Wednesday, July 12, 2017 / Perth Australia / By Niekie Jooste
In this edition of "The WelderDestiny Compass":
We all suffer from recency bias. Basically this means that we believe that things that have happened recently will continue to happen for the foreseeable future. Our recent experiences shape our vision of the future. Based on our recent experiences, we believe that China will continue to be the world's factory, exporting cheap goods all over the world and result in factories in developed economies closing, with jobs being lost there.
Given that I have been around a while, I can remember the same cycle happening with Japan, Taiwan and South Korea. All these economies did however mature, and while they are still significant manufacturing economies, they are no longer the cheap suppliers. They supply products that are comparable in price to Western nations, and they consume products from all over the world.
When I was young, Japanese tourists were everywhere. I was jealous of those flashy cameras they all seemed to have! Now we see the rapid growth of Chinese tourists.
Today we look at what effect this change within China's role in the world economy will have, and particularly on us in the welding industry.
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It is estimated that there will be around 550 million people in the Chinese middle class by 2022. This is only 5 years away, so we are not talking about a distant future here. At 550 million people, this is a group that is almost twice as large as the entire population of the USA.
To draw a parallel, China is now where the USA was around 1950. This was a time when America had largely established itself as the main manufacturing nation, and the average American citizen started being a major consumer. No longer was America's growth largely driven by exports to Europe, but it had started generating a very large internal market for goods and services. Foreign travel and a taste for expensive imported goods also moved from the well-to-do upper class to the established middle class.
Around the 1950's, America's consumer economy shifted into top gear, and it propelled the world economy for the next half a century. While there were other nations that have followed the same cycle, their populations are smaller than that of the USA, so their effect on the world economy was not nearly as great.
America currently has a population of around 320 million. China has a population of around 1371 million. In other words, China's market is more than 4 times larger than that of the USA. Just as America's middle class moved the world economy, so China's emergent middle class is going to move the world economy.
As China became the world's factory, their very low cost base made factories in developed economies less competitive. From around 1970, the trend for American businesses to move their manufacturing facilities to Japan and then China really started taking off. The nett result is that the real (inflation adjusted) average wage in America has remained almost the same from 1970 until 2015. Many of the lower skilled, but well paid, manufacturing jobs were lost in the developed economies.
Chinese factories are not suddenly going to close down, or become uncompetitive. Rather, the higher average wage in China is eroding the low cost base advantage, making manufacturing in developed economies comparatively more competitive than in the past. This is unlikely to lead to direct job growth in the developed economies, as automation will tend to fill most of those gaps. It will however lead to more indirect jobs in service industries that support the automation of the returning industries.
The biggest factor is however that a great deal of Chinese made goods are going to find a market within China, rather than being destined for overseas markets. The Chinese middle class will also demand more foreign made goods and services. From agricultural products and resources to tourism and luxury goods, China's appetite will be huge for consumer products.
At the same time, China's infrastructure spending will keep on growing, adding further growth impetus on the world economy.
China's economic growth has also resulted in political ambition. This has many counties feeling rather threatened and in turn trying to isolate themselves from China. We will leave the politics to the politicians, but it bears thinking about that any country isolating itself from America in the 1950's lost out on a lot of the economic benefits of America's growth. Economic isolation from China at the present time is just not a smart move for any country!
As China's appetite for foreign goods and commodities grows, there will be a lot of positive economic impact on countries that are happy to do business with the Chinese. Generally this means growth within many industries such as mining, energy, transport and tourism.
Regardless the industry, if there is growth, there needs to be new facilities, construction and maintenance. Much of the "factory" based welding for these projects will be done by automated welding, but the field construction and maintenance activities will demand Welders with good skills.
During the rise of the Chinese middle class, which will probably carry on for the next few decades, work as a welder should be plentiful. That is not to say that there will be no ups and downs, with recessions thrown into the mix, (even while the USA grew, it still had recessions) but the general trend for the next few decades should be up if you are in the welding industry.
While the world grows, Welders will make it happen!
Yours in welding
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