic sense for American industry to ship raw materials and electronics components across the globe to have Chinese robots assemble these into finished goods which are then shipped back—when the manufacturing could be done locally for almost the same cost. And with the shipping eliminated, what takes weeks could be done in days and environmental degradation could be reduced.

Most Chinese robots are also not made in China. An analysis by Dieter Ernst of the East-West Center showed that 75% of all robots used in China are purchased from foreign firms (some with assembly lines in China), and China remains heavily dependent on the import of core components from Japan. By Ernst’s count, there are 107 Chinese companies producing robots but many have low quality and safety and design standards. He anticipates that fewer than half of them will survive.

The bigger problem for China is its workforce. Even though China is graduating far more than one million engineers every year, the quality of their education is so poor that they are not employable in technical professions. This was documented by my research teams at Duke and Harvard. Western companies already have great difficulty in recruiting technical talent in China. This will get worse because advanced manufacturing requires management and communication skills and the ability operate complex information-based factories. Ernst says that the increasing scarcity of specialized skills may be the Achilles’ heel of China’s push into advanced manufacturing and services.

Even if China solves its skills problem, builds its own high-quality industrial robots, and develops innovative industrial processes, it won’t be able to maintain its advantage for long. We could simply import the Chinese robots and copy its industrial innovations, after all. I doubt that even Donald Trump’s immigration walls would keep the foreign robots out.

There is little doubt in my mind that over the next five to ten years, manufacturing will return, en masse, to the United States; it will once again become a local industry. Yes, it won’t employ the numbers of workers that old-line manufacturing did, but it will create hundreds of thousands of high skilled, high paying jobs. With its massive investments, China is only accelerating the demise of its export-oriented manufacturing industry.



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Vivek Wadhwa is a Fellow at Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; Director of Research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering,  Duke University; and Distinguished Fellow at Singularity University. He is author of  “The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent”—which was named by The Economist as a Book of the Year of 2012, and ” Innovating Women: The Changing Face of Technology”—which documents the struggles and triumphs of women.  In 2012, the U.S. Government awarded Wadhwa distinguished recognition as an  “Outstanding American by Choice”— for his “commitment to this country and to the common civic values that unite us as Americans”. He was also named by Foreign Policy Magazine as Top 100 Global Thinker in 2012. In 2013, TIME Magazine listed him as one of The 40 Most Influential Minds in Tech.

Wadhwa oversees research at Singularity University, which educates a select group of leaders about the exponentially advancing technologies that are soon going to change our world.  These advances—in fields such as robotics, A.I., computing, synthetic biology, 3D printing, medicine, and nanomaterials—are making it possible for small teams to do what was once possible only for governments and large corporations to do: solve the grand challenges in education, water, food, shelter, health, and security.

In his roles at Stanford and  Duke, Wadhwa lectures in class on subjects such as entrepreneurship and public policy, helps prepare students for the real world, and leads groundbreaking research projects.  He is an advisor to several governments; mentors entrepreneurs; and is a regular columnist for The Washington Post, Wall Street Journal Accelerators, LinkedIn Influencers blog, Forbes, and the American Society of Engineering Education’s Prism magazine.  Prior to joining academia in 2005, Wadhwa founded two software companies.

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