Cheap Chinese Manufacturing: How Can U.S. Businesses Compete? Part I

From Thinking Outside the Boxe’s Sydney Correspondent: For at least a decade now American manufacturers have been fighting what in most cases has been a losing battle against a tidal wave of cheap Chinese imports. There are a number of reasons why Chinese imports are so much cheaper than goods made in the U.S., and pretty much every other nation as well, these include: very cheap labour, an undervalued currency that is pegged to the greenback, and an inexpensive supply change (ranging from components to cargo handling). It is not surprising that many American companies have shifted production offshore to take advantage of these lower costs. As a result America has shed 2.7 million manufacturing jobs between 2000 and 2004. A Bloomberg Businessweek article written in 2004 calls this problem “The China Price”. It means that goods made in China can be produced for 30% – 50% less than what they can be produced in America. The article’s authors note that “In the worst cases, it means below your cost of materials”.

Judging by recent events in America’s solar panel industry the situation hasn’t changed much since 2004. In fact, if you are to believe the claims made in a Forbes article, American and Chinese solar panel manufacturers are at war with eachother. This statement is based on a complaint filed with the Commerce Department by seven U.S. Solar panel manufacturers. They have claimed that Government subsidized Chinese manufacturers are dumping panels on the US market, thus forcing down prices and causing losses for American companies. The complaint asks the US Government to impose a 100% tariff against panels imported from China. Two months earlier American solar panel manufacturer Evergreen Solar filed for bankruptcy protection and German-based Solon announced it was shifting away from manufacturing, in doing so eliminating 60 jobs. Ed Wegener, Vice President of Photo Voltaic products for its American division was reported on the Renewable Energy World website as saying “There are structural advantages that the Chinese have that will keep a spread between the Chinese and U.S. manufacturers. Oversupply, government policy and scale are really what drives that.”

The complaint filed by the US solar panel manufacturers refers to one way in which manufacturers may be able to become more competitive, that is through the introduction of tariffs. This would drive the price of the Chinese solar panels up and hopefully lead to increased sales of American made ones. This is not something that is likely to happen as such a move would most likely be in breach of World Trade Organization regulations. It could also possibly result in the Chinese placing tariffs on American products in another industry. The Forbes article points out that in the long run tariffs are rarely an effective strategy. The article correctly points out that tariffs “end up creating market sanctuaries that hurt consumers…and undermine the urgency of domestic companies to innovate and fend off future challenges by foreign competitors”.

In 2004, a survey of U.S. And Chinese manufacturers conducted by IndustryWeek and the Cleveland based Manufacturing Performance Institute found that 54% of Chinese companies cited innovation as one of their top objectives, compared to only 26% of U.S. Survey respondents. As mentioned in the previous paragraph innovation is vitally important to any business, in order to effectively meet both current and future challenges. However, it seems that in the solar industry at least there are examples that the importance of innovation is being recognized. Solon, the German based company mentioned earlier, realized that they were unable to compete against businesses ten times their size. Their solution was to reinvent themselves by shifting from manufacturing engineering into research and development and becoming a developer. Ed Wegener, commenting on the companies’ strategy said “We have to be more closely aligned with what the market is looking for. There are too many conventional solar panels in the world, and there has to be a better proposition for the end user…we just realized that competitive reality a little sooner”.

Right at the start of this article the undervaluation of the Chinese currency was recognized as one of the main reasons why Chinese manufactured goods are so cheap compared to American products. There is nothing that American manufacturers can directly do to combat this. However, world leaders including President Obama have been putting increasing pressure on the Chinese Government. The President recently said that China has to play by the rules. In reality the Chinese are unlikely to “float” the Yen in the near future although they are likely to slightly appease world leaders by carefully and slowly continuing to allow the currency to appreciate. However this won’t be enough to make too much of a difference. Quantitive Easing (printing money) is one way the Federal Reserve can devalue the American currency and allow exporters to be more competitive. This is not a long term solution.

As shown by the example of Solon, innovation is the key to maintaining competitiveness. Small to mid size businesses more often than not possess a high level of flexibility that can allow them to adapt and change by identifying opportunities when challenges arise. Of course, this is something that large businesses can also do, it might just take more time. But these large companies should be encouraged to devote resources to the area of research and development so that they are able to stay competitive. Another example of successful innovation is provided by Sauder Woodworkings, a business operating in an industry dominated by Chinese imports. Sauder began to develop furniture designs that required assembly by the consumer. As a result, the cost of manufacturing labor was reduced.

Sources:

http://www.renewableenergyworld.com/rea/news/article/2011/08/u-s-panel-maker-too-hard-to-compete-with-china

http://www.businessweek.com/magazine/content/04_49/b3911401.htm

http://finance.yahoo.com/news/How-American-Solar-Companies-xfoftp-531242013.html

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