China’s Manufacturing Prowess

In MTD’s recent article on the global IPO market, I noted that, every once in a while, you see a statistic, or read an article that takes you completely by surprise, causing you to scratch your head and ask yourself: “When and how did that happen?”

That’s how I felt when I learned that China was the undisputed leader in IPO’s for the second year in a row in 2010, dwarfing the volume of IPO’s in the States. Having spent the first part of my career on Wall Street, it’s still hard for me to believe just how much of the global capital formation that occurs every year has shifted to this part of the world.

Over the past 15 years, I have been deeply involved in China’s manufacturing sector, and I have seen many changes there as well. However, I was equally surprised when studying recent data on the global machine tool industry to learn how much of the world’s manufacturing is now also being accounted for by China.

Of course, seeing the “Made in China” label on just about every manufactured item available in stores — from toys to high fashion articles of clothing — is a reminder of China’s pervasiveness as an exporter. But exports alone don’t tell the whole story. Beyond the goods that are exported, China’s manufacturers are busy making the wide range of products that are driving the growth of its economy, and that are in growing demand by China’s increasingly affluent 1.3 billion consumers.

Metal-forming technologies are used to shape hard industrial metals like steel, iron and aluminum into the components that are needed to make everything from computers and iPads to cars and trucks. Metal-forming technologies have been in existence for thousands of years, but came into widespread use with the global industrialization that began to occur in the latter part of the nineteenth century. Metal-forming technologies, and the machine tool industry, continue to be the industrial backbone for any industrial economy.

The dominant players in the machine tool industry have varied with the rise and fall of industrial manufacturing by country. The United States and Germany dominated for most of the post World War II period, until Japan overtook Germany as the world’s largest machine tool producer in the 1980s.

With the rapid industrialization that has occurred in China, it is no surprise that China is now the largest market for machine tools in the world. What is surprising, though, is just how big the China market is compared to the other industrialized countries of the world.

In 2010, Chinese manufacturers purchased $26.4 billion of machine tools, more than five times the amount of machine tools purchased by companies in Korea, America and Germany; almost ten times the amounts purchased by manufacturers in Japan and Italy; and more than 15 times the amounts purchased by those in India and Taiwan. In fact, Chinese manufacturers purchased more machine tools in 2010 than were purchased by all of the companies in South Korea, the United States, Germany, Japan, Italy, India and Taiwan combined.

Moreover, China’s rise to its dominant position in the global machine tool industry is a fairly recent phenomenon. As recently as 2003, China was the largest consumer of machine tools with $6.8 billion of purchases, but Germany was a relatively close second at $4.6 billion. Since then, the China market for machine tools has grown at approximately 20 percent annually, while the markets in Germany and most industrial economies have been flat to declining.

In addition to achieving fast growth, China has transitioned from a major importer of machine tools to the world’s leading manufacturer over this period. In 2003, China manufactured approximately $3.0 billion of machine tools, but imported over $4 billion. Germany and Japan — each with about $7.8 billion of manufactured volume — were the world’s leading producers of machine tools at that time.

By 2010, just seven year later, the industry had completely changed. Last year, China manufactured $20 billion of machine tools, more than double the amount manufactured by Japan. Of the amount manufactured in China, $1.6 billon was exported, while imports declined to less than 30 percent of the country’s needs.

The transition that has taken place in the global machine tool industry over the past seven years is representative of what is taking place in one industry after another. A familiar pattern has emerged: China is a promising market for a particular product; the rapid growth of the Chinese economy quickly makes China the largest market for that product; China transitions from importing many of the inputs needed to make that product to the domestic manufacture of the needed inputs; China begins to export the product.

Apart from what has occurred in the industry itself, the complete transformation of the global machine tool industry is a useful barometer for the entire manufacturing sector. Since the manufacture of most products begins with the bending, shaping or machining of metal, the demand for equipment that bends, shapes and machines tells us a great deal about where economic development is headed. In the case of China, it is true that the country has indeed become the world’s workshop. Every other country is a distant second.

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