Liu Ge: China faces hard battle for manufacturing transition


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Liu Ge: China faces hard battle for manufacturing transition


By Liu Ge    Source: Global Times    Published: 2017-11-1

Manufacturing has been a pillar industry of China`s recent development, but the cost advantage of the domestic industry has been on the wane for some time. Manufacturers of a number of consumer textiles and electronics products have been moving to other developing countries with lower labor costs, such as Bangladesh. Another threat comes from the fact that the US and other developed countries have recognized the importance of the industry and are doing more to support their domestic manufacturers after a long period of neglect, in order to persuade them to move their factories back home.

In the field of ordinary consumer goods, China`s manufacturing has long been a world leader, but it has not done so well in terms of high-end products. Only high-speed rail development and the burgeoning domestic tech sector have gained worldwide recognition. Now that the first half of the game is over, the second half is proving challenging, as China strives to move up the value chain. But national security, economic development, employment and other factors all require China to succeed in the transition toward high-end manufacturing.

From an optimistic point of view, China is weathering the process of the transition fairly well, as low-end manufacturers move to countries and regions with lower labor prices, and as labor costs in China rise. Vietnam has replaced China as Nike`s largest production base, but this has not significantly dented the status of China`s manufacturing industry.

Over the past few decades, developed countries have simply watched as their manufacturers moved their operations to developing countries that could offer lower labor costs, resulting in the hollowing-out of their domestic industries. The US is the best example. But they realized too late the damage this caused, and revitalizing their manufacturing sectors is now a tough task. Meanwhile, China has built an excellent and established position in the international manufacturing sector.

The increase in labor costs in China is certainly an important factor that companies need to consider. But in the high-end manufacturing sector, this is not the main factor when it comes to investment decisions. Although labor costs have increased rapidly in recent years, they generally account for only about 10 percent of total revenue. At the same time, China`s blue-collar workers and engineers are much more cost-effective than in most other developing and developed countries. Chinese engineers and skilled workers have successfully absorbed the lessons from high-speed rail technology from other countries and have created their own new technologies. This is a task that is beyond most other developing countries.

In addition to labor costs, logistics, facilities, the tax environment and local market potential are all factors that are vital for enterprises to consider and China still has a significant advantage in these areas. China`s vast area and the imbalance between interregional economic development provides space for gradual industrial transfer, as some areas of the manufacturing sector can move from the east to the central and western regions rather than going abroad. What`s more, while the central and western regions can provide the right conditions for production, the eastern regions offer affluent markets and demand. This comprehensive advantage does not exist in other countries.

The core advantage of China`s manufacturing industry is the large reserve of technical personnel. China`s later stage of industrialization has just begun, and its fulfillment will require unremitting efforts from at least two or three generations. If importance is not attached to training new generations in this sector and people are simply encouraged to rush toward the finance, high-tech and Internet industries, the manufacturing sector cannot be properly upgraded; and China might then suffer a period of de-industrialization similar to that seen in developed countries.

Recently, the central government has proposed promoting the transition of China`s manufacturing industry toward the higher end of the global value chain and developing a world-class advanced manufacturing cluster. To achieve this goal, detailed preparations will be needed. We could learn from Germany about building a complete set of manufacturing education and training systems, from design to management, and long-term planning could be based on a national strategic perspective. This would make it possible to encourage outstanding young people to receive a professional education to prepare them for careers in the manufacturing sector.

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