Many Americans are amazed by the fact that China is able to produce products are such low costs. America lost the ability to produce products to compete with China for a couple of reasons. The first reason is the cost of labor in the United States is more than the cost of labor in China, according to economists. The other reason is China utilizes economies of scale better than U.S. manufacturers. Most consumers aren’t familiar with the term economies of scale, but it is an important ingredient in producing a profit and producing goods at a competitive price.
When products can be produced on a large scale with fewer costs, economies of scale are achieved. If the labor costs are lower, and material costs are lower, and the quantity produced is large enough, economies of scale will increase a company’s profit margin, according to economists like Christian Broda, who specializes in international investments. Broda is the managing director of Duquesne Capital Management.
When a company realizes economies of scale, economic growth takes place, according to Broda. Broda says the Chinese shoe business is a good example of how the theory works. Chinese shoes factories only accept orders that are big enough to achieve the maximum amount of productivity. The Chinese know that quantity, low-cost labor, and cheap materials equals more profit. The Chinese work on low initial profit margins knowing that productivity and the economies of scale will increase their profit margins. Broda likes to invest in companies that use the economies of scale as the measuring stick for increased profits.
Economists think diseconomies of scale is one of the main reasons American manufacturing lost business to China. China has all the ingredients to produce goods for less and still make a decent profit. Economists also say specialization and division of labor are the key ingredients to achieving a high rate of return on production lines. When these two ingredients are in place, factory workers improve their skills they need to perform their jobs. They become more efficient, and that means they work faster and produce better quality products.