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China`s Manufacturing Set for Successful Transition

2015-08-25

For decades, China has been known as the world`s factory, thanks to its exports of large quantities of finished products. But now its role has been challenged by "the rise of the rest," and people are wondering whether India, Vietnam or another country might replace China as the next world factory.

 

Foxconn Technology Group, a world-renowned electronics manufacturer, announced recently that it will invest $2 billion initially to set up more than 10 plants in Andhra Pradesh, India in the next five years. Given Foxconn is a benchmark for China`s manufacturing, the announcement has attracted much attention.

 

Manufacturing costs in China are rising, which is a price any economy has to pay as it develops rapidly. Data released by the National Bureau of Statistics in early August showed China`s labor cost advantage is weakening, and the country`s demographic dividend has declined for five consecutive years. Currently, China`s working population amounts to 67 percent of the total population. The surplus labor from rural areas that China`s manufacturing industry relies on is no longer as cost-effective as it was in the past. The average monthly salary of Chinese migrant workers rose 15.1 percent annually between 2010 and 2014 to around $500 currently.        

 

Aside from labor costs, other costs such as energy, land and public utilities have also eroded the competitiveness of Chinese manufacturing. The Boston Consulting Group (BCG) Global Manufacturing Cost-Competitiveness Index - which measures changes in direct manufacturing costs in the 25 leading global exporting economies between 2004 and 2014 - highlights the weighting of electricity and natural gas in manufacturing costs. The shale gas revolution has helped the US almost realize the energy independence it has long dreamed of, and the US has become the largest natural gas producer in the world. The fact that China scored poorly in the BCG index is not surprising, given the high natural gas prices in China and limited consumption of natural gas by the country`s manufacturing industry.

 

Amid concerns about the future of China`s manufacturing sector, people have been talking about the recovery of the US manufacturing industry. Many companies have been "reshoring" manufacturing jobs from China and other global economies back to the US. President Barack Obama is eager to tout the trend as one of the greatest achievements during his tenure. However, by taking a close look, we can easily see that the improvement in US manufacturing is still limited and mainly involves a modest rebalancing following years of "offshoring" manufacturing jobs to other countries.

 

Decoding the reasons behind the recovery of US manufacturing sector can help us understand China`s current manufacturing situation from a forward-looking perspective. Firms` decisions to move their plants to the US have been driven by certain key factors. They want to be close to their clients or the end market, and hope to better manage risks in their supply chain, as well as reducing energy costs. They may also seek to capitalize on favorable aspects of the business environment, such as the effective protection of intellectual property rights.

 

Obviously, labor costs are only part of the complicated equation for business success. To meet the fast-developing needs of Chinese consumers, many companies still choose to operate in China and for China.

 

Even though some companies have moved their plants from China to Vietnam, they need to keep a close eye on the huge Chinese market. Many Chinese companies are also "nearshoring" their plants to neighboring countries, where they can benefit from lower costs.  

 

In fact, China`s manufacturing sector is quietly undergoing a major transformation and the "Made in China 2025" plan, which was unveiled by the government in May after three years of formulation, shows the country`s ambitions in this regard. First, China`s overall competitive advantage in manufacturing will be enhanced by high-quality infrastructure and industrial support facilities. The country has nurtured numerous enterprises with international competitiveness, such as telecom equipment maker Huawei Technologies, and ranks first in the world in volume of output and exports with over 200 kinds of industrial products.

 

    Second, China is making efforts to increase production efficiency by accelerating the integration of information technology, and using more robots and other automation equipment. At present, the Internet Plus strategy, which aims to integrate mobile Internet services, big data and other Internet technologies with traditional manufacturing, along with intelligent manufacturing and the Internet of Things, have become hot topics among Chinese entrepreneurs.

 

Made-in-China products are increasingly being replaced by "created-in-China" products.

 

The transformation of China`s manufacturing sector will also get support from the implementation of the country`s "One Belt, One Road" initiative. Chinese enterprises in sectors including rail transit, electric power, telecommunications and construction machinery will become more international and industrial zones set up in countries such as India and Belarus as part of the "One Belt, One Road" plan will also help to improve the competitiveness of Chinese products.

 

Based on the "Made in China 2025" plan, China will complete the shift from a big manufacturing power to a strong manufacturing power in three decades. China has vowed to embark on a new round of the industrial revolution and hopes to become a leader of the revolution.

Weibo: @人大重阳  Wechat official account: rdcy2013


Key Words: Manufacuturing  transformation  labor  

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