Leland Teschler's Editorial: Manufacturing Woes in the News

Nov. 22, 2008
Unemployment is on the rise, our economy is crawling

Unemployment is rising, the economy is slowing down, goods makers are hurting, a real-estate bubble is popping, and there’s a big loss of manufacturing jobs. No, I’m not talking about the U.S. This is China.

You wouldn’t have known about these woes if you’d read a recent post in one of the Machine Design blogs that attracted a lot of attention. It was about statements made by an economist at Global Insight, an economic forecasting house. He asserted China would surpass the U.S. as the world’s leading manufacturer in nominal dollar terms next year. He based this prediction on the slowing U.S. economy and a conjecture that China would gain a larger share of global manufacturing than any other country.

A funny thing happened on the way to this prediction, which was made this past August. The Chinese economy is now slowing drastically. News reports say in one Chinese province 80% of the toy factories have closed, as have half the shoe factories. State-run newspapers claim 37% of the businesses there are losing money, and that 20 million Chinese overall lost their jobs in the first half of this year.

These aren’t just isolated incidents. The purchasing managers’ index in China fell in July and August to a level that indicates manufacturing there is contracting. This hasn’t happened since 2005. Some observers claim the Olympics were responsible for the drop. But though the index bounced back some in September, it is still below where it was in June before athletes started arriving in Beijing.

Those who decry the loss of U.S. manufacturing industries to the Chinese would probably say such problems couldn’t happen to a nicer bunch of people. These sentiments have been amplified by revelations about how the Chinese manage to deliver low prices.

Examples come from Alexandra Harney, a former Financial Times correspondent who wrote a book about conditions in Chinese factories. Harney speaks Mandarin and apparently does so well enough to sense when the Chinese are trying to snow her. In The China Price, she uncovered the fact that 15 years ago, “beating employees was a standard management strategy” at some factories. Times have changed, partly because of new Chinese labor laws and companies like Wal-Mart that began forcing their suppliers to comply with a code of ethics.

But manufacturers widely flout these measures, says Harney. Laws that permit no more than 36 hours of overtime monthly make factories uncompetitive, Chinese claim. So time cards are faked to hide the truth. Employees are coached about how to answer auditors checking on ethics practices. And shadow factories, off-the-books establishments where seven-day weeks and 11 or 12-hour days are the norm, make a lot of China’s exported goods. The existence of these places has been hidden from multinationals like Wal-Mart, at least until Harney’s book came out.

A tightening Chinese labor market and unrest among laborers has mitigated some of these effects. And ironically, in a progression that will sound familiar to Americans, Chinese workers sometimes abandon factory jobs to sell real estate in what has been a hot market.

Can bad mortgages and bank implosions be far behind?

— Leland Teschler, Editor

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