Chinese Manufacturing – Debunking some Preconceptions (1)

Increasingly, talk is turning to China’s technological capabilities and ambitions and what implications this might have for firms in the developed world. In the first of a two-part post we look at the impact of Chinese developments on UK companies and how traditional perceptions of the Chinese economy might be in need of re-adjustment:

All eyes on China

There was no better illustration of China’s integration into global markets than the arrival of the world’s largest container vessel in a UK port last year. The “Emma Maerskâ€? was carrying some 45,000 tonnes of Chinese-produced goods bound for Britain and mainland Europe, just in time for Christmas. On board were not just toys and decorations, but more hi-tech consumer goods such as computers and digital music players. No longer is China just a manufacturer of cheap goods.

UK companies have rightly identified China as a significant competitive challenge to their business. In a recent EEFsurvey almost three-quarters of companies cited China as posing the biggest competitive threat over the next five years. The primary threat from Chinese production is on the basis of cost.

Developed countries continue to maintain a competitive edge in more sophisticated goods and technology. For example, in 2005 the UK had a reasonably large trade surplus with China in goods such as specialist machinery, aerospace and power generation equipment. In contrast, imports of textiles, chemicals and furniture from China far outweighed UKexports.

In addition, we should not overlook the role played by foreign-invested enterprises in China. As much as three-fifths of Chinese exports are produced by foreign investors, capitalising on low-cost factors of production in China. Furthermore, these firms account for around 90 per cent of higher-technology exports.

Going up the value chain

There is a clear desire among Chinese policy makers to shake off the “workshop of the worldâ€? label and move into higher value activities. A statement by China’s minister for science and technology declared, "China is trying to transform itself from a manufacturing centre into the world’s top inventor." In its national “Medium- and long-term programme for science and technology development (2006-2020)â€?, the Chinese government set out what it was going to do to achieve this lofty ambition and a number of key targets it needed to meet along the way:

  • Research and development spending to rise to 2 per cent of GDP by 2010 and 2.5 per cent of GDP by 2020. This would take China’s R&D spending to over US$100bn by 2020;
  • The number of patents granted to Chinese nationals and citations of academic papers to rank among the first five in the world;
  • Science and technology to continue to make a greater contribution to China’s growth and reliance on foreign technology to decline; and
  • The government has identified 16 strategic technologies as priorities for development, including nuclear generation, telecommunications, pharmaceuticals and biotechnology.

Ambitions in China go beyond the development of new products and services. There is also for a desire for these to be developed by indigenous Chinese companies and sold across the world.

Currently, the number of home-grown, global Chinese brands can be counted on the fingers of one hand. Cracking their fragmented home market is difficult enough, without having to meet the tastes and requirements of sophisticated international consumers.

Nevertheless, the guiding hand of the government stepped in last summer with a “brand promotionâ€? tour to give a boost to Chinese brands.

If successful, the challenge posed by China to UK firms could change dramatically. This is not a new phenomenon; UK firms have been faced with competition of this nature in the past. Japan, South Korea, Taiwan and Singapore relied on innovation and technology to support their drive to catch up with developed economies. China is clearly hoping that emulating this approach will bring similar rewards.

The above article originally appeared in the January 2008 issue of China Britain Business Review

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