Why Is Chinese Manufacturing Still So Competitive Despite Losing Its Cheap Labor Advantage?
Since 2010 Speed Agility Automation and Technological Innovation have Increasingly Replaced China’s Original low-wage Advantage
Michael Magoon
Chinese wages rose dramatically, but manufacturing remained competitive. China had accumulated advantages that mattered more than cheap labor.
This is the third and final article in my series that attempts to answer two related questions.
What are the most important factors that make Chinese manufacturing so competitive globally across so many different industries?
How has the relative importance of those factors changed from the beginning of China’s economic reforms around 1980 to 2026? This article will focus on the period between 2010 and 2026 with some speculation the future.
To be clear, this series is not about:
How China developed those capabilities. I write about that topic here.
Whether other nations can duplicate that strategy. I write about that topic here.
Before you read this article, I would recommend reading the first two articles (here and here) in the series. Here I will only very briefly outline their main points:
In the 1978–1992 period of China’s rise to global manufacturing dominance, China leveraged the following:
Cheap Labor
A centralized state that forced local results-based competition among local governments and private firms
Access to the American-backed global trade system
Copying Western, Japanese, and South Korean technology, skills, and organizations
In the 1992-2001 period, China leveraged the above to create more fundamental advantages:
Foreign Direct Investment, which tried to make a profit on the above factors
Government investment in transportation and energy infrastructure
A skilled industrial workforce
Urban manufacturing clusters
By 2001-2010, China had leveraged all the above to become the “World’s Factory” with even more advantages of its global competitors:
Abundant domestic capital
Manufacturing scale
Dense supplier ecosystems
Vertical integration of entire supply chains
In each period, the advantages from the previous period persistently, but new layers of competitiveness were added on to the existing advantages. This enabled China to gradually work their way up the value-added manufacturing chain.
2010–2020: Speed, Agility, and Automation
Chinese manufacturing competitiveness in this period
During the 2010s, something happened that should have weakened Chinese manufacturing. Chinese wages rose rapidly. China was losing the cheap-labor advantage that had helped launch its industrialization, while countries such as Vietnam, Bangladesh, and India offered much lower wages.
Yet Chinese manufacturing continued to expand.
By 2020, China produced nearly 30 percent of global manufacturing output. Its manufacturing base was also extraordinarily broad. China remained competitive in clothing, furniture, toys, and other labor-intensive products while becoming a leading producer of steel, chemicals, machinery, appliances, computers, telecommunications equipment, solar panels, batteries, and many other sophisticated products. Increasingly, China could manufacture both the final product and much of what went into making it.
Competitors with China in this period
By the 2010s, China’s competitive position had become even more unusual. Vietnam, Bangladesh, India, Indonesia, and other developing economies increasingly enjoyed lower wages and competed aggressively for clothing, footwear, furniture, simple electronics assembly, and other labor-intensive manufacturing. Some production did leave China for these countries. Yet China remained competitive in many labor-intensive industries despite its rising wages because low labor costs were becoming a smaller part of its overall advantage.
At the same time, China increasingly competed directly with the world’s established manufacturing powers. Germany and Japan remained formidable in machinery, automobiles, chemicals, and precision manufacturing. South Korea and Taiwan were major competitors in electronics and advanced components. The United States remained dominant in aerospace and many frontier technologies.
But China was now competing across parts of nearly all of these categories while establishing particularly strong positions in telecommunications equipment, solar panels, batteries, electronics, machinery, steel, and other industries. China was becoming capable of competing simultaneously against:
poorer countries on cost, and
richer countries on increasingly sophisticated manufacturing capabilities.
The most important factors in this period
Most of China’s manufacturing advantages during the 2010s had already been created during earlier periods. What changed was their relative importance. Three additional advantages became particularly important in this :
Manufacturing Speed
Manufacturing Agility
Automation
These advantages helped China compensate for rising wages. Increasingly, the question was not simply which country could manufacture a product with the cheapest workers. It was which country could bring products into mass production quickly, adapt when circumstances changed, and use machinery to reduce its dependence on expensive labor.
Manufacturing Speed
Speed means reducing the time required to move from a product design to a prototype and then to mass production. It also means solving production problems quickly once manufacturing has begun.
China’s accumulated manufacturing ecosystem made this possible.
