Chinese Manufacturing – Debunking some Preconceptions (2)

Old Chinese Yuan - Is China's economy really all-conquering?

In today’s post we look in further detail at future trends in the Chinese economy and at initiatives aimed at making the country internationally competitive in sectors other than just manufacturing:

Critical mass

We are already seeing policy ideas being rolled out to deliver the government’s higher value-added agenda. A number of major science parks have been established to create a critical mass of talent and allow co-operation and collaboration.

Some regions have developed policies to attract graduates. One example is Shanghai, which offers a preferential residential policy to high-skilled workers. The government also provides incentives to domestic firms: free office and factory space in technology parks, preferential access to university professors and interest-free loans.

The Chinese government has also sent another signal about the importance of developing its domestic sector with the introduction of a new tax law from January 2008. The new law will align income tax rates for foreign and domestic companies, thereby removing foreign companies’ tax advantage.

Tax reliefs will also be scaled back to concentrate more on technology, research and development and hi-tech industries, rather than being location-oriented.

China is actively pursuing investors looking not just for manufacturing, but also R&D opportunities. In 2004 the government introduced requirements to undertake R&D as a condition of entry for foreign companies in some sectors. Companies are responding, with the number of companies expecting to make R&D investments in China over the next few years on the increase.

There is a particular policy focus on education, which is seen to be key in delivering on China’s technical targets. The current five-year plan emphasises the need to improve basic education. Expenditure on education is planned to increase to 4 per cent of GDP (from 3.4 per cent) with the promotion and consolidation of compulsory education a priority, particularly in rural areas. Higher-level skills will also be necessary to move towards the government’s goal of an innovation-based economy. One way they will seek to achieve this is by funding more students to study abroad.

Implications for business

What is clear is that the competitive threat is increasing. The response from UK manufacturers must be based on value addition. The UK, as a relatively high-cost economy is not well placed to compete on mass produced, low-technology goods – which can be manufactured at lower cost elsewhere. Instead, UK businesses must compete on quality, innovation, technology, design and, increasingly, service provision.

Companies have been putting these strategies in place. UK manufacturing continues to confound the critics who write it off. Despite an increasingly unfavourable exchange rate, manufacturing exports grew by over 10 per cent last year.

At the same time, UK manufacturers need also to ask themselves where best to manufacture, which markets to target, how to sell to a more diverse customer base and where to carry out design and R&D. China is one such place, but there are others, for instance India, Thailand and Vietnam.

In other words, it would be a mistake to see China as an all-conquering behemoth, laying waste to all manufacturing locations standing its way. It is all too easy to be carried along by the wave of hyperbole and overlook the challenges that China faces before it be can truly seen as innovation driven.

Clearly, firms in the UK and elsewhere will need to continue their drive for greater value-addition. Companies are already rising to the challenge by raising investment in innovation and skills.

Companies are increasingly aware of the opportunities generated by China and other emerging markets. For some this will be expanding export opportunities in emerging economies and for others this may involve moving some of their activities abroad to take advantage of lower costs, the ability to work round the clock or to be nearer fast-growing markets.

Overall we can be optimistic about the outlook for UK manufacturing and the prospects for China. However, following in China’s footsteps is a number of other low-cost economies in Asia. Some are cheaper than China, other have more developed infrastructure or a more highly skilled workforce.

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

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