Manufacturing a sexy story that isn't true

You might have seen some headlines last week proclaiming that Chinese manufacturers had overtaken their American rivals in efficiency, productivity, and research and development. But do not believe everything you read.

As everyone knows, China has become the world's leading site for new manufacturing investment. It accounts for about 7 per cent of world manufacturing production, and is likely to keep adding capacity until that figure rises to about 25 per cent. It is, in short, undergoing the same transformation from an agricultural to an industrial economy that Europe underwent 150 years ago and that its East Asian neighbours accomplished in the decades following the second world war. Because China is industrialising at a time of exceptionally liberal global goods flows, it is making the jump at an unusually rapid pace.

This is an impressive and important achievement, and it is helping to lift many millions out of poverty. But for some leader-writers, it is not enough: they must have it that China is also seizing global leadership in technology and innovation. The world, according to this view, is about to be dominated by super-competitive Chinese manufacturing firms. It is a sexy story, but there is little evidence to support it.

The latest titbit was a survey conducted by the US-based Manufacturing Performance Institute, published in the trade magazine IndustryWeek. According to some press reports, the survey showed that many Chinese manufacturing firms have surpassed US firms in research, innovation and productivity.

An inspection of the results reveals otherwise. First, the study compared a selection of Chinese firms, certified by the ISO 9001 quality standard, with a much broader sample of US manufacturers. In other words, it compared the leading edge of Chinese manufacturing with the US average.

Next, one-third of the Chinese manufacturers were joint ventures or wholly foreign-owned enterprises. Third, 75 per cent of surveyed US factories were more than 20 years old; unsurprisingly, 76 per cent of the Chinese plants were less than 20 years old, and the majority were less than 10 years old This is important because it explains the higher rate of information technology adoption by Chinese factories. Plants built in the last 10 years are likely to come equipped with up-to-date manufacturing process software.

In general, the survey does not demonstrate that Chinese manufacturing companies, as a group, are outpacing their US rivals in efficiency gains. Quite the reverse. American firms are nearly twice as efficient in managing inventories. Fifty-five per cent of US manufacturers have reduced per-unit costs over the past three years; in China only 40 per cent of firms reported doing so. And while 60 per cent of Chinese factories have cut order lead times over the past three years, nearly 70 per cent of US firms have done the same, usually by a wider margin. Half of Chinese firms reduced production cycle times over the three-year period; 71 per cent of American firms did.

What these figures show is not that Chinese manufacturers are overtaking their American rivals in technological capacity, but that the Chinese and American manufacturing economies are at different stages of development.

US manufacturers, operating at high cost in mature markets, focus on improving efficiency by cutting costs. Chinese manufacturers, in a fast-growing developing market, focus on adding capacity. The Chinese firms surveyed by IndustryWeek expect to spend an average of 20 per cent of sales on capital expenditure this year, compared to just 3 per cent for US firms.

China is well on its way to becoming a manufacturing giant. But it is far from being a technology leader.

Research by the China Economic Quarterly