Enormous scale supported specialized factories and workers.
Dense supplier ecosystems put thousands of specialized capabilities near one another.
Vertical integration meant that more components and materials could be obtained within China.
Decades of manufacturing created experienced engineers, managers, technicians, and workers.
The result was a manufacturing system capable of moving extraordinarily quickly.
Apple’s supply chain illustrates the magnitude of the capability. Although the iPhone was designed in the United States and contained important components from many countries, China became the center of its final assembly and much of its supporting supply chain.
When Apple introduced a new model, manufacturers had to:
coordinate hundreds of suppliers,
modify production processes,
train workers,
solve unexpected problems, and then
manufacture tens of millions of nearly identical devices to demanding quality standards.
No other nation’s industry could match China’s speed at moving through this entire process.
China’s industrial clusters shortened the duration of each of the steps in this process. If an electronics manufacturer in Shenzhen needed a redesigned plastic case, different connector, new tooling, or modified packaging, companies capable of performing those tasks could often be found nearby. Engineers could meet suppliers directly, examine prototypes, make changes, and try again.
Speed has economic value. A company that gets a product to market several months before a competitor can gain customers, recover its development costs earlier, and respond more rapidly to changing technologies. For products with short life cycles, production speed can matter as much as the hourly wage of the workers assembling them.
Manufacturing Agility
Agility means the ability to change products, suppliers, production processes, and production volumes quickly when circumstances change.
Speed and agility are related, but they are not the same.
Speed allows a manufacturer to get a new product into production quickly.
Agility allows it to change what it is doing after circumstances change.
China’s dense supplier ecosystem makes this much easier.
If a component becomes unavailable, a manufacturer may be able to find several alternative suppliers nearby.
If a customer changes a design, manufacturers can work with toolmakers and component suppliers to modify production.
If orders suddenly increase, companies can add shifts, subcontract some production, or draw upon additional suppliers.
China’s enormous manufacturing base provided manufacturers with alternatives. A company was less dependent upon a single supplier because many competing companies could often perform similar tasks. Suppliers themselves could draw upon networks of subcontractors and specialized producers.
This agility became especially valuable in industries where demand was difficult to predict. Consumer electronics, clothing, appliances, and many other products can experience sudden changes in demand. Manufacturers that can rapidly increase production when a product succeeds gain an important advantage over competitors with rigid supply chains.
Agility also reduced the risks of innovation. New products rarely move directly from design to perfect mass production.
Components fail.
Customers request changes.
Manufacturing problems appear only after production begins.
Suppliers miss deadlines.
A manufacturing system containing many alternative technologies, suppliers, skills, and organizations has more ways to solve these problems.
This is closely related to my broader argument about the value of competition. China’s manufacturing clusters did not contain a single centrally planned supplier for each component. They often contained many companies competing to perform similar tasks. Manufacturers could compare prices, quality, speed, and capabilities and shift orders when another supplier performed better.
The same competitive system that increased efficiency also created redundancy. Redundancy can appear wasteful when everything works perfectly. When conditions change, it becomes valuable because manufacturers have alternatives.
This helps explain why manufacturing did not simply migrate to the lowest-wage countries as Chinese wages rose. Moving final assembly to a lower-wage country might reduce labor costs while sacrificing access to dozens or hundreds of alternative suppliers, experienced subcontractors, specialized workers, and nearby technical capabilities.
A lower wage is easy to measure. Agility is harder to measure, but manufacturers discover its value whenever something goes wrong.
Automation
Automation means using machinery, computers, and robots to perform tasks previously performed by workers. As Chinese wages increased during the 2010s, automation became an increasingly important way for manufacturers to reduce the amount of labor required for each product.
This represented a reversal of China’s original manufacturing advantage. During the 1980s and 1990s, labor was abundant and cheap while capital was scarce. Manufacturers had strong incentives to use workers rather than expensive machinery. By the 2010s, wages were much higher, capital was more abundant, and Chinese factories had reached scales that could justify large investments in automation.
Industrial robots show how quickly the change occurred. China installed roughly 15,000 industrial robots in 2010. By 2019, annual installations had risen to about 140,000. China had become the world’s largest market for industrial robots, accounting for roughly one-third of global installations by the end of the decade.
Automation spread across many of the industries in which China had become globally competitive.
