China Widens Lead as World’s Largest Manufacturer

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China Widens Lead as World’s Largest Manufacturer
by David Sims | March 14th, 2013

Although China overtook the U.S. as the world’s largest manufacturing nation in 2010, the production margin between the two countries has been razor-thin. However, new data indicates that China recently widened its lead as the top global producer.

According to the latest research from the United Nations, China has further outpaced its competitors in world manufacturing, generating $2.9 trillion in output annually versus $2.43 trillion from the U.S., the world’s second-largest manufacturing economy.

Over the last two years, China’s manufacturing sector has made strong gains, while the U.S. has been mired in economic and political doldrums.

“In 2011, China’s manufacturing output surged by 23 percent while manufacturing output in the U.S. only increased by 2.8 percent,” the American Enterprise Institute explains. “That brought China’s manufacturing output last year to more than $2.9 trillion, which was almost half a trillion dollars (and 20 percent) more manufacturing output than the $2.43 trillion of manufacturing output that was produced in the U.S. last year.”

America’s trade gap with China also widened considerably over the same period. According to statistics from the Manufacturers Alliance for Productivity and Innovation (MAPI), the U.S. trade deficit with China rose by 8 percent to $498 billion in 2012, while the Chinese surplus increased 15 percent, to $755 billion.

MAPI officials point out that from 2009 to 2012, “the U.S. deficit rose by $172 billion, or 53 percent, while the Chinese surplus soared by $333 billion, or an extraordinary 79 percent.”

In addition to striking a blow to national pride, the comparatively slower growth in U.S. production versus Chinese manufacturing has also cost many jobs. MAPI found that the three-year increase in the U.S. trade deficit resulted in the loss of 700,000 to 1.4 million American manufacturing jobs, including 140,000 to 280,000 jobs in 2012 alone.

China’s output gains have been driven primarily through domestic demand, as “gains in new business allowed manufacturers to step up production by adding jobs and making more purchases,” the Associated Press reports.

HSBC’s chief China economist, Qu Hongbin Qu, told AP that while external demand was still “tepid,” the domestic-driven restocking process “is likely to add steam to China’s ongoing recovery in the coming months.”

However, many experts consider the rapid growth in Chinese manufacturing to be unsustainable unless the country begins to reorient its economy toward more advanced processes and complex products.

China is currently in an “edgy transition,” the Financial Times notes. “As the country ages and reaches the limits of physical labor and capital accumulation, its growth model will have to shift towards transformative technology and innovation.”

The factors putting stress on China’s industrial economy include a downturn in overall productivity, which is a vital part of economic growth and depends on technological change and institutional efficiency. So while China might have produce a higher quantity of manufactured goods, the U.S. still leads in quality and advanced manufacturing, particularly aircraft and other specialized products.

Moreover, the costs of offshoring production are becoming increasingly onerous for U.S. companies. Given the insecurity of intellectual property in China and other factors, many businesses are discovering that it makes more sense to keep production capacity at home.

Last year, Manufacturing Trends and News concluded that “changes in the economic environment are making homeshoring more and more attractive, with a number of manufacturers actively moving their offshore operations back to the home turf.”

Instead of simply looking at cheaper labor costs, manufacturers now look at the “total cost of ownership,” or TCO. This relies on a comprehensive view of the manufacturing industry, taking into account the cost of quality, delivery, transportation, energy consumption, labor monitoring, carrying stock, freight, packaging, and all other aspects of production.

In addition, Chinese labor costs are rising an average 15 to 20 percent per year, compared to only 2 percent increases in the U.S.

More importantly, the overall U.S. economy is considerably more diverse and less dependent on a handful of major industries than China’s, meaning that growth can continue despite slowdowns in individual industries.

“America’s household consumption alone generated $10.7 trillion of economic activity in 2011 – $3.5 trillion more than China’s entire gross domestic product,” the Atlantic observes. “This, despite the fact that our population is one quarter the size.”

Despite China’s accelerating growth, the U.S. continues to lead in top-end manufacturing and smart technologies. And if additive manufacturing, or 3-D printing, expands as forecast, America is likely to further solidify its position as the world’s leader in advanced production capabilities.