China Makes, The World Takes

A look inside the world’s manufacturing center shows that America should welcome China’s rise—for now.
Good for Us—For Now

What should we make of this? The evidence suggests what I hadn’t expected: that the interaction has been good for most participants—so far.

Has the factory boom been good for China? Of course it has. Yes, it creates environmental pressures that, if not controlled, could pollute China and the world out of existence. The national government’s current Five Year Plan—the 11th, running through 2010—has as its central theme China’s development as a “harmonious society,” or hexie shehui, a phrase heard about as often from China’s leadership as “global war on terror” has been heard from America’s. In China, the phrase is code for attempting to deal with income inequalities, especially the hardships of farmers and millions of migrant laborers. But it is also code for at least talking about protecting the environment.

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. For China, it is far from the worst social disruption the country has endured in the last 50 years. At least this upheaval, unlike the disastrous Great Leap Forward of the 1950s and Cultural Revolution of the ’60s and early ’70s, has some benefits for individuals and the nation.

Some Westerners may feel that even today’s “normal” Chinese 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 10 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.

Chinese spokesmen do make a different point about their economy, and they rattle it off so frequently that Western audiences are tempted to dismiss it. They say, “Whatever else we have done, we have brought hundreds of millions of people out of poverty.” That is true, it is important, and the manufacturing export boom has been a significant part of how China has done it. This economic success obviously does not justify everything the regime has done, especially its crushing of any challenge to one-party rule. But the magnitude of the achievement can’t be ignored. For all of 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.

Has the move to China been good for American companies? The answer would seemingly have to be yes—otherwise, why would they go there? It is conceivable that bad partnerships, stolen intellectual property, dilution of brand name, logistics nightmares, or other difficulties have given many companies a sour view of outsourcing; I have heard examples in each category from foreign executives. But the more interesting theme I have heard from them, which explains why they are willing to surmount the inconveniences, involves something called the “smiley curve.”

The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product’s creation and sale. At the beginning is the company’s brand: HP, Siemens, Dell, Nokia, Apple. Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design—the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.

The significance is that China’s activity is in the middle stages—manufacturing, plus some component supply and engineering design—but America’s is at the two ends, and those are where the money is. 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.

At each factory I visited, I asked managers to estimate how much of a product’s sales price ended up in whose hands. The strength of the brand name was the most important variable. If a product is unusual enough and its brand name attractive enough, it could command so high a price that the retailer might keep half the revenue. (Think: an Armani suit, a Starbucks latte.) Most electronics products are now subject to much fiercer price competition, since it is so easy for shoppers to find bargains on the Internet. Therefore 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 that 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.

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James Fallows is an Atlantic national correspondent. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.

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