Automobile factories used robots for welding and painting.
Electronics factories automated component placement, testing, and assembly tasks.
Metalworking companies installed computer-controlled machine tools.
Factories and warehouses increasingly automated the movement of materials and finished goods.
China’s enormous manufacturing scale made these investments particularly valuable. A specialized machine may not make economic sense for a factory producing 10,000 units per year. If a factory produces 10 million, even a small reduction in labor required for each product can justify a large investment in machinery.
China’s existing supplier ecosystem also made automation easier to adopt. Factories needed engineers who could install equipment, technicians who could maintain it, companies that could modify machines for specialized tasks, and suppliers capable of integrating equipment into existing production lines. Decades of industrial development had created many of these complementary capabilities.
The Chinese government encouraged the transition. The Made in China 2025 program, announced in 2015, sought to strengthen Chinese capabilities in robotics, advanced machine tools, electric vehicles, aerospace, information technology, and other advanced manufacturing industries. National and local governments supported manufacturers through financing, subsidies, industrial parks, procurement, and other incentives.
Government support could accelerate investment, but it worked within a manufacturing system that already possessed factories, suppliers, infrastructure, engineers, customers, and enormous production volumes. Subsidizing automation cannot create those complementary capabilities by itself.
Automation changed the relationship between wages and competitiveness. If machinery reduces the number of workers required to manufacture each product, wages can rise without labor costs per unit rising proportionately. The competitive importance of having the world’s cheapest workers therefore declines.
By 2020, China’s manufacturing advantage was no longer primarily that it had more cheap workers than its competitors. China’s manufacturing advantage rested on a system that could:
manufacture at enormous scale,
draw upon dense and vertically integrated supply chains,
bring products into production quickly,
adapt when conditions changed, and
increasingly substitute machinery for expensive labor.
2020–2026: Domestic Innovation
Chinese manufacturing competitiveness in this period
By the 2020s, China had become the world’s dominant manufacturing nation. It now produces roughly one-third of global manufacturing output, far more than any other country. Its strength also extends across an extraordinary range of industries, from clothing, furniture, steel, and chemicals to machinery, electronics, solar equipment, batteries, and electric vehicles.
But something important had changed.
The Chinese economy was no longer growing at anything close to the rates achieved during the great industrial expansion of the previous four decades. China’s real GDP had frequently grown by 8 to 10 percent or more per year during earlier periods.
Excluding the unusual pandemic rebound of 2021, growth fell to 2.3 percent in 2020, 3.1 percent in 2022, 5.4 percent in 2023, and about 5 percent in both 2024 and 2025. Manufacturing remained considerably stronger than many other parts of the economy, growing 6.8 percent in 2025, but China had clearly entered a slower-growth era.
The most important factors in this period
Nearly all of China’s major manufacturing advantages during this period had been created earlier. Scale, supplier ecosystems, vertical integration, domestic capital, infrastructure, abundant energy, speed, agility, automation, and accumulated production knowledge all remained important.
One additional advantage may now be emerging:
Innovation on the technological frontier.
Innovation on the Technological Frontier
Innovation on the technological frontier means developing important new technologies in the world’s most advanced industries. This is different from improving manufacturing techniques and production processes, which Chinese manufacturers had been doing throughout the previous four decades.
The new development was China’s growing ability to create technologies at or near the global technological frontier, particularly in industries likely to shape the next generation of manufacturing.
By the 2020s, Chinese companies were increasingly attempting to compete at the technological frontier itself. Electric vehicles, batteries, solar energy, telecommunications equipment, robotics, drones, and some forms of advanced industrial machinery became particularly important. In these industries, Chinese companies increasingly competed not simply by manufacturing technologies invented elsewhere more efficiently, but by innovating important technologies and products themselves.
Electric vehicles and batteries have been a focus. Chinese companies have developed new battery chemistries, battery designs, electric-vehicle platforms, power electronics, software, and highly automated production systems. They increasingly compete directly with companies from Japan, South Korea, Germany, and the United States over which technologies will define future generations of vehicles and energy storage.
Electric vehicles show this transition particularly clearly. China initially entered the automobile industry far behind established manufacturers from the United States, Japan, Germany, and South Korea. The shift to electric vehicles created an opportunity to compete around a new set of technologies. Chinese companies increasingly developed their own electric-vehicle platforms, battery systems, power electronics, software, and manufacturing technologies.
