Friday, October 24, 2008

Meta-factories and mega-production in China

Image of a piece of machinery in a factoryDear Gentle Reader,

This article looks at one reason why the "the China price" has moved from low-value manufactured goods to high-value manufactured goods.  Your scribe credits what he calls the meta-factory with allowing "the China price" to move up the value chain.

"The China Price" refers to the lowest possible manufacturing price that China's manufacturers are famous for.  

When China joined the world of global commerce, the country produced low-value products that required a large input of low-skilled labour.

It was the cheap price of Chinese labour, combined with high volume outputs, that allowed for "the China price", but now "the China price" is moving up the value chain.

The rise of the meta-factory, a virtual factory with a contributed inventory of manufacturing production units, is allowing "the China price" to impact more and more production markets.

My thesis is that mega-production has been brought about by the rise of meta-factories.  Let's look at mega-production first before I define meta-factories.

Classically, mega-production would be understood as a very large factory output of a particular product to achieve economies of scale.  ('Economies of scale' refers to the idea that if you produce a lot of something, eventually you can produce that thing for much lower cost than someone who produces less.)  

Historically, it has been economy of scale outputs by Chinese factories combined with exceptionally low labour costs and regulatory costs (historically lax environmental and safety regulations, and later lax enforcement, for example) that helped China develop "the China price".

The new reality is that meta-factories allow for mega-production in the sense that vast ranges of products are capable of being produced, not just vast output of a single product. That is what I mean by mega-production in this article.

In the meta-factory a number of businesswomen or men bring together the various manufacturing production units which they own (the machines which are used individually along a factory production line).  

These owners contribute to each other the potential use of idle manufacturing production units, or the potential use of manufacturing production units which are not being used in an optimal capacity.

These meta-factories are not grounded; they are ephemeral, and, as production opportunities coalesce into production contracts, the needed units are combined at a location to produce a "classical" factory production line. 

These classical production lines produce all the goods that the "Factory to the World" produces.

When I read the phrase "Factory to the World" these days it references the reality that China produces almost everything that anyone in the world would want to consume.  

Further, people buy from China because China's businesswomen and men produce goods the world can afford--they produce goods priced at "the China price".

To me, the epithet "Factory to the World" has become a reality due to the rise of the astonishing meta/mega-factories found in both the Pearl River Delta beside Hong Kong and, to a lesser extent, in the Yangtze River Delta beside Shanghai.

A classical factory might look like this. 

Image of an activated carbon factory in Datong, China
A factory like this is purpose-built and designed to produce a thing, a product, efficiently.

Raw materials, coal and energy, are brought to the factory, transformed by manufacturing production units, and a finished product, activated carbon, leaves the factory.

Meta-factories are different because they are an inventory of manufacturing production units available for differing configurations and combinations. These combinatorial possibilities allow for a tremendously broad range of potential output products.

The meta-factory arose as businessmen and women in China started contributing their unused pieces of machinery, the manufacturing production units, into ad hoc joint ventures. 

This allowed the component pieces of factories to become mobile, and the manufacturing production units themselves became "inputs" to other factories.

New factories would be assembled from unused or idle pieces of equipment.  As manufacturing production units were need for higher value applications, they could be swapped out.  

Soon the Pearl River Delta became a meta-factory, so that it could produce mega-factories (from an output perspective).  

Consortia of friends/business owners could assemble their own manufacturing production units to create virtual factories to bid on contracts.

Factory components could be set up anywhere.  When an important person like a buyer or an inspector comes to visit, the manufacturing production line for a specific product can be set up in the pretty factory listed on the contract or pictured in the sales brochure.  

When the important person is gone, the manufacturing production line can be set up in another location, maybe an idle section of another factory, and the glamour site is ready for the next visiting buyer or inspector.

This is the marvel that allows China to be the factory to the world.

It's not just that China can and does produce everything that people in the world could want to consume due to huge, cheap labour pools.  India has massive labour pools, but India is not (yet at least) a factory to the world.

In China, as production and demand opportunities shift, the manufacturers and the owners of units of production can shift or swap components around.

These businessmen and women can bid on tenders to produce anything, almost, without having to buy any, or at least many, manufacturing production units prior to bidding.  

The bidders know they can go into the circle of owners, the meta-market of the meta-factory, and get manufacturing production units to do almost anything. 

For these bidders, the cost of entering new industries drops. The Chinese "meta-factory" owners can now bring "the China price" to new industries that were previously immune to "the China price".  Correspondingly, the Chinese business class moves up the manufacturing value chain.  

Greater wealth also allows for greater state wealth, through taxation, and much of that state wealth is being re-invested in infrastructure projects. Improved infrastructure benefits all factories, but especially the meta-factories as it allows the manufacturing production units to be even more mobile.

There is, however, one thing that these meta-factories cannot swap production around to accommodate...

That one thing is reduced demand.  This whole system still requires exactly what it allows... continuous use of the units of production.

When a global downturn drops sales and production, then unit costs rise and these meta-factories are in trouble.

When credit becomes more expensive, or, worse, inaccessible (see the China opinion post on the credit crisis), then further problems occur which these meta-factory owners are not insulated against.

And that is what your humble scribe sees happening now.


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