Complete Manufacturing & Distribution Blog

Three Strategies To Adopt For China’s Manufacturing Transformation.

Aug 17, 2016

By Paul Stepanek and Jennifer Clement, Complete Manufacturing and Distribution

Chinese Manufacturing Business Trends

For the past few decades, China was the place to manufacture on the cheap.  Sale prices were low but still yielded decent margins even after accounting for logistics and shipping.  However, as China’s social, wage, and overhead costs have risen, so too have sale prices. And some believe that commodity costs, today at historic lows, will eventually increase—and put even more downward pressure on profits.  Manufacturers are responding by moving production further inland where labour and overhead rates are lower, or by exiting China for countries in Southeast Asia, motivated by tax rates, tax breaks, and other incentives. 

China will not roll over and play dead

The race to stay on top as the world’s manufacturer is on, and China is responding swiftly and aggressively. Bold moves include:   

  • Made in China 2025 (MIC2025) is an effort to outpace Japan, the USA, and Germany as the world’s leading manufacturer by 2049, the year the People’s Republic of China turns 100. This program will encourage efficiencies through automation, create 15 innovation centres in strategic industries, and “raise domestic content of core components and materials to 40% by 2020 and 70% by 2025[i].”  Efficiencies gained are expected to help offset rising labour and overhead costs.
  • One Belt One Road (OBOR) is an unprecedented network of ports, railroads, and pipeline infrastructure, stretching from Xi’an to Rotterdam that will connect 70% of the world’s population, 75% of known energy reserves, and 55% of global GNP[ii]. China is investing $3 trillion to make it happen. OBOR is expected to accelerate demand for Chinese goods. 
  • Seaway expansion. Protecting what many Chinese consider vital national security and economic interests, China will continue to flex muscle in the South China Sea to safeguard supply chain interests and the flow of goods to its shores.

The ripple effects for multi-national companies who stay the course in China are many. First and foremost, the race for efficiency is on – to outpace other countries also undergoing similar post-industrial transformation to a services-driven economy.  This is good news for the industrial automation space.  By 2017 the International Federation of Robotics (IFR) estimates there will be 428,000 industrial robots in China, compared to 260,000 in the USA[iii].   This is bad news for Western firms in industries China has targeted for increased domestic content.  For example, MIC2025-related regulatory changes recently blocked a global CMD client from importing a Western-developed solution that would have been produced and sold in China.  What’s notable is China’s focus on “domestic content” – and the resulting unwelcome news for advocates of free and fair competition. 

The bottom line:  no longer is China solely dependent on Western firms for importing intellectual property (IP) West to East.  Chinese entrepreneurs and innovators are stockpiling home-grown IP. Senior officials at Honeywell summarized: the historic flow of West to East (China imports IP) is now trending East to West (China exports IP) and increasingly East to East (in China for China)[iv], due to growing domestic demand.

Three recommendations

Are these three on your China radar?

  • Diversify your supplier base. Have solid plans for A, B, and C sourcing options – in the event that you find your company in the cross hairs of regulatory change.  Consider where growth markets are, and potential for shortening supply chains when serving US, European, and SE Asian customers.
  • Include at least one non-China supplier in the mix for each major component, to offset the risk of global politics and/or unfavourable trade deals getting in the way of your business. Countries like Vietnam are stepping up to compete; to learn more, download the Business Case for Vietnam.
  • Consider how Chinese capital could impact your industry…and your business. Chinese firms are increasingly interested in buying technologies and infusing innovations to localize products for Eastern markets. It’s no coincidence ‘China is buying Germany’ – specifically German technology companies—at the rate of one per week[v]. To accelerate non-China sales, Chinese smart device maker Xiaomi Corp. bought 1,500 Microsoft patents in spring of 2016, and has future plans to sell devices in the USA.[vi] And Haier, China’s largest appliance manufacturer, bought GE’s Appliance division in 2016.  China is shopping globally.

Rising costs, political pressure, regulatory changes – the storm clouds are brewing.  Weather aside, China will continue to be a major manufacturing force for the coming decades.  Companies upping their game now will outpace those who are slow to hit the refresh button. 

Sources

[i]Made in China 2025: A New Era for Chinese Manufacturing

http://knowledge.ckgsb.edu.cn/2015/09/02/technology/made-in-china-2025-a-new-era-for-chinese-manufacturing/

[ii] “One Belt One Road, China’s Regional Integration Initiative, European Parliamentary Research Service, July 2016.

[iii] http://www.chinadaily.com.cn/china/2015-02/06/content_19505006.htm

[iv] http://investor.honeywell.com/Cache/1500086432.PDF?O=PDF&T=&Y=&D=&FID=1500086432&iid=4121346

[v] http://www.wsj.com/articles/chinas-deal-makers-have-germany-tech-firms-in-their-sights-1465394152

[vi] http://www.wsj.com/articles/chinas-xiaomi-to-buy-1-500-patents-from-microsoft-1464739201

Topics: In The News, Thought Leadership, Intellectual Property, Operations