Why Chinese Manufacturing Wins

At the end of the first millennium, around
1000 AD, China was definitively the most powerful country in the world. More than a third of the world lived within
its borders, it’s technology was the most advanced in existence, and its economy accounted
for an astronomical 50% of the worlds GDP. The west paled in comparison to China, but
eventually, Europe arose from its dark ages, the importance of China diminished, and the
west came to rule the world. Today that is still largely the case, but
China is rising again. In 1978 China had a GDP of only $200 billion,
only about 4% of the world’s GDP, but nowadays that GDP has risen to $11 trillion and accounts
for 15% of all economic activity in the world. This economic renaissance of the last 40 years
is largely thanks to one industry—manufacturing.

We’ve come to accept that China is the world’s
factory, but it wasn’t always this way. In the early 20th century goods were often
just produced right near where they were sold. America made American goods, Europe made European
goods. It wasn’t until cheap, worldwide shipping
became available that the production side of a company could be relocated to the other
side of the world, but why did China win? How did this country become the manufacturing
giant it is today? In 1978, Deng Xiaoping took power in the People’s
Republic of China. He quickly visited Bangkok, Singapore, and
other flourishing Asian cities and was convinced that, in order to succeed, China needed to
open itself up to the outside world, at least to an extent.

He gave people control of their farms, privatized
businesses, and, most importantly, allowed foreign investment in the country for the
first time in decades. He opened up four special economic zones with
tax incentives and exemption from the oversight that the rest of the country saw on its investments
and trade activity. These four zones were essentially the free
market portions of China, but none was more successful than this one—Shenzhen in the
Guangdong Province so I went there to see what it was like. Before its designation as a special economic
zone in 1980, Shenzhen was a tiny town with about 30,000 inhabitants but today that’s
grown to nearly 18 million people. That means its size rivals that of New York
and London. It’s believed that Shenzhen might have been
the single fastest growing city in human history. Every other Special Economic Zone was an established
area before its designation, but Shenzhen made sense as a spot where China could embrace
the west as it lay just north of the border of Hong Kong—what was at the time a British

Today Shenzhen is the electronics manufacturing
capital of the world. “Shenzhen as a city is really known for
two things. One is manufacturing capabilities especially
for consumer electronics products and second, its gravitation for talents or human resources
especially on the product development or research and development disciplines.” Apple, Samsung, Microsoft, Sony, Canon—they
all manufacture products here in Shenzhen. In fact, 90% of the world’s electronics
are made at least in part in this city. Everything just costs less in China so labor
costs less too. Where a factory in the United States might
pay upwards of $10-15 an hour, a Chinese laborer would happily accept $3 or $4 an hour in Shenzhen.

When I was there I withdrew the equivalent
of $80 from the ATM upon arrival and left four days later with cash leftover. A 30 minute taxi ride cost about $7 US dollars. A full meal at a local place was about $3. But China isn’t cheap entirely naturally. China has artificially depressed the value
of their currency. Up until 2005, the Chinese government just
said that the exchange rate was 8.27 yuan per dollar and that was that. They then went a few years allowing it to
increase in value within a margin, but in 2008 they pegged its value again to make Chinese
exports more attractive during the financial crisis. Nowadays, the government just picks a exchange
rate daily and lets the currency fluctuate from it by up to 2%.

This just makes it so western companies can
buy more for less. China also doesn’t charge taxes on exports
while the US doesn’t charge taxes on imports. The US doesn’t even charge customs fees
for some products like tablet PC’s so some products can make it all the way from their
factory in China to stores in the US completely tax free. When I was in Shenzhen I visited a company
called Anker. They make all sorts of consumer electronics
but chances are if you have something from them, it’s one of their portable batteries. I asked their CEO why so many electronics
companies are now based in Shenzhen. “So the advantage is that, you know, we’re
close to the supply chain so everything is faster. Right, so, instead of like, you know, you
do a mock up and you see it two weeks later here you send design to mockup and you receive
it, like, three days later.” In Shenzhen there are markets where you can
buy every part imaginable, there are factories ready to build prototypes in a matter of days,
there are engineers ready to work at the drop of a hat.

Development just happens faster in Shenzhen. A US company might use the same factories
as one based in Shenzhen but the geographical distance makes production slower. In addition, word travels fast in Shenzhen. A few years ago Anker was first-to-market
with a technology called PowerIQ that allows for faster device charging. The engineers from Anker told me that a big
reason they were able to go to market before the western companies was because they heard
about it first thanks to their proximity to other engineers and companies. Shenzhen just produces things better and faster,
but a product isn’t just a physical item. “Honestly being in Shenzhen for this company
is an advantage for the supply chain that we can develop good products with a competitive
price but for the brand its also a kind of a challenge.” What Shenzhen can’t build as well is brands. Certain companies like Anker have been able
to to an extent thanks to smart PR and marketing, but some other companies just don’t bother.

