In The Long Run, Everything Is In Asia

A great piece from Julie Irwin Zimmerman looks at what factors American companies consider when deciding where in China to locate a factory. The biggest issues turn out to be “communications, physical infrastructure and amenities such as fire protection” and education levels of among the local workforce matter for some sophisticated goods. But I thought this larger point about why to locate in China carries an important message that people need to understand:

“One big reason companies go to China is the cheap labor,” says South, who has extensively researched plant location in Mexico and Central America as well. “But there’s also a huge market for goods there. The auto manufacturers making cars there have a huge market for the cars right there. You can get cheap labor in other places, for instance in Africa, but you don’t have access to the markets there that you do in China. And third, China has access to natural resources, raw materials such as heavy metals.”

Obviously in the world-as-it-exists the low wages in China are an important issue. But if you imagine a long-term trajectory that’s bending toward similar wages around the world with similar prevailing technology, then the key thing for Americans to consider is that Asia is the dominant choice for production even under a level playing field. That’s because Asia is where the bulk of the people are. Ask yourself within the western world why the United States ahas an aviation industry and New Zealand doesn’t. It’s not because we’re undercutting their wages. It’s because the total market for airplanes in New Zealand is small so it doesn’t make sense to locate a factory there. Instead, they trade sheep for airplanes. And by all accounts they have a high standard of living doing so. But they’re not exactly winning the future. Yet it’s difficult to see what a remote nation with relatively few citizens could possibly do to become a world leader in heavy industry or cutting edge technology.