Why Chinese Factories Struggle to Fill Production Lines - Case Study Example

CHINES FACTORIES STRUGGLE TO FILL PRODUCTION LINES Table of Contents Introduction 3 The Current Situation of China’s Manufacturing Industry 4 The Comparison with the Other Asian Countries 6 Challenges 7 1. The Decreasing Rate of Manufacturing Industry Growth 7 2. The Shift of the Low Value-Added Jobs 8 3. The Decrease in the Industrial Production 9 4. The Decrease in the Job Vacancies 10 5. The Increase in the Minimum Wages 11 6. The High Ratio of Employed Persons 13 7. Trend of Labor Population 14 Solutions 15 1. The Decrease in the Down Payments of Home 15 2. Cutting the Benchmark Interest Rates 15 3. Consumer-Driven Growth 16 4. Increase in the Yearly Wages of Manufacturing 16 5. Diversification in the Products 17 Conclusion 17 References 18 Introduction The manufacturing industry of China has encountered a tremendous development and this has led to the better ranking in several aspects as compared with the other countries of the world. The pillar industry that has given a boost to its economy is its manufacturing industry. This industry is not only responsible for the economic transformation and growth, but also for increasing the employment rate and the competitiveness of China. It has given a title to the country as a ‘giant country of manufacturing’ [Asi15]. There are six largest industries of China in the manufacturing area, they are medicine, food, petrochemicals, machinery, metallurgy and forestry [The154]. The manufacturing industry of China is contributing heavily in the GDP of the country. It contributes one third of the GDP of the nation. In the year 2010, China ended the dominance of the U.S, which U.S had kept from the year 1895 in the field of manufacturing. It happened through the huge migration of people living in the rural areas to the industrial cities [Mat15]. The following table is the outlook of the production of the countries in which China got the title of being number one: Figure 1: Top Ten List of Global Manufacturers in USD Billions [Mat15] In the above table, China had produced 1,995.40 Billion USD in the year 2010, U.S had produced 1,951.60 Billion USD and Japan had produced 1,027.40 Billion USD. The margin between the China and U.S was small at that time, but it became higher in the following years. The Current Situation of China’s Manufacturing Industry The today’s facts and figures of the manufacturing industry are alarming for the country. It is worse than the previous three years and is giving the sign of economic contraction. In the months of February and August, the Purchasing Manager’s Index had fallen below 50 [Sco15]. This index determines the activities in the factories and ultimately the health of the economy and the figure above 50 asserts the expansion in the economy [Age15]. Moreover, the heavy industries and commodities sectors of China are going into recession. The investment economy is showing the weakest growth, because of the decline in the residential construction and the reduction of the company’s capital investments. This has given way to the slowdown in the manufacturing industry. In the first six months of the year 2015, several provinces indicated the GDP in negative figures and due to this, loss of jobs took place in the state own firms [Sco15]. The problem with the owners of the factory is that their workforce is decreasing due to the two major reasons. One is the ageing population and the second is the trend of moving to the lesser stressful jobs [Ben15]. The population above the age of 65 and 80 is expected to have a great rise in the future [Pop10]. The following graphs depict the projection of the continuation of the ageing population: Figure 2: Ageing Population of China [Pop10] This means that the ratio of the population will be more misbalanced in the upcoming years. The probability of the age groups that are 65+ and 80+ will increase in the future. The ageing population, especially the group of 65+ rises tremendously from 2007 to 2050. There will be more than 300,000 aged people in the population of china in the year 2050. The rise of the ageing population is alarming for the country and so to the production units, where the labors are highly required. In addition, the rights of the workers and the rise in the pay scale of the workers are the major reasons for high turnover of the vacancies in the production industry. The economy is facing a continuous phase of contraction from the past seventeen months and the job shedding is increasing as well. It seems like the country is unable to promote the slogan of simple manufacturing and if it switches to diversification then it will be difficult for it to continue with its prior slogan. The current situation declares the failure of the manufacturing industry of China [Mat15]. The Comparison with the Other Asian Countries If we compare the current status of all the Asian countries in the terms of the industrial production, the title of being number one is no more with the China. There are other countries that are performing well and are now the emerging economies of the world. The industrial production of China is 5.60% and it is lower than the industrial production of Georgia, Iran, Macau, Mongolia, Sri Lanka, Tajikistan, Uzbekistan and Vietnam. These countries are filling their production lines mostly by paying low wages to the workers and through simple manufacturing. Recently, the highest industrial production has been generated by Macau, then Mongolia and then is Tajikistan. Till now, the highest industrial production has been generated by Kyrgyzstan that produced 105.80% and the lowest industrial production has been generated by Iran that produced -61.29% [tra15]. The following table explains the scenario of industrial production in the Asian countries: Figure 3: The Industrial Production of the Asian Countries [tra15] Challenges 1. The Decreasing Rate of Manufacturing Industry Growth According to Candrowski (2015), the growth of manufacturing industry is not appealing for the past five years. It is fluctuation and its trend is going more downwards as in figures. There is an index that measures the state of growth in an economy. It presents two types of situation, expansion or contraction of the economy. These situations are separated by the border line and that is the index number 50. If the growth rate is