A New Era of Manufacturing in China

The emergence of China as a manufacturing super-powerhouse has been astonishing to many, as it overtook Italy’s manufacturing capacity as early as the 1980s and the United States’ in 2011, becoming the world’s largest producer of manufactured goods. China has been using its manufacturing engine to boost the living standards of its citizens, doubling the country’s GDP over the last decade, an achievement that took the UK’s industrialization 150 years. Today, however, China faces new challenges as economic growth slows, wages and other cost factors rise, cost of import of raw materials are rising and becoming more difficult to control, value chains become more complex, and consumers grow more sophisticated and demanding. 

Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China, as it gets richer. Manufacturing growth is slowing more quickly than aggregate economic growth, for example, and evidence suggests that the country is already losing new factory investments to lower-cost locations, such as Vietnam, sparking concern about China’s manufacturing competitiveness.

Despite the variation across manufacturing subsectors, companies—Chinese owned and multinational alike—can’t escape the need to raise their game and move up the value chain by boosting productivity, refining product-development approaches – R&D and new Technologies.,. Getting into the Value Added production.Those that do should prosper in the years ahead, while those that rely on yesterday’s model of rock-bottom wages and stratospheric domestic growth rates are likely to fade.

China challenges for the up coming years … For years, China’s low salaries; strong supply base; high investment in port, road, and rail infrastructure; and solid engineering and technical skills and above all low price products mainly based on a OEM or Cheap pricing Strategy, provided a strong platform for manufacturing exports. Meanwhile, a vast domestic market helped fuel China’s continuing transition to a consumption-based economy.

Rising factor costs;

Rising wages, recession in the world market and the appreciation of the renminbi have dampened China’s exports in recent years and focused global attention on its future viability as a low-cost manufacturing center. Most multinationals that produce labor-intensive goods, are actively seeking to diversify beyond China to reduce costs and mitigate political and supply-chain risks. China-based processors of goods such as beverages, fabricated metals, food, and tobacco are also concerned about rising costs, including those for packaging. Yet their regional focus makes this less a global competitive issue and more a question of which players in the value chain will create the most value

Rising consumer sophistication;

World Bank research suggests that by 2020, the income of more than half of China’s urban households, calculated on a purchasing- power-parity basis, would catapult them into the upper middle class— a category that barely existed in China in 2000.

The explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation—and it’s not over yet. By 2022, World Bank research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year.

The members of this group already demand innovative products that require engineering and manufacturing capabilities that many local producers do not yet adequately possess.

Just look at the China’s automakers they already facing challenge in China and in the world: consumers perceive their brands as lower in quality, even compared with foreign brands assembled in nearby Chinese factories. These issues confront players in a range of other sectors—from appliances and chemicals to electrical and office machinery, heavy machinery, pharmaceuticals, telecommunications gear, transportation, aviation and medical equipment and many others areas…

What they have in common is that they compete on the strength of their R&D, technology, and ability to bring customers a steady stream of new products and services.

Rising consumer expectations will require all Chinese Manufactures to raise their level on freshness and regulatory compliance, areas where China’s standards still lag behind Western ones.

Great governmental demand for the highest world standards in; Agro tech, Green Tech, Water tech, energy saving Tech, Homeland security, medical tech....

Will speed this process…

The uncertain global economic environment since 2008 has complicated life for manufacturers everywhere. Those in China have arguably been the most severely affected, given the country’s status as the workshop of the world.

In China’s steel industry, for example, annual demand growth slowed to 3 percent in 2012, after a decade of double-digit increases. The result has been lower capacity utilization, cutthroat competition, and a 56 percent decline in average profit margins for the industry from 2010 to 2012.

Many other industries are facing the same impacts…

So… what is the right direction for China’s Industry?

The future of the Chinese economy is to build a strong value added Industry that will be build on Innovation, R&D, and strong hi end Technologies.

As China leaders are demanding, “ No more made in China” we should move on toward… innovated by China “.

Chinese companies are looking for new cooperation in Technologies… innovation, R&D and JV with the leading international Players. 

The Chinese government in all levels are supporting and encouraging this direction.

