China Takes Aim at the Profitable Heart of U.S. Manufacturing

For a long time, Americans have channeled their fear about China's factories into an exasperated, four-word refrain: They're stealing our jobs! By offering low-wage competition to U.S. workers, the Chinese picked off low-end manufacturing work for multinational corporations, whether it was stitching shoes for Nike or assembling iPads for Apple.

In the last few years, though, the anxiety has shifted a bit. Instead of worrying we'll be undercut on the price of manual labor, the concern is we could actually be out-competed in higher-end markets. You hear it when Democrats like President Obama talk about China winning the race on green jobs. And it came to my mind this week, thanks to a piece in Bloomberg Businessweek on China's growing prowess in heavy industry.

While China transformed itself into the world's top exporter by building light goods and electronics, the biggest chunk of its exports are now large, high-margin goods such as ships, locomotives, and construction equipment, as illustrated in this graph from Businessweek.

Not only are China's capitalists moving in this direction, but they're getting a hand from the government. As Businessweek reports, "Equipment manufacturing, shipbuilding, and cars are among the industries slated to receive $2.5 billion from the government this year to improve technology and product quality."

This should be of some concern to U.S. policy makers. Heavy machinery and transportation equipment are at the heart of the U.S. industrial base. They're part of our Big Six manufacturing sectors, along with food, chemicals, electronics, and metal products. These are businesses where labor is a relatively small part of the overall cost of making the product, and where America's technologically advanced factories have traditionally given us an edge. If they founder, there's not much left to replace them.

Chinese firms might not be ready to start taking on U.S. companies on their home turf, but they are in a good position to compete in the international market. According to Reuters, the leadership in Beijing intends to turn the country into the world's top exporter of construction equipment, such as bulldozers and forklifts, within three years. And as Businessweek notes, they're making fast progress:

While China's new manufacturers are not competing in developed markets yet, already they are challenging Caterpillar (CAT), Siemens (SI), General Electric (GE), and other established equipment makers in places like South America and Russia. China's construction-machinery industry is expected to overtake Japan's and Germany's soon, making it the world's second-largest exporter in the category, behind the U.S. 

And this is what should be making American officials sweat. To understand why, let's look at Caterpillar. As Reuters wrote yesterday, the Illinois-based industrial giant is one of the companies spreadheading America's recent manufacturing and export gains. It's also doubling down on its U.S. operations; in the last two years, it's built or upgraded 15 facilities and gone on a hiring spree. Meanwhile, it's committed to an additional $2 billion in capital investments here at home this year.

Part of the reason Caterpillar is confident enough to plunk down all this cash is that the United States is in the midst of a mining boom, which creates demand for their products. American construction companies also need to replace their aging equipment after holding back during the recession. But Caterpillar also feels flush because of its wildly successful international sales. The chart below breaks down its 2011 revenue by region:

North America generates a plurality of Caterpillar's income, but the company thrives because of its global presence. When Chinese companies go toe-to-toe with a corporation like Caterpillar abroad, they're going toe to toe with America's manufacturing base here at home as well. So welcome to the next phase of our competition with Beijing. Instead of stealing our jobs, it's time to worry about them stealing our markets.

>