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Why Chinese Manufacturing Wins

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11:03   |   Aug 08, 2017

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Why Chinese Manufacturing Wins
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  • At the end of the first millennium, around 1000 AD, China was definitively the most powerful
  • country in the world.
  • More than a third of the world lived within its borders, it’s technology was the most
  • advanced in existence, and its economy accounted for an astronomical 50% of the worlds GDP.
  • The west paled in comparison to China, but eventually, Europe arose from its dark ages,
  • the importance of China diminished, and the west came to rule the world.
  • Today that is still largely the case, but China is rising again.
  • In 1978 China had a GDP of only $200 billion, only about 4% of the world’s GDP, but nowadays
  • that GDP has risen to $11 trillion and accounts for 15% of all economic activity in the world.
  • This economic renaissance of the last 40 years is largely thanks to one industry—manufacturing.
  • We’ve come to accept that China is the world’s factory, but it wasn’t always this way.
  • In the early 20th century goods were often just produced right near where they were sold.
  • America made American goods, Europe made European goods.
  • It wasn’t until cheap, worldwide shipping became available that the production side
  • of a company could be relocated to the other side of the world, but why did China win?
  • How did this country become the manufacturing giant it is today?
  • In 1978, Deng Xiaoping took power in the People’s Republic of China.
  • He quickly visited Bangkok, Singapore, and other flourishing Asian cities and was convinced
  • that, in order to succeed, China needed to open itself up to the outside world, at least
  • to an extent.
  • He gave people control of their farms, privatized businesses, and, most importantly, allowed
  • foreign investment in the country for the first time in decades.
  • He opened up four special economic zones with tax incentives and exemption from the oversight
  • that the rest of the country saw on its investments and trade activity.
  • These four zones were essentially the free market portions of China, but none was more
  • successful than this one—Shenzhen in the Guangdong Province so I went there to see
  • what it was like.
  • Before its designation as a special economic zone in 1980, Shenzhen was a tiny town with
  • about 30,000 inhabitants but today that’s grown to nearly 18 million people.
  • That means its size rivals that of New York and London.
  • It’s believed that Shenzhen might have been the single fastest growing city in human history.
  • Every other Special Economic Zone was an established area before its designation, but Shenzhen
  • made sense as a spot where China could embrace the west as it lay just north of the border
  • of Hong Kong—what was at the time a British territory.
  • Today Shenzhen is the electronics manufacturing capital of the world.
  • “Shenzhen as a city is really known for two things.
  • One is manufacturing capabilities especially for consumer electronics products and second,
  • its gravitation for talents or human resources especially on the product development or research
  • and development disciplines.”
  • Apple, Samsung, Microsoft, Sony, Canon—they all manufacture products here in Shenzhen.
  • In fact, 90% of the world’s electronics are made at least in part in this city.
  • Everything just costs less in China so labor costs less too.
  • Where a factory in the United States might pay upwards of $10-15 an hour, a Chinese laborer
  • would happily accept $3 or $4 an hour in Shenzhen.
  • When I was there I withdrew the equivalent of $80 from the ATM upon arrival and left
  • four days later with cash leftover.
  • A 30 minute taxi ride cost about $7 US dollars.
  • A full meal at a local place was about $3.
  • But China isn’t cheap entirely naturally.
  • China has artificially depressed the value of their currency.
  • Up until 2005, the Chinese government just said that the exchange rate was 8.27 yuan
  • per dollar and that was that.
  • They then went a few years allowing it to increase in value within a margin, but in
  • 2008 they pegged its value again to make Chinese exports more attractive during the financial
  • crisis.
  • Nowadays, the government just picks a exchange rate daily and lets the currency fluctuate
  • from it by up to 2%.
  • This just makes it so western companies can buy more for less.
  • China also doesn’t charge taxes on exports while the US doesn’t charge taxes on imports.
  • The US doesn’t even charge customs fees for some products like tablet PC’s so some
  • products can make it all the way from their factory in China to stores in the US completely
  • tax free.
  • When I was in Shenzhen I visited a company called Anker.
  • They make all sorts of consumer electronics but chances are if you have something from
  • them, it’s one of their portable batteries.
  • I asked their CEO why so many electronics companies are now based in Shenzhen.
  • “So the advantage is that, you know, we’re close to the supply chain so everything is
  • faster.
  • Right, so, instead of like, you know, you do a mock up and you see it two weeks later
  • here you send design to mockup and you receive it, like, three days later.”
  • In Shenzhen there are markets where you can buy every part imaginable, there are factories
  • ready to build prototypes in a matter of days, there are engineers ready to work at the drop
  • of a hat.
  • Development just happens faster in Shenzhen.
  • A US company might use the same factories as one based in Shenzhen but the geographical
  • distance makes production slower.
  • In addition, word travels fast in Shenzhen.
  • A few years ago Anker was first-to-market with a technology called PowerIQ that allows
  • for faster device charging.
  • The engineers from Anker told me that a big reason they were able to go to market before
  • the western companies was because they heard about it first thanks to their proximity to
  • other engineers and companies.