Lucrative western consumers want familiar
and approachable feeling brands but cultural differences and geographic distance often
make China based companies just seem different. All across Shenzhen I saw these boxes filled
with rentable portable chargers and as it turns out, it was an Anker product but the
Chinese designed product didn’t really succeed in the western market. “Talking about AnkerBox, the product is
initially designed for the western market, however, actually, our trial in Seattle wasn’t
that successful so we realized that, first of all, that US people actually, when they
go to a bar they actually really go there drinking instead of looking at their phones. Well if you walk into a bar in China you’ll
find that actually, like 20 tables of people standing around looking at their phones.” When the designers are thousands of miles
away from the consumer they might not be as knowledgeable of their wants.

Some companies have sprung up in Shenzhen
whose whole business is to develop and produce products without a brand. They’re called “white label companies.” They might produce earphones, for example,
then sell them to a western audio company who will attach their brand and sell the product
at a mark-up. Despite it’s enormous role in increasing
the GDP of China 30-fold in the last 30 years, manufacturing is not an entirely sustainable
industry for the country long-term. The problem is that, rather ironically, the
economic growth that manufacturing spurred in China has increased labor prices to a point
where their manufacturing is less competitive. Before manufacturing came in China was a country
of poor, rural farmers but today China has a real middle class and cities that are expensive
to live in. It used to be that workers like the ones at
Anker’s factory moved to the city for a few years when they were young to make money
for their family back home but nowadays people are moving to cities permanently and want
to be able to set up solid, middle class, urban lives.

The average cost for real-estate in central
Shenzhen is almost $1,200 per square foot. That’s even higher than San Francisco and
New York. Even when workers live outside the city center,
higher wages are necessary even just to pay for housing. At the same time manufacturing is becoming
less labor intensive every day as robots and automation are becoming increasingly advanced
and inexpensive. In 2015 China launched a initiative spending
hundreds of billions of dollars each year to upgrade and automate factories in order
to keep prices low, but this will likely do little to keep companies from packing up shop
and moving elsewhere.

Manufacturing lines that can be automated
are likely to move back to the United States and the rest of the western market. Robots cost the same whether they’re in
the United States or China so manufacturing products in the US helps save on shipping
costs and certainly is good for PR. At the same time, the labor intensive jobs
that China prospered on in past decades are moving to less developed and less expensive
countries like Vietnam, Bangladesh, and India.

Chinese manufacturing firms are responding
to this by opening up their own factories all across the world—everywhere from Africa
to the United States itself. The model that might work for China in the
future is that of Anker—Chinese based firms that can take advantage of their proximity
to the production lines to cut down on development cost and time. Shenzhen based start-ups like Anker, DJI,
and OnePlus have already succeeded in taking advantages of this proximity, but more are
being established each day.

If you see a hardware-based Kickstarter campaign,
there’s a good chance it comes from Shenzhen. 10 years ago a company would be hard-pressed
to succeed in Shenzhen as its own brand because historically the retailer has acted as a barrier
in between the manufacturer and consumer, but with the rise of Amazon and other e-commerce
sites its now possible for eastern companies to sell directly to the western consumer in
a system that rewards for quality over price. The time really is ripe for Chinese entrepreneurship. While Silicon Valley might be the dominant
area for software start-ups, its hard to rival Shenzhen as an ecosystem for hardware development
and manufacturing. I have to give a huge thanks to Anker for
bringing me out to Shenzhen to research and film this video. It truly would not have been possible without
them and they gave me complete creative control over the video.

I’ve actually owned and used an Anker battery
for over five years thats never broken down even when it’s been accidentally submerged
twice and dropped countless times but luckily they upgraded me to one of their newest ones
which I love. The main thing I want to plug for them is
their “Power it Up” contest going on right now. 10 winners will each get $2,000 in cash and
a bunch of free Anker products. To enter you make a video up to 1 minute long
about an unpleasant or awkward situation caused by running out of power, upload it to youtube,
then share it on their page and the 10 highest voted ones at the end of the contest win. The link to enter is in the description so
good luck! Aside from that, please be sure to check out
my podcast Showmakers and subscribe to this channel to get all my future videos right
when they come out. Thanks again for watching and I’ll see you
next week for another Wendover Productions video..

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