Turning of the Tide

Last year a major milestone for the global economy passed, all but unheralded.  In 2012 the working age population of China peaked.  This population is defined as the number of Chinese between the ages of 16 and 60.  There is a smaller pool of workers this year than there was last year.  That number will decline again next year, and every year after that for the next couple of decades.

This decline is the inevitable result of the one child per family policies put in place decades ago.  And the process is unstoppable.  Even if the Chinese government were to relax its population control policies tomorrow, and Chinese women to immediately react by having more kids, it would be at least 17 years before that increased fertility would begin lifting the number of workers.

This is a major milestone because China has become the world’s go to location for manufactured goods.  Export of manufactured products has powered the unprecedented growth of the Chinese economy.  However, two processes are about to collide.  As  the Chinese economy gets bigger, it is starting to generate more internal demand.  At the same time, the pool of labor is beginning to get smaller.  More demand for a scarcer resource inevitably means the price of that resource gets bid up.

We are already seeing that process starting.  In the southern coastal regions, which have been the major manufacturing areas, wage increases of 10% to 24% have been reported.

For the last ten years, powered by a seemingly inexhaustible supply of cheap labor, Chinese manufacturers have taken market share away from domestic producers.  Chinese made products have taken over whole industries.  This has been great for consumers, who have benefited from low prices, but for American manufacturers, it has meant layoffs and plant closings.  There are now signs of this process reversing.  Motorola has opened a factory in Texas to start making cell phones.  And Apple Computer has announced plans to begin making some computers in the US again.  GE is moving more production of appliances back to the heartland.

Of course, China is not the only low wage country out there.  Vietnam, India, the Philippines—the world is awash in low cost labor.  Also, if Chinese workers decide to stay in the labor force past age 60, the erosion in the size of their labor force will stop.  Still, as an American manufacturing manager, the last ten years have been like watching the tide go out, with every year bringing tighter margins and fewer opportunities.  So I can be forgiven for taking Chinese demographics as a hopeful sign.

Maybe we’re seeing the turning of the tide.