That China manufacturing is a competitive threat to western producers is well known but why this is so has been poorly analysed. There is cheap labor yes – about $1 per hour versus something like $18 per hour in the United States. But the operational inefficiencies of a Chinese manufacturer negate some of this labor cost advantage. For one thing Chinese enterprises typically use twice the labor count of equivalent American producers. Other inefficiencies lie in the out-dated production machinery, little automation, wasteful use of resources, disregard for environmental controls and the wellbeing of the workforce. By the way Chinese management know quite a bit about automation, but labor is indeed cheap so by design automation is not implemented.

The huge and strongly growing domestic market is a most important supporting backdrop for Chinese producers. But there other aspects to Chinese industry brought as a throw over of the now pretty much abandoned communist system that provides very definite competitive advantages. The main influencing aspects are industrial integration and flexibility. Take the Chinese magnesium metal smelting industry that dominates 80% or more of world production. (Magnesium metal is used extensively in auto parts and the like). A typical Chinese magnesium metal complex is integrated with ferrosilicon smelting (a raw material used in the process), coal coking (the free coke-oven-gas off-gas is used in the magnesium furnaces). In addition the magnesium industry is located in a coal producing area with dolomite ore mining (dolomite is the magnesium ore). This is planned total integration and linking of the industry providing many cost advantages.
 
In the United States we cringe at this level of integration arguing that it puts the enterprise as a whole in a straight-jacket. But Chinese companies still domestically cooperate more than they do compete. This provides incredible flexibility to supply anyone and everyone with the main outputs or by-products. Equipment will be used to maximise capacity utilization even if gross margins are minimal. To this observer the Chinese are not practising unfair competitive methods and the west should stop saying so.

The China approach work well for China right now – but is unlikely to last in the long range. Eventually the western-like true competitive spirit will take hold in China and we will see this industrial structure disappear. For more on TRU Group Inc china work visit - http://trugroup.com/TRU-China-consultant.html