MADE IN CHINA

Americans may soon be seeing far fewer “Made in China” labels at the mall

Sometimes it seems like everything we own has been made in China—the iPhones in our pockets, the TVs in our living rooms, the clothes in our closets, and the toys under the Christmas tree. (And if it’s plastic—the tree, too.) China, after all, manufactures more stuff than any other country in the world.

But that’s not enough for the Chinese government. In late May, the country’s State Council released a plan called “Made in China 2025,” endorsed by Premier Li Keqiang, Beijing’s second-in-command. The goal of the plan, according to Xinhua, China’s official news agency, is to “transform China from a manufacturing giant into a world manufacturing power.”

Confused? It may seem baffling that a country already covered with factories would require a new government program to support even more of them. But the “Made in China” campaign highlights a little-acknowledged reality facing the Chinese economy: It is losing its competitive edge in manufacturing.

For workers in America who have watched China steal away their manufacturing jobs over the past 30 years, this may sound impossible. But China’s economy has changed dramatically in recent years, significantly altering its position in the global economy.

China’s spectacular rise was, to a large degree, driven by cheap labor. After the government introduced free-market reforms and opened up to foreign business in the early 1980s, it tossed its massive, impoverished population into the international supply chain, forever altering the global economy. Chinese workers were plentiful and wages were low. To take advantage, companies from around the world set up factories in the country, especially companies looking to produce goods that require a lot of  China is facing more competition from developing economies with cheaper costs. labor, like apparel and electronics. That sparked the high growth and industrialization that transformed China into the world’s second-largest economy in a mere three decades.

That, however, was the old China. Economies never remain static, and as they change, so do their advantages (and disadvantages) as compared to other countries. Wages in China have risen significantly in recent years, and now its factory workers are the best paid in developing Asia.

According to a 2014 survey by the Japan External Trade Organization, the total annual cost of a Chinese manufacturing worker (including salary, benefits, social security payments and bonuses) is $8,204, compared to $4,481 in Indonesia, $3,618 in India, $2,989 in Vietnam, and $1,580 in Bangladesh.

Meanwhile, Chinese workers aren’t nearly as plentiful as they used to be. Because of China’s controversial policy limiting many couples to only one child, the population’s workforce is not only greying, but shrinking. Today’s young workers, furthermore, have far more opportunities than their parents ever did, and therefore are less inclined to take on boring assembly-line jobs. Factory managers in industrial enclaves like Shenzhen complain of serious labor shortages, forcing them to lure workers with free vacations, better housing and other pricy benefits.

All of this has made China a less attractive environment for manufacturing, especially in many of the products for which it is famous, including electronic gadgets, clothing and shoes. Foreign direct investment into China in the first quarter of 2015 grew by a healthy 11.3%—but in manufacturing, it actually declined by 3.6%.

Meanwhile, other countries in the emerging world are stepping up their efforts to compete with China for manufacturing jobs. India’s prime minister Narendra Modi has launched a high-profile “Make in India” campaign to attract more factories to the South Asian giant. Vietnam is becoming a major competitor to China in the export of consumer goods, and the country will likely win another advantage with the completion of the Trans-Pacific Partnership: a giant 12-nation free-trade pact organized by the US. Vietnam is a member of the TPP, but China has been conspicuously excluded.

And while China is facing more competition from developing economies with cheaper costs, its companies lack the technology, management expertise and branding power to fight it out with companies from more advanced economies. Many of the products stamped “Made in China” are really only assembled in the country, with the core technologies, designs and key components coming from elsewhere. Chinese factories often add little value in the process. The Tokyo-based Asian Development Bank Institute once pulled apart a made-in-China Apple iPhone and discovered that Chinese assembly lines contributed a mere 3.6% of its production cost.

Homegrown Chinese products often suffer from a reputation for dubious quality—which is sometimes well-deserved. Surveys by research outfit JD Power show that automobiles manufactured by Chinese domestic brands suffer significantly more initial defects than those produced from international nameplates (though to be fair, the gap is narrowing). That’s why nearly all Chinese car exports end up in emerging markets where cheap prices count for more than safety.

Lacking brand power, Chinese companies often struggle to compete with more established players in major markets like the US. Chinese smartphone maker Xiaomi, which made a big splash locally with low-priced but feature-packed products, has so far dodged the US entirely and targeted other emerging economies like India and Brazil instead. States have a poor record of encouraging creativity. 

So if China is to avoid getting squeezed between cheap-labor emerging economies and those with more advanced technology, it needs to upgrade its industry. That’s the motivation behind “Made in China 2025”—to marshal financial resources to invest in new research and development, and promote cutting-edge products.

The industries targeted by the program all require a higher degree of innovation, efficiency and quality control: information technology, eco-friendly cars, high-end ships and advanced robotics, to name just a few. As Xinhua reported in May, Chinese minister of industry and information technology Miao Wei has said he expects China to “realize industrialization nearly equal to the manufacturing abilities of Germany and Japan at their early stages” by 2025.

But will the plan work? It would be wrong, of course, to underestimate China and the capability of the Chinese people. But while changing policies to make a country more attractive to manufacturing isn’t all that difficult, changing a country to make it more innovative is a whole other matter.

The program, in the words of state media, will be “guided by the government,” and that’s where the problem starts. States have a poor record of encouraging creativity. Despite widespread perception, Asia’s recent economic ascent is not based on government industrial policies. Japan’s bureaucrats, for example, have tried to “pick winners”—promote certain sectors with state-directed assistance—but had as many failures as successes. There is no reason to believe that the Chinese government can throw money at a few industries and have better luck.

If China really wants to take its economy to the next level it needs deeper free-market reform—to reduce the role of the state and unleash the creative energies of entrepreneurial Chinese. The “Made in China” plan does realize the need to strengthen the rules and institutions supporting a market economy—by, for instance, improving the (now miserable) protection of intellectual property rights. President Xi Jinping has also pledged to give a bigger role to the marketplace as part of a grand reform agenda to refashion China’s entire economic model.

Perhaps if Xi follows through on his pro-market promises, the “Made in China 2025” program stands a chance. But if not, Americans might notice that “Made in China” label less often while shopping at their local mall.

Follow Michael on Twitter at @MichaelSchuman. We welcome your comments at ideas@qz.com.

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