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Ding Gang: Industrial shift poses challenge for China

2016-05-19

By Ding Gang    Source: Global Times    Published: 2016-5-19

 

Globalization doesn`t always produce positive effects. Although China used to be among countries that have benefited most from globalization, in future it may have to bear increasing negative impacts that globalization will bring.


Ren Zhengfei, founder and president of Huawei, one of China`s biggest telecommunications companies, recently said in an interview with the Xinhua News Agency that his company doesn`t purchase components from Dongguan, Guangdong Province any more. Instead, it has turned to the dollar-based Southeast Asian supply markets.


Three years ago when I worked in Southeast Asia, many Chinese and foreign enterprises transferred their textile and shoemaking factories to countries such as Cambodia and Vietnam. But they still placed a large amount of their purchasing orders for production segments and equipment in China.


It is astonishing that after just three years, Southeast Asian countries have become a major supplier for such leading IT companies as Huawei.


According to The Economist, Japan`s exports of metal processing machinery to China reached a peak in 2012 and then declined drastically afterward. In contrast, a sharp increase was seen in its exports to Vietnam during 2014-15. Currently, 66.1 percent of Vietnam`s imported metal processing machines come from Japan.  


China has technically caught up with Japan in manufacturing basic machine tools, such as textile equipment. But it still lags behind Japan in producing numerical control machines. Apparently Vietnam imports such machines from Japan to become more capable of processing more precise parts for high-tech products such as smart phones.


It is in electronic products that South Korea has invested recently in Vietnam and became the biggest investor in the latter in 2015. Investments from South Korea accounted for about 30 percent of the total foreign investment in Vietnam. More eye-catchingly, companies like Samsung have moved many of their manufacturing bases from China to Vietnam.


Among all Southeast Asian countries, Vietnam, with a young population, lower salaries, and a hard-working tradition, has the best foundation to develop and upgrade its manufacturing industry. Another advantage is that Vietnam has joined the Trans-Pacific Partnership (TPP) and hence will improve its investment environment to meet TPP criteria. It also has the TPP preferential treatment that allows Vietnam to export to other TPP members including the US and Japan and therefore become a part of the mid- and high-end products production chain of these countries.  


Soaring labor prices in China, coupled with bettering investment environment and workforce quality in Southeast Asian countries, have driven foreign enterprises to move their factories out of China. The transfer has created greater unemployment in China.


The Chinese industrial sector is characterized by mid- and low-end and labor-intensive manufacturing. Take Foxconn, which has nearly 100,000 workers at its plant in Chengdu, southwest China`s Sichuan Province. Should the manufacturing transfer continue, a large number of workers will lose their jobs, worsening the unemployment problem already caused by the plan to reduce production capacity in traditional fields such as steel and coal. It won`t be an easy thing for China to achieve re-employment of those laid-off. The manufacturing transfer will increase the cost of maintaining social stability.


Capital transfer means the restructuring of the production chain. It`s likely to shake up China`s position in the global manufacturing chain and even alter the trade pattern between China and the Southeast Asian countries. This won`t be reversed simply by heavy investment in overseas infrastructure. China has to take this seriously when advancing the "Belt and Road" initiative.


The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.

Key Words: globalization   industrial   effect  

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