Hope is still alive for manufacturing
- By Chris Leung
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E-mail Shanghai Daily, February 10, 2014
Meanwhile, improvements in innovation, education and higher margins have attracted entrants into more capital intensive industries. China is gaining US market share in higher-skilled manufactures and medium-skilled manufactures of electronics and parts. Machinery and equipment is now the biggest category of China’s manufactured goods shipped to the US (53 percent in 2012). The ratio was only 45 percent when the yuan started to appreciate against the US dollar in 2005; and 35 percent when China entered into the WTO in 2001.
Such developments are consistent with the progression of an economy as entrepreneurs realign strategies in light of changing comparative advantages. Factory relocation so far has not caused severe unemployment. On the contrary, labor shortages are more prevalent than ever before. In 2013, China’s working-age population declined by 2.44 million.
The prospects for manufacturing still look good. While China lost market share in the US and EU in the past two years it has not lost any market share globally. The share of world exports has increased in all categories by level of capital intensity and technological sophistication. Looking forward, we are encouraged by the fact that China has moved up the value-added chain well before neighboring countries forced their way into low value-added segments. Finally, manufacturing is not just about exports. It is also about producing for locals, and China is a huge market in itself. While export growth of garment and clothing accessories averaged 9 percent in the past five years, retail sales of garment products in China grew 21 percent. Manufacturing will remain a key part of China’s economy for years to come.
High value-added
Rising wages and the yuan’s appreciation have pressured manufacturers of low value-added goods to abandon existing area of expertise and venture into higher value-added production. That said, profit margins may not be substantially higher. It is a strategic shift if the transition is well planned with corresponding soft and hard infrastructure in place. However, if the decision to transform is made out of desperation driven by herd mentality, entrepreneurs may eventually find themselves trapped in a position without any comparative advantages due to the lack of experience and customer networks.
The crux of the issue is that low value-added manufacturers do not know how to move up the value chain within their own area of expertise. A good example is the shoe manufacturing industry. Italian and French made shoes are often sold for more than 2,000 euros (US$2,720) per pair, whereas Chinese made shoes are often priced between 50 and 100 euros. Such huge discrepancies are attributed to factors such as culture, protection of intellectual property, branding strategy, perseverance of traditional craftsmanship skills and even education and vocational training policies.
The gradual decline of low value-added manufacturing is the natural result of evolving comparative advantages and the consolidation process will continue for quite a while. Threats from emerging rivals exist but are generally exaggerated. Nothing suggests an imminent demise of China’s manufacturing sector.
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