When Steve Jobs introduced the iPhone in 2007,
Chinese labor cost about one U.S. Dollar — less than Thailand or the Philippines
and a bargain compared to Malaysia. Fast-forward fifteen years and wages
have increased nearly everywhere. But China is in a league of its own. By the time the iPhone 14 was released last year, the cost of labor had gone
from one to eight dollars. Today, for the price of one hour of
Chinese labor you can buy 4.5 in Mexico. In fact, the only major Latin American
economy with a higher cost is Chile. Not only is “Made in China” no longer cheap, globally speaking, you might
even say it’s expensive. So, what next for the “World’s Factory”? Sponsored by Nebula, the platform created,
owned, and loved by creators. Sign up for exclusive, early, and bonus content
and to support PolyMatter directly. This is what two decades of cheap
T-Shirts, TVs, and toys looks like. This is Walmart and Amazon and the Dollar Store. On the left are people. You know about the One Child Policy, but you
may not know what immediately preceded it. Mao was convinced that a large population
was the best deterrent against nuclear war. On his final visit to Moscow, the
chairman bragged about the ease with which his country could lose 300 million people. So, although children — also known
as free farm labor — are desirable in any agricultural society, in China,
this incentive was inscribed in law. Points, which could be redeemed for food, were
awarded based on the size of one’s family. Surprise! The population exploded. 30 years later, this is what China
looked like in the year 2000. Each rectangle represents an age group
— for example, 55 to 59 year-olds. Babies are at the bottom and seniors at the top.
The longer the rectangle, the larger that group. Let’s also add some historical context — the
year each age cohort was born — over here. These 45-year olds in the year 2000,
for instance, were born in 1955. Now, the difference in size between
these rectangles may seem fairly minor. But see this “minor” difference between
25-29 year olds and 20-24 year olds? That represents 25 million people. As you can see by the large
number of 25-34 year olds, Mao’s “strength in numbers”
baby boom was quite effective. And what’s special about 25-34 year olds? Well, they’re what an economist might classify
as young, dumb, and broke. They’ve recently graduated and they’re hungry to start working,
even for low pay and with poor conditions. In other words, if you were trying
to unleash on the world an endless supply of affordable toasters and cheap T-Shirts, you could hardly have designed a more perfect
demographic structure than early-2000s China. In summary: your cheaply-made
iPhone 3G was a distant ripple of Mao Zedong’s 1960s-plan to survive nuclear war. The second ingredient to this generation of cheap, mass-produced consumerism we
take for granted was migration. All those baby boomers were
born in rural communes way out in China’s geographic equivalent of Montana. Reaping the fruits of industrialization
required that they pack their bags and travel hundreds of miles
East, toward the urban coast. Between 1990 and 2010, ten million new fresh-faced
migrants made this journey each and every year. And at this rate, it’s awfully hard
to imagine ever running out of labor. But beneath these impressively
large numbers, China was just going through the same demographic
transition as every other country. In the first stage, you have an agricultural
society. Without the aid of tractors or harvesters or sprinklers, there’s only enough food
to survive if everyone spends their time farming. And, on the farm, remember, children are free labor. Just don’t expect
to live very long without modern medicine. Lots of births, lots of deaths.
China during the Cultural Revolution. Next, you start building a few rudimentary
machines — nothing fancy but enough to allow a single farmer to produce rice for, say, one
point one people. Then something magical happens: someone else’s time is freed up to
focus on something like antibiotics. Mortality goes down, but fertility
stays high. China in the 70s and 80s. As time goes on, more and more farmers put
down their shovels and move to the city. And in the city, children turn
from valuable assets to expensive liabilities. Fertility, therefore, starts to fall. Now, for simplicity, imagine just three
groups of people — kids, adults, and seniors. Because mortality was until recently high, you
don’t yet have a lot of 80 and 90 year-olds. Because fertility was previously
high, you now have lots of adults. And because fertility is currently
very low, you don’t have many kids. This is your country’s golden opportunity — what’s
called a “demographic dividend”. A few short decades where you have lots of working-age adults,
with few kids or seniors to financially support. If you can put them all to work, you can ride
this demographic wave all the way to modernity. And that’s exactly what China did. The only difference is that China’s
demographic dividend happened on an extremely condensed timeline. It ramped up incredibly
quickly and is now collapsing all at once. Before Mao died, here in 1976, he was actively trying to expand the
population as quickly as possible. Naturally, 30 years later, all those baby boomers
entered the labor market at the same time. Immediately after Mao died, here, the One Child
Policy suddenly made high fertility illegal. So, today, the labor market is suddenly shrinking. For the last few decades, only diaper
companies have felt this dearth of children. Economically speaking, kids are pretty useless. But today, those kids are no longer kids —
and their absence is an absence of labor. Remember those millions of
extra 25-34 year-olds from 2000? They’re now, on average, 53, and
rounding the corner to retirement. What was once a demographic
dividend has become a deficit. Needless to say, China today is the youngest
it will likely ever be in our lifetimes. If you’re currently 20 and live to 90, you can plausibly expect to see its
total population decrease by about 40%. The rate of urbanization, likewise,
can only go as high as 100%. China is reaching what economists
call the “Lewis Turning Point”. The total number of Chinese workers peaked back
in 2015 and has declined every year but one since. So, where does this leave companies
who rely on this disappearing labor? In one of three categories. First, if China is your primary
market, you might be inclined to stay. If not, the question is: do
you require skilled labor? If the answer is ‘no’, your
company left China a long time ago. There’s no reason to pay four times
more when you could move to, say, Mexico — especially given its
proximity to American consumers. Just 21% of Nike footwear, for
example, is still made in China. Finally, by dedu ction, it’s
safe to assume any company that hasn’t left cares about more than just cost. It helps that China has 62 million more
20-year olds than Vietnam has people. You can’t beat its scale or flexibility.