  • Shenzhen just produces things better and faster, but a product isn’t just a physical item.
  • “Honestly being in Shenzhen for this company is an advantage for the supply chain that
  • we can develop good products with a competitive price but for the brand its also a kind of
  • a challenge.”
  • What Shenzhen can’t build as well is brands.
  • Certain companies like Anker have been able to to an extent thanks to smart PR and marketing,
  • but some other companies just don’t bother.
  • Lucrative western consumers want familiar and approachable feeling brands but cultural
  • differences and geographic distance often make China based companies just seem different.
  • All across Shenzhen I saw these boxes filled with rentable portable chargers and as it
  • turns out, it was an Anker product but the Chinese designed product didn’t really succeed
  • in the western market.
  • “Talking about AnkerBox, the product is initially designed for the western market,
  • however, actually, our trial in Seattle wasn’t that successful so we realized that, first
  • of all, that US people actually, when they go to a bar they actually really go there
  • drinking instead of looking at their phones.
  • Well if you walk into a bar in China you’ll find that actually, like 20 tables of people
  • standing around looking at their phones.”
  • When the designers are thousands of miles away from the consumer they might not be as
  • knowledgeable of their wants.
  • Some companies have sprung up in Shenzhen whose whole business is to develop and produce
  • products without a brand.
  • They’re called “white label companies.”
  • They might produce earphones, for example, then sell them to a western audio company
  • who will attach their brand and sell the product at a mark-up.
  • Despite it’s enormous role in increasing the GDP of China 30-fold in the last 30 years,
  • manufacturing is not an entirely sustainable industry for the country long-term.
  • The problem is that, rather ironically, the economic growth that manufacturing spurred
  • in China has increased labor prices to a point where their manufacturing is less competitive.
  • Before manufacturing came in China was a country of poor, rural farmers but today China has
  • a real middle class and cities that are expensive to live in.
  • It used to be that workers like the ones at Anker’s factory moved to the city for a
  • few years when they were young to make money for their family back home but nowadays people
  • are moving to cities permanently and want to be able to set up solid, middle class,
  • urban lives.
  • The average cost for real-estate in central Shenzhen is almost $1,200 per square foot.
  • That’s even higher than San Francisco and New York.
  • Even when workers live outside the city center, higher wages are necessary even just to pay
  • for housing.
  • At the same time manufacturing is becoming less labor intensive every day as robots and
  • automation are becoming increasingly advanced and inexpensive.
  • In 2015 China launched a initiative spending hundreds of billions of dollars each year
  • to upgrade and automate factories in order to keep prices low, but this will likely do
  • little to keep companies from packing up shop and moving elsewhere.
  • Manufacturing lines that can be automated are likely to move back to the United States
  • and the rest of the western market.
  • Robots cost the same whether they’re in the United States or China so manufacturing
  • products in the US helps save on shipping costs and certainly is good for PR.
  • At the same time, the labor intensive jobs that China prospered on in past decades are
  • moving to less developed and less expensive countries like Vietnam, Bangladesh, and India.
  • Chinese manufacturing firms are responding to this by opening up their own factories
  • all across the world—everywhere from Africa to the United States itself.
  • The model that might work for China in the future is that of Anker—Chinese based firms
  • that can take advantage of their proximity to the production lines to cut down on development
  • cost and time.
  • Shenzhen based start-ups like Anker, DJI, and OnePlus have already succeeded in taking
  • advantages of this proximity, but more are being established each day.
  • If you see a hardware-based Kickstarter campaign, there’s a good chance it comes from Shenzhen.
  • 10 years ago a company would be hard-pressed to succeed in Shenzhen as its own brand because
  • historically the retailer has acted as a barrier in between the manufacturer and consumer,
  • but with the rise of Amazon and other e-commerce sites its now possible for eastern companies
  • to sell directly to the western consumer in a system that rewards for quality over price.
  • The time really is ripe for Chinese entrepreneurship.
  • While Silicon Valley might be the dominant area for software start-ups, its hard to rival
  • Shenzhen as an ecosystem for hardware development and manufacturing.
  • I have to give a huge thanks to Anker for bringing me out to Shenzhen to research and
  • film this video.
  • It truly would not have been possible without them and they gave me complete creative control
  • over the video.
  • I’ve actually owned and used an Anker battery for over five years thats never broken down
  • even when it’s been accidentally submerged twice and dropped countless times but luckily
  • they upgraded me to one of their newest ones which I love.
  • The main thing I want to plug for them is their “Power it Up” contest going on right
  • now.
  • 10 winners will each get $2,000 in cash and a bunch of free Anker products.
  • To enter you make a video up to 1 minute long about an unpleasant or awkward situation caused
  • by running out of power, upload it to youtube, then share it on their page and the 10 highest
  • voted ones at the end of the contest win.
  • The link to enter is in the description so good luck!
  • Aside from that, please be sure to check out my podcast Showmakers and subscribe to this
  • channel to get all my future videos right when they come out.
  • Thanks again for watching and I’ll see you next week for another Wendover Productions
  • video.

