Complete Manufacturing and Distribution and Chinese Manufacturing Solutions
Understanding the 2018

China Manufacturing Landscape

Introduction

In checking the pulse of the current outsourcing landscape, it’s clear that despite its challenges, China is still a major go-to manufacturing hub with its complete manufacturing solutions. Despite rising wages, we’ve seen a rise in worker productivity and specialization. Despite uncertainties, we’ve also seen a rise in opportunity. The general consensus among industry leaders is China will remain a manufacturing powerhouse for decades to come, and viable sourcing alternatives are rising in SE Asia and beyond.

With that being said, China is by no means an easy landscape to maneuver. Manufacturing underwent an evolution in 2017, presenting challenges and opportunities for foreign companies with China interests. The pending implications of a trade war, regulatory changes, increasing competition, and the need for efficiency must be addressed in a successful 2018 strategic plan. Successful companies who gather facts and dive deep into China’s possibilities are well positioned to adapt and thrive in China’s dynamic market.

Landscape Pulse Check

China has seen tremendous changes in the past decade. It overtook the United States to become the world’s largest producer of manufactured goods, earning the title of ‘the factory of the world’. In the process, it doubled its GDP per capita – a feat that took the United Kingdom over a hundred years to achieve.

Just five years ago, China was heavy on fixed assets. Corruption was rampant. The global financial crisis was winding down but still leaving behind a trail of economic uncertainty, and top leadership was focused on preventing a Soviet-style collapse. In response to that, China’s 18th Party Congress injected cash into the economy and advanced reforms.

And now, the 19th Party Congress just stepped on the gas by laying out a clear vision with consolidated leadership to drive accountability and execution. As Randal Phillips, Mintz Group's Managing Partner for Asia, summarized for CCTV Business, “Expect what you’ve seen for the last five years on steroids going forward. It’s clear where the power is. Now it’s all about results.”

Companies with China interests are focusing on these areas:

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Tariffs

Trade diplomacy can often seem like abstract geopolitics - an international and faraway matter. However, when it comes to the subject of tariffs on products manufactured in large scales, the impact on economies and on your business is directly observed.

President Trump’s announcement of increased tariffs on imported steel (+25%), aluminum (+10%) and the list of about 1,300 Chinese exports that could be targeted for tariffs has already caused intended and unintended consequences. In terms of product categories being impacted, CMD believes tariffs will apply to raw materials vs. component parts. Lawmakers are urging exemptions for fairly-traded aluminum and steel from Canada, Mexico, and the EU be carved out. Trump has stood firm that no exemptions will be allowed.

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Intellectual Property

China's patent office received 1,101,864 filings in 2015, which was double of what the US office received, making it the first office to receive more than a million applications in a single year. While China continues to face issues with intellectual property theft, its leadership and government agencies have made concerted efforts to propel their IP protection systems, hence turning it into the IP powerhouse it is today.

There are two forces driving tighter enforcement of IP.  1) In order to attract more foreign investment, China realizes it must lower risks for foreign firms interested in bringing technologies to China.  2) China desires to have its own inventions serve domestic demand and accelerate export.  

For example, China-based DJI is a global leader in drone technologies (one large customer includes the US military).  In the past, China didn’t see a need for a level playing field for IP.  But as China develops more leading high-tech industries to export, China realizes that if it asks for protection abroad, it must reciprocate at home.

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Corruption

China’s President Xi Jinping has vowed to step up the country’s fight against corruption until complete victory is achieved. His anti-graft campaign that commenced in 2012 has punished 1.34 million officials as of last year. The Chinese Communist Party (CCP) will also strengthen internal supervision of party members across all levels.

This is welcome news for multi-national firms demanding transparency and execution of consistent ethical business practices at all levels of the organization. Long accustomed to nonconventional sources of income, this paradigm shift is cultural and will not disappear overnight. It’s important for line staff to see enforcement pushed down from the top to the middle of the organization to make it clear the new normal applies to them.

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Competition

Even in times of a looming trade war with the United States, China’s Executive Vice-Premier, Han Zheng has pledged to further open up the Chinese economy, promising to level the playing field for foreign firms. This signal that domestic and foreign companies will be treated as equals to better protect interests of foreign companies. A key reform China will implement is letting the market play a decisive role in allocating resources.

As with IP, China desires reciprocity abroad, and that means providing parity at home. While foreign direct investment has always been welcome, regional consistency is still needed at the implementation level. Investors often run into red tape regarding patents, regulatory compliance, licensing, and taxation.

More competition does not include privatization of State Owned Enterprises (SOEs). Supply-side structural reforms include reforming SOEs in three steps: make them bigger (combine them), make them better (consolidate, keep desirable functions) and make them stronger (streamline efficiencies and reduce capacity).

