In terms of profitability and trade-generated wealth, China is a hollow dragon.
It is widely assumed that manufacturing (a.k.a. the world’s workshop) is the source of China’s wealth. But how can this be true, given that manufacturing profit margins are razor-thin in China, and have been since the early 2000s?
Given that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, how can anyone claim manufacturing has generated enormous profits?
(Mis)leading Indicators:
Analysts differ over how much of the final price of an iPhone or an iPad should be assigned to what country, but no one disputes that the largest slice should go not to China but to the United States. That intellectual property, along with the marketing, is the largest source of the iPhone’s value.
Taking these facts into account would leave China, the supposed country of origin, with a paltry piece of the pie. Analysts estimate that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, in the form of income paid directly to Foxconn or other contractors.
Foreign funded enterprises (FFEs–typically joint ventures between a foreign firm and a domestic Chinese company) dominate Chinese manufacturing. In the 2000s, the share of industrial machinery exports produced by FFEs grew from 35 percent to 79 percent. In computer equipment, FFEs’ share rose from 74 percent to 92 percent.
In the late 1990s, China allowed wholly owned foreign enterprises (WOFEs) to operate, essentially cutting out domestic ownership of production.
Meanwhile, the state-owned enterprises (SOEs) that have long dominated China’s economy remain inefficient, unprofitable and dependent on government-subsidized loans for their survival.
Correspondent Mark G. puts China’s remarkably unprofitable manufacturing sector in the proper historical context:
It may be the Chinese copied the old British Empire system without ever fully understanding it. As AJP Taylor pointed out back in 1965, the British direct trading account of exporting finished products only showed a surplus over food and raw materials imports one year in the course of a century from the 1820s – 1920s.