above 50, then the manufacturing industry is working better and is leading the economy to grow and expand. Whereas, if the growth rate of a manufacturing industry is below the index number 50, then the industry is not performing well and is adding its share in the economy to contract. The year 2015 is not fruitful for the manufacturing industry. The growth rate is marked below from index number 50 and every month the rate of growth is shifting downwards. This is not a good sign for the country and the industry as well. There are several reasons for the low growth rate and the significant reason from all of them is the skilled workforce, which is not available in the production lines, such as in Dongguan. The following graphs represent the growth rate of the manufacturing industry from the year 2004 to 2015: Figure 4: Growth Rate of China's Manufacturing Industry [Sco15] 2. The Shift of the Low Value-Added Jobs The manufacturing industry is changing and improving its technical standards. It is copying the designs and is more into the joint ventures with the international companies. Eventually there is a rise in the value chain in the manufacturing and the dispersal of the job according to their wages. This means that the jobs that have high value-added are remained with the manufacturing industry while the lower value-added jobs are moved to the inland provinces, where the wages are low [The154]. 3. The Decrease in the Industrial Production The Dongguan is famous due to its industrial units and it is known as the ‘World’s Factory’. It is one of the largest manufacturing bases that are operating on a global basis. There are more than 10,000 foreign companies that have heavily invested in the production units of Dongguan. The city is well-equipped with the latest and comprehensive system of manufacturing and it is producing more than 60,000 types of products. Moreover, there are more than 30 industries that are operating in this city [Placeholder3]. Despite of its remarkable coverage to the number of industries and development, the industrial production is decreasing as compared with the last year. The year 2015 is not showing the progressive facts and figures, which the city has shown previously in the terms of the industrial production. The industrial production covers the output of businesses that are in the field of manufacturing, utilities and mining. The production rate was abruptly declined in the beginning of the year till the month of March. Then the production experienced growth till the month of June. From the month of July, the country is facing low industrial production and has reached to the point of 5.6%. Figure 5: Industrial Production of China [tra15] 4. The Decrease in the Job Vacancies Another challenge for the production and manufacturing industries in the China is the level of job vacancies. It was better in the previous years and attracted more people to work in its boundaries [Tra151]. However, this year is not offering much favor to the people in offering jobs. As per Bland (2015), the workforce is insufficient in the production areas and people are migrating to other cities for better opportunities. This asserts that the jobs are available for the people, but they are moving to other places, where they can get high salary by offering lesser skills. This is an irony for the production units that offers job for the people, even at high pay scale, but the workforce is not attracted to their job vacancies. According to Trading Economics (2015), in the third quarter of the year 2015, the job vacancies were decreased to 5,050,000 from the figure of the second quarter i.e. 5,600,000. Figure 6: China Job Vacancies [Tra151] 5. The Increase in the Minimum Wages To fill the production lines of the Chinese industries, there are certain wage levels set for different cities, which are according to their basic necessities. From the past decade, the wage level has increased in China due to the two factors. One is the rapid growth of the economy and the second is the declining growth of the population. There is a small number of young people, who are entering in the workforce of the industries. Moreover, these young people only opt for entering into the workforce, if they get higher salaries. So, in order to recruit the staff and retain it as well, the employers are forced to provide high salary packages to the workforce. The minimum wage is different in different areas of the China. For instance, in Shanghai the minimum wage is 2000 yuan, in Guangxi the minimum wage is 1000 yuan, in Yichun the minimum wage is 850 yuan and in Dongguan the minimum wage is 1510 yuan [Chi15]. The challenge over here is the lack of workforce, even with the increase in the minimum wages of the workforce. The minimum wages has been arise from the past decade and is further expected to rise more [Tra152]. The overall change in the minimum wages is graphically shown as below: Figure 7: Minimum Wages in China [Tra152] 6. The High Ratio of Employed Persons In China, the ratio of employed persons has increased from the past years. The irony of the increased employed persons ratio is that the production lines still lack the workforce in their manufacturing units. There is an increase of employed persons from 76977 Tens of Thousands to 77253 Tens of Thousands in the year 2014. The employed persons level in the last year was the highest recorded figure in the history of China. However, the manufacturing industries have several vacancies that are not filled yet. This is challenging not for the industry only, but for the country as well [Tra154]. The following graphs explains the gradual rise in the employed person in the country of China: Figure 8: Employed Persons in China [Tra154] 7. Trend of Labor Population According to Deloitte (2011), the trend of the labor population variates from the year 2001 to 2020. There are three types of labor that are offering its services to the manufacturing industry. Initially, the primary labor that aged from 16 years was in abundance in the manufacturing industry of china. But the primary labor switched to the other jobs after the year 2005 and it is expected that the trend of primary labor till the year 2020 will be reduced more. The second type of labor, the intermediate labor, had lower population in the year 2001, but their population was expanded after the year 2005. It is expected that this