Is Offshoring to China Working as Advertised 'So Far'?

By Lee Russ

Tuesday, July 03, 2007 at 08:45 PM

So says James Fallows, author of "China Makes, The World Takes," a very lengthy account of life in China's new industrial belts in the July/August 2007 issue of The Atlantic. He thinks offshoring to China has helped both the U.S. and China so far, but watch out for the future. And having read the whole damn article three times, I think he's being remarkably optimistic. I think the picture he paints is about as scary as it gets.

His conclusion, in his words:

So far, America's economic relationship with China has been successful--and beneficial for both sides. Free trade may not always be good for all participants, and in the long run trade with China may hold long term perils for the United States. But based on what I have seen in China, and contrary to what I expected before I came, so far it is working as advertised.

On what does he base his optimism about the relationship so far? Three main things.

1. Chinese Factory Jobs are not "Taken" from U.S. Workers

One important factor, according to Fallows, is that "most" of the jobs performed on Chinese assembly lines have not been "taken" from American workers, because if the work had remained in the U.S., it would have been performed by machines:

At the moment, most jobs I've seen the young women in the factories perform have not been "taken" from America, because in America, these assembly-type tasks would be done by machines. But the Chinese goal is, of course, to build toward something more lucrative.

In fact, Fallow points out that Chinese factories prefer human labor to automation:

Moreover, the Chinese factories use more human labor, and fewer expensive robots or assembly machines, than their counterparts in rich countries. "People are the most adaptable machines," an American industrial designer who works in China told me. "Machines need to be reprogrammed. You can have people doing something entirely different next week." ... Even some newly built facilities leave to human hands work that has been done in the West for many decades by machines.

First, it sounds like every factory owner's dream has come true in China: they work so cheap that machines are too expensive. Second, I don't buy the idea that "most" of the jobs have not been "taken" from U.S. workers, or at least I don't buy the idea that Fallows could know this to any degree of certainty.

Even automating assembly lines to the max in the U.S. does not completely do away with human workers. There are still inspectors, mechanics, cleaning and maintenance crews, and, of course, the need to build, transport, install, and modify the machines. To the extent that these jobs would have been done by Americans, they have, indeed, been lost to China.

And, of course, not all factory jobs in America have been fully automated. To the extent that they were performed by human beings and the work sent to China, they have again been lost to China. Fallows could not possibly know what portion of the Chinese factory jobs consist of these "lost" American jobs.

NOTE--Then there's the inhibiting effect that the threat of offshoring jobs has on the wages paid for jobs still done in the U.S. That's not technically "jobs lost" to China, but it sure as hell is "wages lost," to the employer if not to China. And there's the psychological effect that the new labor environment has on workers in America; you think it's coincidental that U.S. workers are reporting longer hours, more stres"???.

2. Very Little of the Cost of Offshored Products Stays with Chinese Factory Owners & Workers

This idea is summed up as follows:

The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this--that the real money is in brand name, plus retail--may sound obvious but its implications are illuminating.

That seems to overstate his actual case, though, as he later implies in an example of where the $1,000 sales price of a laptop computer goes. His quote above seems to refer to heavily branded products that are sold by the "manufacturer," like Armani suits & Starbucks coffee.

His laptop example:

...the generic Windows-style laptops I saw in one modern factory might go for around $1,000 in the United States, with the retailer keeping less than $50. Where does the rest of the money go? The manager of the factory guessed that Intel and Microsoft together would collect about $300, and that the makers of the display screen, the disk-storage devices, and other electronic components might get $150 or so apiece. The keyboard makers would get $15 or $20; FedEx or UPS would get slightly less. When all other costs were accounted for, perhaps $30 to $40--3 to 4 percent of the total--would stay in China with the factory owners and the young women on the assembly lines.

First of all, he seems to be cheating on the numbers here. I think the relevant analysis is not how much stays in China given the current state of offshoring, but how much would have stayed in the U.S. if the work had stayed here--i.e., what's the impact in the U.S.. As he discusses elsewhere, the new, higher future federal minimum wage of $7.25 produces a weekly income some 10 times higher than the standard Chinese factory worker earns (for a hell of a lot more hours worked). If the jobs performed in China were performed by workers making the $7.25, presumably the factory work that now accounts for only $30 to $40 would account for $300 to $400.

Second, his analysis seems to assume that the other components of the $1,000 price for the laptop are not produced in China. I'm not so sure. The disk-storage, monitor, and other components accounting for "$150 or so apiece" may well also be made in China. Same with the keyboard.

3. The Offshoring is Good for Many in the U.S

Fallows flat out says:

Has the move to China been good for American companies? The answer would seemingly have to be yes--otherwise, why would they go there?

And, "In case the point isn't clear:"

Chinese workers have been helping American designers, marketers, engineers, and retailers making $1,000 a week (and up) earn even more. Plus, they have helped shareholders of U.S.-based companies.

I have no argument with him on the fact that drastically slashing labor costs has, at least so far, been "good" for the people who own the companies that are making increased profits (ignoring for the moment the likelihood that fewer Americans will be able to afford the products, if their own incomes are reduced by the offshoring phenomenon). Whether the same can be said for marketers, engineers,, or even retailers, depends on whether the cheaper cost of the end product somehow increases their profits or salaries. I'd guess that in some cases it does, while in others it does not.

The Future

And then, of course, you get to the scary bit about the future. Fallows offers these illustrations of China doing everything it can to bring more of the "high value" work into the country (the good paying stages of the smiley curve):

In the north of China, Intel has just agreed to build a major chip-fabrication plant, with high-end engineering and design jobs, not just seats on the assembly line. In Beijing, both Microsoft and Google have opened genuine research centers, not just offices to serve the local market. Down in Shenzhen, Liam Casey's company is creating industrial-design centers, where products will be conceived, not just snapped together. What was recently a factory zone in Shanghai is being gentrified; local authorities are pushing factories to relocate 10 miles away, so their buildings can be turned into white-collar engineering and design centers.

Yes, and Watching the Watchers has discussed this little scenario before, as in the story Offshoring About to Bite the U.S. R&D Community, and the "advantages" of starting up your own IT company in India.

The Present, for Chinese Workers

Finally, there's an acknowledgement that life for Chinese factory workers is miserable; he doesn't gloss over that at all. But he's got an unexpected take on the problem, to the effect that the poor, miserable Chinese factory worker may actually be better off than an American minimum wage worker:

And, yes, throughout China's boom many people have been mistreated, oppressed, sometimes worked to death in factories. Even those not abused may be lonely and lost, with damaging effects on the country's social fabric. But this was also the story of Britain and America when they built their great industries, their great turbulent industrial cities, and ultimately their great industrial middle classes.

...

Some Westerners may feel that even today's "normal" working conditions amount to slave labor--$100 a month, no life outside the factory, work shifts so long there's barely time to do more than try to sleep in a jam-packed dormitory. Here is an uncomfortable truth I'm waiting for some Chinese official to point out: The woman from the hinterland working in Shenzhen is arguably better off economically than an American in Chicago living on minimum wage. She can save most of what she makes and feel she is on the way up; the American can't and doesn't. Over the next two years, the minimum wage in the United States is expected to rise to $7.25 an hour. Assuming a 40-hour week, that's just under $1,200 per month, or about ten times the Chinese factory wage. But that's before payroll deductions and the cost of food and housing, which are free or subsidized in China's factory towns.

...

For all the billions of dollars given in foreign aid and supervised by the World Bank, the greatest good for the greatest number of the world's previously impoverished people in at least the last half century has been achieved in China, thanks largely to the outsourcing boom.