Why do All Roads Lead to China?

Why do All Roads Lead to China?

Open your briefcase or purse. What do you see?

Probably stuff made in China.

No matter if it’s the latest greatest mobile phone or some cheap knock-off sunglasses – China makes it all.

From Buenos Aires to Budapest, there’s stores stocked full of Chinese products.

How did Chinese manufacturers manage to beat local companies, in all corners of the world, at their own game? How did China become the world’s factory?

The art of dumping

China achieved its manufacturing coup with a strategy known as “dumping.”

This is when a manufacturer purposefully sets the prices of their exports below the domestic market value or lower than the cost of production. By lowering the price so significantly, the consumer is swayed to pick the less expensive product.

The goal is to sustain the discount long enough to gain greater market share and undercut competitors, forcing them out of the game.

Jiangxi – female workers in the Jin Yuan chemical fiber products Co., Ltd. factory workshop. Chemical fiber products are exported to Europe, America and Southeast Asia. (Shutterstock)

 

This is central to China’s neo-mercantilism strategy. Imports are discouraged and exports are encouraged. Authority is centralized by the government and capital movement is controlled. From exports, China’s treasury accumulates huge foreign reserves, giving the government even more power over monetary and fiscal policy.

China has not been shy of implementing this strategy worldwide.

In the U.S., over fifty types of commodities have already been subjected to antidumping duties. Products like ironing tables and wooden bedroom furniture are now protected from China’s exporting schemes.

Other countries have been less resilient to China’s strategy.

For example, India, with its a huge pool of cheap labor, should have manufacturing capabilities on par with China. Not to mention that transporting products from China to India isn’t cheap.

Packaging, custom duty fares and overseas shipping definitely adds up. And yet, Chinese producers are still able to sneak in and dominate the marketplace by offering goods at reduced prices.

How on earth is China beating India on its own turf? Even in low-tech goods like toys and alarm clocks?

The power of productivity

With the largest population in the world, China certainly has an abundant workforce. And while China’s middle class may be growing, labor is still cheap.

Many believe these two factors made China into the world’s manufacturing hub.

But that’s simply taking China’s achievement at face value. Countries like Bangladesh, Thailand and Vietnam all pay their workers less.

The piece of the puzzle that’s commonly missed is the power of productivity. After productivity is added to the equation, labor costs in China are only 4 percent cheaper than costs in the United States!

How is that possible?

China’s calculating government is almost entirely responsible.

Before opening their economy’s doors, the government crafted an ingenious manufacturing plan.

The plan included spending billions on improving highways, railways, ports and spreading electricity. A web of stable supply chains was established. Transportation became quicker and less costly, boosting productivity.

View over the famous Dragon highway intersection in Shanghai, China. (Shutterstock)

 

The government also opened Special Economic Zones in order to lure in Foreign Direct Investment. Bureaucrats in Beijing invested heavily in the country’s human capital by implementing nation-wide skill development programs for workers.

For more than three decades, China stuck meticulously to its economic plan. Over time, their well-designed and successfully executed policies steered them closer to prosperity. Eventually, China became a manufacturing master.

The difference is stark. While a manufacturing operation in China will run smoothly and cheaply, a factory in India will face electricity cuts and transportation delays.

Chinese salaries now match those of other emerging markets. But in terms of improved productivity, China is years ahead of other emerging markets.

So, it’s China’s productivity, not it’s cheap wages, which sets it apart from its peers, giving Chinese products a competitive edge worldwide.

But productivity isn’t China’s only secret to success.

China’s industrial success is owed to thinking big

Rather than focusing on local demands, Chinese manufacturers pursue global markets.

The government creates policies which encourage economies of scale. Chinese factories are able to order materials in bulk and produce in bulk, lowering costs.

Let’s not forget that China devalues its currency at a shocking 30 to 40 percent! That means that every product China exports is 30 to 40 percent cheaper than its competitors. How can companies compete with that? The truth is, many can’t.

Aerial shot of an industrial zone in China – these zones are build on vast scales, with a huge array of transportation infrastructure attached to each. (Shutterstock)

 

Of course, none of this would be possible without the Chinese government turning a blind eye to intellectual property disputes. This is referred to as a reverse engineering process.

If a Chinese company wants to mimic or imitate well-designed or successful international products, it isn’t constrained by regulation. These “copycat” products are sold back to their original marketplace at a cheaper price, undercutting the initial product.

Below are a few stocks which are benefiting from China’s crafty dumping techniques. These companies are cutting edge and their continued ability to undercut the competition makes them ideal for your portfolio.

Ticker Name
300129 CH Equity Shanghai Taisheng Wind Power Equipment Co Ltd
BDARTZ CH Equity Changzhou Changhai Fiberglass Products Co Ltd
300196 CH Equity Jiangsu Changhai Composite Materials Co Ltd
0790774D CH Equity Changzhou Trina Solar Energy Co Ltd
600019 CH Equity Baoshan Iron & Steel Union Co Ltd
000898 CH Equity Angang Steel Co Ltd
0601466D CH Equity Hebei Iron & Steel Group Co Ltd
0262010D CH Equity Zhenjiang Rietech New Energy Science Technology Co Ltd

 

In tomorrow’s daily, we’ll take a peek into China’s masterplan called “Made in China by 2025.” Let’s see what China’s future has in store, and reveal which industries have been selected to lead the new era of Chinese growth.