By the 2020s, companies such as BYD were no longer primarily copying established foreign automakers. They were introducing new technologies and products that forced some of the world's most advanced automobile manufacturers to respond.
How China got here
It is important to keep in mind that none of this recent innovations would have been possible without the important advantages China acquired in the previous eras:
Cheap labor gave China its initial foothold in global manufacturing and allowed millions of workers to acquire industrial skills and experience.
Competition among local officials encouraged results-based experimentation, investment, infrastructure construction, and the rapid expansion of successful industries.
Access to the American-backed global trade system gave Chinese manufacturers access to enormous foreign markets and allowed successful companies to expand far beyond the limits of China’s initially poor domestic market.
Copying foreign technologies, skills, and organizations allowed China to acquire capabilities that more advanced nations had spent generations developing.
Foreign direct investment brought additional capital, technologies, management skills, production systems, and connections to global customers.
Government investment in transportation and energy infrastructure provided the transportation, electricity, communications, industrial land, and other physical systems required by increasingly sophisticated manufacturing.
Urban manufacturing clusters concentrated workers, companies, skills, suppliers, and knowledge in places where they could interact and learn from one another.
Abundant domestic capital increasingly allowed Chinese companies and governments to finance factories, machinery, infrastructure, research, and industrial expansion without depending primarily upon foreign investors.
Manufacturing scale allowed companies to spread costs across enormous production volumes, specialize production, invest in advanced equipment, and accumulate experience through learning by doing.
Dense supplier ecosystems gave companies access to specialized components, materials, machinery, tooling, engineers, and technical expertise.
Vertical integration gave China control over more stages of production and allowed technologies and production knowledge to spread across related industries.
Speed allowed companies to move new products and technologies from design and prototype to mass production unusually quickly.
Agility allowed manufacturers to modify products, components, suppliers, and production processes as technologies and markets changed.
Automation increased the sophistication and precision of Chinese manufacturing while reducing its dependence on low-cost labor.
Together, these accumulated advantages created an environment in which Chinese companies could increasingly move beyond copying and improving technologies developed elsewhere and begin innovating on the technological frontier themselves.
Have we reached Peak China?
To be clear: we do not yet know how this period will turn out. Some people view Chinese manufacturing as an unbeatable juggernaut that will inevitably acquire a higher and higher percentage of the global market.
China’s slower economic growth is one reason for caution. The forces that powered earlier growth cannot continue indefinitely.
The movement of hundreds of millions of workers from low-productivity agriculture into more productive urban activities has largely run its course.
China’s population is aging and
its labor force is shrinking.
Years of extraordinarily high investment have created diminishing returns in some parts of the economy.
Problems in property markets and local-government finances have also weakened important sources of domestic demand.
The international environment has changed as well. The United States and other countries are imposing trade barriers and attempting to rebuild strategic industries. Companies are diversifying some supply chains away from China. Developing nations such as India and Vietnam are trying to capture more manufacturing. Advanced manufacturing nations are responding to Chinese competition with their own investments in technology and industrial capacity.
It is therefore too early to know whether innovation on the technological frontier will become another durable Chinese manufacturing advantage. Nor do we know whether the slower growth of the 2020s represents a transition toward a mature but still extraordinarily competitive industrial economy, or the beginning of a more serious erosion of China’s manufacturing advantages.
What we can observe is the possibility of an important transition. China:
Began its industrialization largely by combining inexpensive Chinese workers with capital and technologies developed elsewhere. It
Gradually accumulated its own capital, factories, suppliers, skills, production knowledge, and technologies.
Now that the extraordinary catch-up growth of the previous four decades is slowing, China’s ability to generate technological innovation domestically may become increasingly important.
Whether it can do so will help determine the next stage of China’s manufacturing story.
Bibliography
Barry Naughton, The Chinese Economy: Transitions and Growth
Nicholas R. Lardy, Integrating China into the Global Economy
Yasheng Huang, Capitalism with Chinese Characteristics: Entrepreneurship and the State
World Bank and Development Research Center of the State Council, China 2030: Building a Modern, Harmonious, and Creative Society
Dan Wang, Breakneck: China’s Quest to Engineer the Future
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