By John Richardson
AS you can see from the above chart, China’s percentage share of the global polypropylene (PP) market has risen from 15% of consumption in 2000 to 33% in 2014. During the same period, however, India’s share of worldwide consumption only rose from 7% to 9%.
This kind of chart is used as the basis for myopic, one-dimensional optimism about the future. “What has been achieved in China will be achieved in places like India and Latin America with the right investment in infrastructure followed by cost competitive manufacturing. Then the next frontier is Africa, where a manufacturing revolution will also take place,” is the argument.
It is the growth of manufacturing in China, mainly for export markets, which has been behind its economic transformation. This has led to rapid growth in consumption of all chemicals and polymers over the next 14 years – not just PP, of course. China has needed lots of chemicals and polymer imports to supply its factories. And all the wages paid-out by those factories has made people richer, thus enabling them to afford vastly greater volumes of consumer goods made from chemicals and polymers such as PP.
So it is assumed that as labour costs rise in China, other countries can step into the breach and repeat what has happened in China. So India, Latin America and eventually Africa etc. will replace China as the “low cost workshops of the world”.
But as I first discussed on Friday, with more details added to my arguments on Monday, the mathematics simply don’t add up.
In East Asia alone, which of course, excludes India, Latin America and Africa, there are two billion people who need to escape the “middle income trap”, with only one proven way of raising per capita incomes beyond $10,000: Manufacturing goods for export to wealthy countries. And yet there are also only one billion affluent consumers in the world.
And, crucially, we also know that these one billion relatively rich people mainly live in North America and the EU, where populations are rapidly ageing. Less babies means less demand, and so less demand means lower economic growth. And when economic growth is lower, everyone spends less money. When people grow older, we also know that their spending also declines. So there is no way that these one billion affluent consumers can once again provide the same type of “economic lift-off” that has delivered such fantastic benefits to China.
We also know that:
- China has created such vast oversupply in many manufacturing sectors, particularly during its 2008-2013 economic stimulus programme. It will take many years for these surpluses to be absorbed. So how can, say, India even contemplate building a big new autos industry?
- Despite China losing some of its edge in low cost manufacturing, its tremendous logistics and supply chain advantages will enable it to largely maintain its position. And, anyway, it can and is moving lower-value manufacturing to inland areas, where its labour costs are lower, leaving its developed provinces to focus on higher-value production. Further, as it tries to escape its own middle income trap, it will be able to move more effectively into higher-value industries than many people think. In the case of smartphones, for instance, it can build high-tech production hubs in eastern China, whilst moving final assembly of the components of the phones to western China, where cheap labour make this final assembly very viable.
So let’s now turn to the West and think of how it is going to respond to the challenge of demographics. Today’s young people, and the next wave of young people, along with the ever-growing number of retirees, will, on the whole, only be able to afford cheap products. These products will also have to be good quality – i.e. ones that last a long time. China, as I’ve just described, is in pole position to supply low cost but high quality smartphones, washing machines and refrigerators etc.
Then there is the role of disruptive technologies, such as 3D printing. Let’s think through how this might work in the West:
- You have a minor accident and so are left with a cracked bumper on your car – a discontinued model that you bought back in the early 2000s. The engine also needs a major overhaul.
- In the good old days, you would have just scrapped the car. But you are one of the high percentage of young people in Europe still out of work 15 years after the beginning of European sovereign debt crisis, and so you don’t have the money for a new car.
- Luckily, though, your local car repair shop has a 3D printer which can print a new bumper for your old car, along with all the replacement engine parts that you need. Mass manufacturing of the parts of your discontinued model no longer takes place, and so your only option is to, anyway, go to a 3D printer.
- 3D printing also involves additive manufacturing – i.e. you only use exactly the amount of raw materials you need to make a particular product by building the product layer by year. Mass production involves subtractive manufacturing, however, where raw materials are cut down to size – and so involves more waste. So keeping your old car on the road in this way is a big environmental as well as economic plus.
- The local 3D auto components printer that you give your business to has only recently set up shop, thanks to a generous government grant. The government gave this company a big grant because of a new policy of “local for local” jobs. Western politicians now realise that they have to protect their home markets from imports, in order to preserve local employment, which is what China has been doing for decades.
Sure, as Nick Allen, founder of the UK 3D printing company, 3D Print UK, rightly points out: Three-dimensional printing is a great way of making a unique product cheaply, as it does not require expensive tooling like injection moulding machines do, but items printed from a 3-D printer are unlikely to ever match the quality and strength and surface finish of mass manufactured goods.
The layer-by-layer process of 3-D printing is a slower, more expensive, worse way of manufacturing than moulding or subtractive manufacture.
But necessity is the mother of invention, as we have most recently been reminded of in the US shale oil sector. How might 3D technologies evolve over the next ten years and more?
This also all goes to further support my argument that there is no room any more for one dimensional analysis. You simply must take into account all the constantly changing social and political, as well as economic factors, as the demographics-driven New Normal develops. If you do not you will end up adding the wrong kind of chemicals capacity in the wrong quantity, and in the wrong place.