type of labor will remain faithful with the industry and it will work in the factories with the same number of population. It includes the age group that is above 19 years. The third kind of labor is the senior labor, which include the age group of above 22 years and the population included in it are educated at the tertiary level. This age group is working in the manufacturing industry and its population is rising slowly and gradually till the year 2020. The problem in this situation is the graph of the primary labor that is continuously reducing to a large extent. This kind of labor is not educated much and is only on the secondary level of education. That’s why they are paid less by the manufacturing factories, hence increasing the revenue margin and to maintain the production output of the industry [Del11]. Figure 9: Trend of Labor Population in China [Del11] Solutions 1. The Decrease in the Down Payments of Home To limit the population in a certain area, so that the workforce is available in all the provinces equally, there has been changes made by the government. Now, it is easy to buy a second home with the down payment of 20%. Previously, it was 30%, but it gives rise to the high real estate prices that made the workers to think about their shifting[Sco15]. 2. Cutting the Benchmark Interest Rates For the first time in the past two years, the central bank of China has given a proposal that has surprised the economists very much. The central bank of China has reduced the interest rates to support the fading growth of the economy. The People’s Bank of China is decreasing its yearly rate of deposits and lending as well [Age15]. 3. Consumer-Driven Growth The decreased rate of growth in the manufacturing industry is severely affecting the economy. On this note, the leaders of the country are hoping the betterment in the economy by focusing on the growth that solely depends upon the consumers. The leaders are emphasizing not to depend on the investments and exports anymore [Age15]. 4. Increase in the Yearly Wages of Manufacturing Another solution to attract the workforce in the manufacturing industry is the increase of wages of the workers. This step is made by the government from the past decade to aid in the survival of the manufacturing industries of the country. From the past five years, the increment in the wages is more as compared to the previous years. The increase in the wages can motivate the young people to enter in the manufacturing industries [Tra153]. From the following graphs, it can be seen that how government is making its efforts to sustain its manufacturing industries by increasing the yearly average manufacturing wages to a great extent: Figure 10: Yearly Average Manufacturing Wages in China [Tra153] 5. Diversification in the Products Till now, China is famous for producing the products that are pirated or simple on low cost. There are other countries that are producing the goods for the big and international companies with low cost. According to Trading Economics (2015), Georgia, Iran, Macau, Mongolia, Sri Lanka, Tajikistan, Uzbekistan and Vietnam are producing the industrial products more than the production of China. This means that the strategies that were used by China to get the title of being the number one in providing the manufacturing output, are now used by these countries. In order to retain and gain the position of industrial production of China, there is a need of diversification. It can be in terms of producing its own products for its own companies with the use of latest technology. This can lead to the rebuilding the position of China, which it had in the year of 2010. Conclusion The manufacturing industry of China has encountered a tremendous development and this has led to the better ranking in several aspects as compared with the other countries of the world. The pillar industry that has given a boost to its economy is its manufacturing industry. This industry is not only responsible for the economic transformation and growth, but also for increasing the employment rate and the competitiveness of China. It has given a title to the country as a ‘giant country of manufacturing’. The today’s facts and figures of the manufacturing industry are alarming for the country. It is worse than the previous three years and is giving the sign of economic contraction. In the months of February and August, the Purchasing Manager’s Index had fallen below 50. This index determines the activities in the factories and ultimately the health of the economy and the figure above 50 asserts the expansion in the economy. Moreover, the heavy industries and commodities sectors of China are going into recession. The investment economy is showing the weakest growth, because of the decline in the residential construction and the reduction of the company’s capital investments. This has given way to the slowdown in the manufacturing industry. The problem with the owners of the factory is that their workforce is decreasing due to the two major reasons. One is the ageing population and the second is the trend of moving to the lesser stressful jobs. In addition, the rights of the workers and the rise in the pay scale of the workers are the major reasons for high turnover of the vacancies in the production industry. The economy is facing a continuous phase of contraction from the past seventeen months and the job shedding is increasing as well. If we compare the current status of all the Asian countries in the terms of the industrial production, the title of being number one is no more with the China. There are other countries that are performing well and are now the emerging economies of the world. The challenges that are met by the manufacturing industry of China are enormous. However they can be minimized by the suggested solutions in this report. References Asi15: , (Asia Trade Hub, 2015), The154: , (The China Perspective, 2015), Mat15: , (Timms, 2015), Sco15: , (Candrowski, 2015), Age15: , (Agence France-Presse, 2015), Ben15: , (Bland, 2015), Pop10: , (Population Reference Bureau, 2010), tra15: , (Trading Economics, 2015), Placeholder3: , (Lu, 2013), Tra151: , (Trading Economics, 2015), Chi15: , (China Labour Bulletin, 2015), Tra152: , (Trading Economics, 2015), Tra154: , (Economics, 2015), Del11: , (Deloitte, 2011), Sco15: , (Candrowski, 2015), Tra153: , (Trading Economics, 2015), Read More