On China’s Manufacturing Catch-Up—Part 1

A lot of the stuff you own comes from China, either as a completed product or with plenty of parts that were assembled elsewhere. “Made in China” is a label you see very often when looking for the source of your products, albeit not everybody is convinced of the quality. In this series of two blog posts I want to look at how China improved its technological know-how as well as its manufacturing proficiency, and what challenges it faces as well as in its opportunities to completely close the gap with the Western world. This series of posts is a mixture of facts and a lot more opinions, so feel free to disagree.

Introduction

China is the manufacturing powerhouse of the world. China contributed a whopping 31.63% to the world’s manufacturing output in 2024, twice that of the USA with 15.87%, and miles ahead of Japan (6.52%), Germany (4.78%), and India (2.87%).

However, if adjusted for population, the output is much less impressive. China manufactures a value of 3 533USD per person in their industrial sector, far behind Germany with 9 001 USD, Japan with 8 294, and the US with 7 342. In fact, China was ranked only in position 36 of 166 countries I looked at. Below is a chart with the share of the world’s manufacturing output for all countries with more than 1% (blue bars), as well as their manufacturing output per person (in red).

If you are wondering about what Ireland does so much better than other countries, do note that they have a very low tax rate, and hence the value add is just taxed there, but mostly not actually produced in Ireland. The highest manufacturing output per person would be in Switzerland (15 943 USD) and Singapore (15 233 USD), followed by Germany (and excluding tax havens like Ireland, San Marino, and Puerto Rico). (Source: Manufacturing from World Population Review, population from Wikipedia List of countries and dependencies by population, both ca. 2024).

Still, it’s a remarkable catch-up for China. In 1995, China contributed “only” 4.9% of the world’s manufacturing output as a rather agricultural society, but thirty years later in 2025 is at 31% as a heavily industrialized society (source: China’s Rise to Manufacturing). South Korea also made remarkable improvements and also industrialized their agricultural society. See below for how the industrial value add per person changed over time for selected Asian countries. See my blog post Manufacturing – A Key Stepping Stone on the Road to Prosperity for more on that.

Reasons for the Manufacturing Rise So Far

There are a number of reasons for the significant increase in Chinese manufacturing over the last thirty years. Probably the biggest was the low labor cost, and many companies moved production from their high-labor home turf to China and many other countries. Dealing with taxes and local laws is always a hassle, and doing this once for a big country is easier than doing this many times for a lot of small countries, especially if your supply chains would have to cross borders multiple times. Hence, one big country like China was easier to handle than lots of cross-border shipment of parts in southeast Asia. China also heavily invested in infrastructure, which many other low-labor-cost countries lack (hello, Africa anybody?).

China also had a strong industrial policy. While China started out as a low-skilled and low-cost manufacturer, they surely did not want to produce the cheap stuff forever. Government policy aimed at increasing not only manufacturing volume but also increasing the share of high-tech production. The methods to get knowledge into China were not subtle. China forced foreign companies to establish research labs in China and provide lots of knowledge and know-how, had communist party members installed in many locations, and required that all companies in China have at least 50% Chinese ownership. Foreign companies grumbled about this a lot… but then produced in China anyway because it was cheap, and China was also becoming a large market as prosperity rose. For example, many German car makers make most of their profits in China.

China was accused of unfair tactics in stealing technology, which has some truth. But, from the Chinese point of view, acquiring knowledge at all cost made sense, as it made sense for Western companies trying to prevent it. Back in history, Europe and the USA did the same, and mechanized spinning technology was stolen around 1700 from Italy by Britain, and then from Britain by Germany and the USA. For more of the story (including murder and witches), see my post How a Little Bit of Industrial Espionage Started the Industrial Revolution. In general, countries that lack knowledge try to get it, and those countries that have it try to protect it. As the manufacturing technology in China is improving, I believe China will slowly change its position from the “It’s okay to steal technology” to the “Do not steal technology” group (just like many other countries before), with the usual in-between “It’s okay to steal your technology, but you must not steal mine.”

The Challenge of Catching Up in Existing Industries

One of the challenges for China will be that they are getting closer and closer to the level of Western technology. And, as you get closer, the more difficult it is to advance. Forty years ago, a standard manufacturing textbook from the West may have been very helpful to China. Nowadays, not so much, and the more advanced the technology is, the less people are willing to share. Besides, the West is not standing still, and China is trying to catch up to a moving target.

One example is semiconductor manufacturing, where at the time of writing, Mainland Chinese technology is still years behind the Western technology of TSCM for chip manufacturing (Taiwan), ASML for lithography machines (Netherlands), Zeiss for lenses (Germany), Trumpf for lasers (also Germany), Shin-Etsu Chemical for wavers (Japan), and Tokyo Ohka Kogyo for Photoresist and Chemicals (Japan) to name just a few. This catch-up, especially for such an advanced technology, will be very difficult and costly, despite China pumping billions into chip making.

The Chance of Being a Front-Runner in New Industries

However, this historic advantage for Western countries evaporates for new technologies. If everybody has the same starting point, the playing field is much more leveled. A good example is automobiles. Germany had 150 years of experience with combustion engines, and German combustion engines are still superior to Chinese ones. Electric vehicles, however, were new to everybody. And Chinese E-mobiles are probably better and are definitely cheaper than German ones, creating a major headache for German car makers. The US company Tesla has been doing pretty well for some time, but it seems its quality has gone down, and due to the erratic behavior of its CEO Elon Musk, it suffers from… let’s call it an image problem, okay?

This post is getting longer than expected, and hence I will continue this on a second post. Now, go out, improve your manufacturing, and organize your industry!