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Balancing Trade

In February 2018, China reported a trade surplus of USD 33.74 billion, compared to a USD 0.1 billion gap in the same month a year earlier. Exports jumped by 44.5% while imports rose 6.3%.

China is keen to close the trade gap to sustain friendly foreign relations.  The expansion of existing Free Trade Zones (FTZs), new FTZs, new Free Trade Ports (FTPs), and an opening of previously restricted industries for investment—were all announced. China also recently announced tariff reductions on imports of American automobiles.

With respect to the USA, China intends not to close the trade gap by reducing $480 billion USD in exports but instead increase imports from their current level of $120 billion USD. China sees a double opportunity to close the poverty gap along with the trade gap. Fueled by continued year on year growth of 6-7%, China’s vision includes raising more people out of poverty. Specifically, targets include increasing from $8,600 USD per capita GDP to $12,000 USD by 2020 and $20,000 USD by 2030. Higher spending power will drive demand for everything, including foreign goods.

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Environmental Crackdown

As of the end of 2017, China penalized more than 30,000 companies and over 5,700 officials under their environmental crackdown campaign. This campaign is not a one-off, China’s central government has pledged to continue with biennial inspections.

In the last four decades, 500 million people moved from rural to urban areas of China, and especially to Tier 1 cities (15+ million people each). The masses chased jobs, and the government encouraged the rapid development of industry to create jobs. As urban populations rose, so too did industrial environmental problems. The government responded with laws to protect 1) public health and 2) worker safety. Enforcement over the years has been inconsistent. But lately, enforcement is toughening up. The ball is moving in Tier 1 cites and is expected roll to others from there.

Environmental-related issues are causing real supply chain disruptions and enforcement will grow even stronger in 2018 and beyond. China wants high-polluting, undesirable industries to clean up their act or get out of China. While environmental laws have been on the books for years, evidence is mounting that enforcement is catching up with policy.

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Conclusion: Shift from Quantitative to Qualitative

Multi-national firms who are seeking a level playing field have cause for optimism. What China sees as pro-party and anti-party are now aligned under Xi Thought for a Beautiful China. If you pollute, you’re anti-party.  If you’re involved in corruption, you’re anti-party.  If you poach a patent, you’re anti party. The opposite of trickle down, reform is now expected from the ground up.

Finally, with Beautiful China, President Xi advocates changing how success is measured from quantitative measures (like GDP growth %) to qualitative measures (like air quality).  Beautiful China also includes a better house for those on the bottom rung of the economic ladder. For the first time “Poverty Alleviation” was written into the constitution as a goal.

The focus for years has been on economic gains.  Will China be willing to trade off slower economic growth for a beautiful life in 2018?  We’ll see.

How CMD Accelerates Your Growth

Complete Manufacturing and Distribution has an ear to the ground in Asia to help companies see what is coming in 2018 to help them adapt and thrive in the changing market. CMD discovers critical actions to weave in your 2018 strategic planning. Here’s how:

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Strategy

If you aren’t in the habit of dynamic strategic planning, you’re in for an awakening. In an ever-changing landscape like China, successful companies don’t consider strategic planning an annual event. It’s a dynamic process that never stops.

CMD will work side by side with your leadership team. Seasoned experts at CMD will help leverage your unique strengths and differentiators.

To ensure success in strategy, we’ll align goals and objectives with the practical realities of doing business in China.

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Market Research

What happened last year will not work this year due to a myriad of moving factors. Reliable data helps leaders stay fresh and steps ahead.

CMD focuses on providing you with information you can trust when the decisions are complex and the stakes are high.

Clients turn to us to not only keep a pulse on the ever-changing landscape but to help them understand its implications and how to prepare.

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Due Diligence

There’s a lot that goes into outsourcing in a foreign country. Are your suppliers aligned with your values? Properly licensed? Practicing modern quality techniques…consistently? Investing in automation that will help control costs?

Clients who engage CMD tap into more than three decades of experience accelerating successful programs in China…and around the globe. We leverage that experience to help size up your opportunities in China.

And as conversations unfold, CMD can also help negotiate the best deal possible.

The Bottom Line

The industry and Chinese manufacturing solutions have seen change with deep implications in the last few months and will continue to constantly evolve. With a firm grasp of the landscape, your business could turn these challenges into unprecedented opportunities for doing business in China.

If you want to position yourself for success in 2018 and beyond, download our complete China manufacturing guide for an in-depth analysis on these topics along with actionable solutions on how to accelerate your business in China’s dynamic landscape.