China’s rise to manufacturing preeminence in recent years has been amazing. Yet rising costs, more sophisticated consumers, and fundamental macroeconomic realities mean that yesterday’s approaches to manufacturing are losing their relevance. For Chinese-owned and multinational manufacturers alike, the imperatives now are to boost productivity, refine product-development approaches, and tame supply-chain complexity. Those that do so can create an enduring competitive edge and for the rest …...

As labor costs rise and slowing growth dampens the ability of China’s steadily rising industrial output to deliver regular productivity gains, manufacturers there will need to strive for global levels of operational excellence.

Companies hoping to differentiate themselves beyond low-cost labor also can focus their efforts to harness innovation and product-development efforts.

Staying competitive will require domestic companies and multinationals alike to change, starting with the mind-sets and attitudes that have provided product-development activities in China.

The new facts are bringing the Domestic Chinese companies to get beyond the “faster, cheaper” fixation that has characterized their approach to R&D in recent decades. Despite its impressive progress, China is presently facing new challenges, as its economic growth is slowing down, costs factors are rising, value chains are becoming more complex, and consumers are growing more sophisticated and demanding. These pressures occur against the backdrop of a fundamental macroeconomic reality; the almost inevitable decline in the relative role of manufacturing in China as the country is getting richer. That is, manufacturing growth is slowing down more quickly than the aggregate economic growth.

For years, China’s low salaries, strong supply base, high investment in infrastructure, solid technical skills, and above all - low priced products based on cheap pricing strategies, provided a strong platform for manufacturing exports. Meanwhile, a vast domestic market helped fuel China’s continuing transition to a consumption-based economy. Nonetheless rising wages, recession in the world market, and the appreciation of the Renminbi, have dampened China’s exports in recent years and focused global attention on its future viability as a low-cost manufacturing center. Most multinational companies that produce labor-intensive goods are actively seeking to diversify beyond China to reduce costs and mitigate political and supply-chain risks. Evidence of that, for example, is that the country is already loosing new factory investments to lower-cost locations, such as Vietnam, sparking concern about China’s manufacturing competitiveness.

In the meantime, domestic consumer sophistication is shifting the market’s currents. World Bank research suggests that by 2020 the income of more than half of China’s urban households, calculated on a purchasing-power basis, would catapult them into the upper-middle echelon of the population, a category that barley existed in China in 2000. The explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation; members of this group already demand innovative products that require engineering and manufacturing capabilities which many local producers do not adequately possess yet. This shift is strengthened by World Bank research claiming that by 2022 more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 Renminbi ($9,000 to $34,000) a year.

When examining China’s auto industry the shift in Chinese consumerism is already noticed, whereby Chinese consumers perceived their brands to be inferior in quality, even when compared to foreign brands assembled in nearby Chinese factories. This issue is apparent in other sectors, from appliances to pharmaceuticals, machinery, aviation, etc. Thus, regardless of the industry concerned, Chinese-owned and multinational companies alike will need to raise their innovation and regulatory compliance, and move up the value chain by refining product-development approaches through R&D and new technologies. Indeed those who do so, shall prosper in the years ahead, while those that relay on yesterday’s model of rock-bottom wages and stratospheric domestic growth rates are likely to fade.

Governmental demand for the highest technological standards in agritech, meditech, water treatment, energy saving, etc. will serve as a catalyst for the shift in manufacturing approaches, from cost-based to value-based, feeding into the new shift in consumer demand. The future of the Chinese economy is to build a strong value-added industry that will found upon innovation, R&D investments, and strong high-end technologies. China’s leaders are gradually demanding an end to the “Made In China” era, moving towards an “Innovated in China” approach instead. As such, Chinese companies are looking for new cooperation and joint ventures with leading international players for introducing R&D, high-tech, and innovation into the Chinese market, and the Chinese government is fully supportive of this direction.

On this backdrop, we at Navigator Ventures are focused on identifying advanced technologies that can bring innovation and drive growth in the Chinese market. Our Strategy involves project management from initial financing, to implementation, and operation in a variety of fields including greentech, agritech, meditech, homeland security, among others.

Written by Dr. Ronen Dagon, Chairman and Founder of Navigator Ventures