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What went wrong with the manufacturing sector in China

China, after years of global dominance in manufacturing thanks to the readily available and inexpensive labor in the country, is slowly losing its edge in the sector and a large number of external producers have started looking towards other countries in Asia and Africa for their manufacturing needs.

Last month's fall in the Purchasing Managers' Index to 51, a four-month low, pointed out the drop the country has seen in its manufacturing sector. Following the drop in the manufacturing index, the non-manufacturing Purchasing Managers' Index also slid to 54.6 in December 2013 from 56 in November 2013. Also, the Chinese economy expanded by 7.6 percent in 2013, the slowest pace in 14 years. On an average, China's economy saw a growth rate of more than 10 percent from 2000 to 2009. During that period, China's share of world manufacturing output rose from just 7 percent to 19.7 percent. Moreover, China's government is currently undertaking economy restructuring and is looking at sustainable long-term growth while prioritizing sufficient expansion in order to protect jobs.

So what went wrong with the manufacturing in China? Why is it that China finds itself in a hole too deep to climb out from?
Some market pundits believe that China's despair is caused by its own lack of foresight. Ever since economic liberalization began in the country in 1978, China has maintained its position as one of the world's fastest growing economies. Backed by the low labor costs in the country, its high productivity and up to par infrastructure, manufacturing in China reached its zenith in the 2000s. However, it should be noted that during the manufacturing boom in China, most of the manufacturing companies only sought to take advantage of the available cheap labor and built their entire business model around it. With this advantage starting to slip away now, these companies are dumbfounded and have no idea how to deal with the transition occurring in global manufacturing.

Desperation has slowly started creeping into the minds of the Chinese as they are hit with the harsh reality that China is no longer a low-cost manufacturing hub. With the newer Chinese generation being much more resistant to the longer work hours and lesser wages gleefully accepted by workers from the previous era, man-management has become increasingly difficult. Managers are constantly faced with the dilemma of trying to get work done without being too autocratic. The outdated business models continue to haunt manufacturers as they now face the challenges of cash flow as Chinese banks are no longer offering the easy loans that they used to earlier when China wanted to continue its growth at any cost. This has resulted in debt accumulation, which seems to be impossible to resolve with the outdated business model.

As a workaround to benefit from the low-cost labor model, factories that were first set up in the coastal cities of China started moving inland and continued to lure investors by claiming that workers there could be paid half of what they received in other industrial cities. A large number of Chinese business owners are even trying to sell their businesses in China and move the manufacturing to Western countries, where the prevailing stronger property rights would respect their ownership of property. Although the existing laws in China that limit outbound asset transfers make things difficult for such business owners, they continue to find ways around those laws in order to protect their capital and to earn a return on investment.
A combination of wage inflation, increased transport costs, along with poorer productivity and quality control have thus led to the evident drop in the manufacturing sector in China. Nevertheless, despite these challenges, China continues to be very strong in manufacturing as of now. However, it remains to be seen how China handles these challenges in the coming years.

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