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Description

Enter to win $2000 with Anker's "Power it Up" contest: http://bit.ly/2uXquXZ
The battery I talked about at the end: http://amzn.to/2wCwwgh

While Wendover Productions retained creative control over the video itself, the sponsor paid for travel expenses and for the post-roll advertisement.

Check out my podcast with Brian from Real Engineering:
https://itunes.apple.com/us/podcast/showmakers/id1224583218?mt=2 (iTunes link)
https://www.youtube.com/channel/UC_10vJJqf2ZK0lWrb5BXAPg (YouTube link)

Support Wendover Productions on Patreon: https://www.patreon.com/wendoverproductions

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Youtube: http://www.YouTube.com/WendoverProductions
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Animation by Josh Sherrington (https://www.youtube.com/heliosphere)
Sound by Graham Haerther (http://www.Haerther.net)

Sources and script available here: http://bit.ly/2viM3Tj

Deng Xiaping footage courtesy Reagan Library
Singapore historic photo courtesy Hiramatsu Kaxuhito
Chinese bar photo courtesy Roman Boed

Big thanks to Patreon supporters: Kevin Song,
Kevin Song, David Cichowski, Andy Tran, Victor Zimmer, Paul Jihoon Choi, Dylan Benson, M van Kasbergen, Etienne Dechamps, Adil Abdulla, Arunabh Chattopadhyay, Ieng Chi Hin, Ken Rutabana, John Johnston, Connor J Smith, Rob Harvey, Arkadiy Kulev, Hagai Bloch Gadot, Aitan Magence, Eyal Matsliah, Sihien Goh, Joseph Bull, Marcelo Alves Vieira, Hank Green, Plinio Correa, Brady Bellini