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Monday, 11 November, 2002, 07:52 GMT
China: the world's factory floor
Maryjo Cohen is shutting two factories.
Cheap, high quality goods from China have eaten away profit margins at National Presto industries, a Wisconsin-based firm which makes pressure cookers and electric frying pans.
"That's going on all over the US, our entire industry has moved to China," says Ms Cohen, National Presto's president.
She is reluctant to say how many jobs will go at National Presto's plants in New Mexico and Mississippi but it will be a "substantial number for a company our size" - at least half the workforce.
National Presto has an agent in Hong Kong who subcontracts work to plants in China's neighbouring Guangdong province.
Guangdong is the heartland of China's manufacturing boom, a commercial gold-rush region whose paddy fields have been concreted over with industrial parks over the past 20 years.
In that time, China has raced ahead to become the world's fourth-biggest industrial producer, after the United States, Japan and Germany.
It has gone from being a maker of mostly low-tech products like Christmas decorations, toys, footwear and clothing to producing TVs and fridges.
It is the biggest exporter to the US, having knocked Japan's ailing economy into second place.
Buying to sell
Meanwhile, many foreign investors have seen their dreams of supplying the world's biggest market turn to headaches. They find themselves grappling with bureaucracy and appalling logistics.
But producing for export can be highly profitable, thanks to China's huge pool of cheap labour.
Many global firms have built their own factories in China, such as mobile phone firm Motorola and consumer electronics giant Philips and GE, the fridges to turbines conglomerate.
Many others have found that Chinese-run factories can turn out high quality goods that they are happy to put their logo on.
Economists think low cost "Made-in-China" items are starting to have an impact on retail price indices in the world's major economies.
Japan could be one of the biggest losers - it must beat deflation to hoist itself out of the doldrums.
China has "probably already contributed at the margin to deflation of some consumer goods" in the US, says Dr Nick Lardy, a specialist on China's economy at the Brookings Institution in Washington DC.
Slashing shop prices
US Labor Department figures show American shoppers are paying significantly less than they were four years ago for many typical Chinese exports.
Imports of all those categories from China rose by more 13%. Black & Decker, for instance, sources its brand-name power tools in China.
The winners are American consumers, for whom lower prices mean fatter wallets.
Stereotypes of Chinese goods being of poor quality persist, but perceptions are lagging behind reality, says Dr Mark Fung, a China analyst at Johns Hopkins University in Washington DC.
What's more, shoppers don't care where goods come from if the price is right and they trust the store to refund defective goods, he points out.
Iconic American retailer Wal-Mart trusts the quality of Chinese goods enough to buy about $14bn-worth of them last year - or 13% of all US imports from China in 2001.
It has signed a deal with Chinese household goods maker Haier to stock fridges sporting the Haier brand.
National Presto was persuaded to switch production to China because quality is "superb", says Ms Cohen.
"That's been true for years, vis-à-vis the US. They can use people to finish products whereas other manufacturers use tooling," she says.
China's vast pool of cheap labour is a major reason for its success. Wages are a fraction of those in the US, and six times cheaper than Mexico - averaging about 40 US cents an hour for a factory worker.
At least 100 million migrant workers from poor rural districts are seeking work in the cities, according to Chinese government figures.
There are so many waiting to follow them that economists think upward pressure on wages is likely to be almost non-existent for the foreseeable future.
But China's winning formula is the "nice melding" of unskilled workers and inexpensive but well-educated middle managers, says Dr Fung.
Foreign executives who might otherwise be at a cultural and linguistic loss have been able to rely on Chinese middle managers for quality control.
"It's not even about cheap labour, its about skilled labour use. If you have a 10% defect rate, it's costing the company a lot of money," he points out.
But China wants to take on the world in hi-tech semi-conductors as well as fridges and hand-polished frying pans.
The government is promoting high-tech industry and investing heavily in scientific research, though total spending remains a fraction of US levels.
The country's pool of skilled engineers are vital to this project too.
IT engineers cost foreign firms about $15,000 a year each - a fortune in China where the average annual wage is about $1,000.
Already firms in the Dongguan district of Guangdong produce 37% of the world's hard disk drives and 10% of its computer monitors, according to the Los Angeles Times.
Analysts warn that the country lacks the most advanced technology. China's output of semiconductors, for example, lags way behind the US, $3bn worth of chips versus $71bn in 2001.
But Western hi-tech giants are increasingly viewing China as a research lab, with Motorola planning to invest $1.3bn in research programmes and Microsoft $750m.
Analysts believe China's technological know-how is only five or 10 years behind US levels.
The scale of China's challenge to the US will depend ultimately on the success of its bid to become a high-tech producer.
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