China as No. 2: Why Its Days as a Manufacturing Outsourcer Are Numbered

Last Updated Aug 16, 2010 3:01 PM EDT

China's GDP has finally passed that of Japan, making the former the second largest economy in the world, after the U.S. The numbers are only for the past quarter, but anyone who has watched the world's economic progression knew this would eventually happen. China has a huge number of people -- which means lots of consumption. It has some important natural resources, such as coal, iron ore, natural gas, aluminum, rare metals, uranium, and the world's largest hydropower potential.

Most importantly, China is home to an enormous amount of outsourced manufacturing. The balance of trade with developed countries is almost always in its favor, and the incessant hum of production has guaranteed a flow of foreign currency and buying power. However, prosperity has its price, and China's will be greater demand by citizens for better lives -- and a growing inability to satisfy Western companies that want to save some money on labor. It's an inevitable cycle, and corporations have consider how the face of manufacturing will change over the next ten years just as thoroughly as it did two decades ago.

This shift has been in process for 30 years. China exports more than Germany, much of that in the form of good produced in factories on behalf of Western countries. Much of the population is still poor, but labor and material prices are on the rise in China. It makes sense, as domestic growth must compete for the same physical and people resources.

However, they're also on the rise throughout other parts of Asia, including Indonesia, Vietnam, and Bangladesh. What we now see is the beginning of a shift of economic conditions. For a short period of time, companies could become manufacturing nomads, moving from one country to another in search of low costs. Eventually, however, you run out of new territories.

Then we have the complication of the loss of manufacturing jobs in the West. It's popular for people to talk about a shift to a knowledge-based economy, but let's look at the education reality of the U.S. According to the Census Bureau, out of roughly 227.4 million people aged 18 or older, only 25 percent have at least a bachelor's degree. The other 75 percent don't. And yet many "experts" want to pretend that the country can focus completely on what can be done with the mind, not with hands. It's clearly foolish. Furthermore, unless the U.S. has robust jobs ready for that 75 percent of the populace, who is going to buy all the goods and services that create the revenue stream for corporations? The Chinese? They'll buy domestically, thank you.

It's time for U.S. companies to pull their heads out of dreams of cost containment and realize that the merry-go-round is about to stop. It won't be today or tomorrow or even next year. But in the foreseeable future, corporations will find that body shopping at factories around the world will cease providing a saving advantage. Executives must stop focusing on labor costs, which, with automation, have become a tiny part of product costs, and look into how to right-size marketing, sales, and general overhead expenses. And, while they're at it, figure out who's left with money to purchase products.


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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.