Apple can hire a small country’s worth of temporary workers right before
the next iPhone is released. Infrastructure is also important. Roads, ports,
bridges… Chinese cities roll out the red carpet. After all, the careers of local bureaucrats
depended on their ability to attract businesses. Now, these companies have and will diversify,
opening a few factories in Vietnam or India, but they won’t leave China until
they’re dragged kicking and screaming. We know they can’t easily escape because they
just put up with three years of lockdowns, protests, and travel restrictions. Apple used to reserve 50 business-class tickets
between San Francisco and Shanghai per day. You didn’t hear Tim Cook complaining when
those flights disappeared for a thousand days. Likewise, although China’s labor force is in
decline, its consumer market is still large and relatively untapped. Starbucks, Walmart,
and McDonald’s will continue expanding, not shrinking in the country
for the foreseeable future. That’s what happens to companies.
But what about China, the country? Previously, the large working-age population kept the cost of labor down,
leading to increased profit. Confident in its continued growth, companies then
used that profit to invest back in the country. But as the population begins to
decrease, so too does foreign investment. That puts China in a tough position
— its labor is too expensive to be competitive on the low end, but not
skilled enough to occupy the high end. This is called the “Middle Income Trap”
and the only way out is education. Greater skills equal higher wages. And
those higher wages are spent on cars, phones, and vacations — consumption
that neatly replaces lost investment. And man oh man does China have education. College enrollment tripled between 2000 and 2015.
Performance on the Gaokao — the college entrance exam — is less a score than an identity. And the
after-school tutoring arms-race became so intense that the government was forced to intervene. If
China had a state religion, it might be education. The problem is not so much a
shortage as an uneven distribution. A tiny minority are extremely well educated
while the vast majority are left behind. The country may churn out bachelor, graduate, and professional degrees, but 70%
lack even a high school education. What it really needs is something in the middle. These days, even, quote, “low-skill” factory work requires skills those without a
high school diploma may be missing. Meanwhile, there are only so
many glamorous white-collar tech jobs — the kind China’s college
graduates were told awaited them. In other words, most of the labor force
either lacks the skills required of a mechanic, machine worker, or technician, or is
unwilling to do what they see as “menial work”. The result of this labor
mismatch is mass unemployment. Last year, the youth unemployment
rate reached nearly 20%. Now, China has been trying to tackle
these challenges since at least 2007, when Wen Jiabo announced the shift
to a consumption-driven economy. But little progress has been made since.
Chinese household consumption as a share of GDP, for instance, remains nearly
half that of the U.S. or U.K. For years, the “rise of China” was
considered a near inevitability. Magazine covers depicted giant
dragons smothering the globe. Book covers portrayed red, white, and blue
eagles being trampled by giant, red pandas. Increasingly, however, these predictions
resemble the anxious, motivated, and sometimes xenophobic portrayals
of the Japanese economy in the 1980s. Beneath these narratives was an implicit
assumption: that China would continue on its current trajectory. That the “demographic
golden age” would last forever. That it would somehow be miraculously unimpeded by the
challenges faced by every other country. But the simple fact is, these
are really hard problems. Investing in vocational schools is not enough — it
also must reverse the stigma which surrounds them. Neither is convincing couples to simply have more children — it has to make
things child care affordable. And it can’t just induce consumption — it has to
address the root cause — unaffordable housing, which swallows up people’s savings. It’s no wonder that out of 101
countries between 1960 and 2012, only a dozen or so escaped the Middle Income Trap. A more realistic preview of China’s future may lie
in the actual fate of Japan — still a large and influential economy but severely constrained by
fundamental realities like a declining birth rate. In the meantime, one of the most fascinating
products of late-globalization are China’s highly-specialized factory towns. For example, the one town that produced most of
the world’s Christmas decorations. Another one, Baotou, at one point produced 60%
of the world’s rare earth metals and we explore its rise in this episode of “China,
Actually”, my Nebula Original series. You might be wondering why Nebula? The
answer is simple: because it’s ours. Running a YouTube channel is
like renting a space in a mall. Sure, the mall brings us foot traffic and for that
we’re grateful. But we’re also at its mercy. And our interests aren’t always aligned. After all,
malls have many tenants and advertisers to please. So, a few years ago my creator friends and
I decided to build our own mall — one where our interests are aligned with yours. On
Nebula, our incentives are to design the very best experience and produce
the very best content — the end. Content like RealLifeLore’s “Modern Conflicts”,
City Beautiful’s “Great Cities”, and Nebula Classes, giving you a peek behind the curtain of
how some of your favorite YouTube videos are made. Last month, the Nebula team asked for suggestions
on Reddit and this year we’ll be adding features like playlists, better playback controls, and
loads of other quality of life improvements. Now, normally, Nebula costs $5 a month. But
you can get it for just half that— with Nebula Classes included at no extra charge — by signing
up for a year with the link on screen or in the description now. That’s just $2.50 a month
for loads of exclusive content you’ll love.
On the nose as always.
It’s so insightful that literally hundreds of people, including real experts, have been saying exactly this for more than ten years. This is almost literally a rip off of an Economist or Bloomberg title from 2010-2012. Much profound, so deep, such low effort plagiarism, but now with fresher(lol) Zeizan-Rohan Hypothesis Takes