Leaping into the First Echelon
China strives to rise globally through a massive manufacturing overhaul
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Print Edition> Business
UPDATED: April 20, 2015 NO. 17 APRIL 23, 2015
Precipice of Change
Sold-in-China doesn't—and shouldn't—mean the end of Made-in-China
By Michael Zakkour

AIMING HIGHER: Laborers work on a plane produced by the Aviation Industry Corp. of China in Shijiazhuang, capital of north China's Hebei Province, on March 3 (WANG XIAO)

Since the dawn of the industrial revolution in England in the late 18th century, the manufacturing and production of mass market goods has predictably moved around the world to the countries where conditions mixed for an ideal low cost manufacturing economy.

An England shaped by the science and rationalism of the Enlightenment produced the men and women who developed steam power, water power, advanced metallurgy, trains and mechanization of all kinds that transformed the world through mass production and mass transportation of goods and people. England, through its empire, also created the first industrial era supply chains, moving goods around the UK, Europe and the world in ways never before possible. In England, science, the coal reserves, the ports, the labor force and infrastructure made the entire mass production process feasible.

In the years that followed, other countries in Europe followed in England's footsteps, and so did America. When the American Civil War started in 1861, the North mobilized its latent industrial potential in a way no one had ever seen before to win a war of attrition. The America that emerged in the post-war period became the most powerful industrial country on Earth in the 1870s through the 1920s.

The global depression temporarily slowed things down, but American industrial might grew to new heights during World War II and afterwards, when it was the only major industrial country still standing tall. America held this dominant position through the 1970s, but two new industrial powers—Japan and Germany—also emerged in the post-war period. In fact the combination of the United States, Japan and Germany accounted for the vast majority of the world's industrial output until the 1990s.

And then the dragon woke up.

The reform and opening up that started in the late 1970s found its ultimate expression in the rebirth of China as a world power through the careful planning that made the country the largest and most important manufacturing economy on Earth.

It is hard for me to overstate how dominant and important Chinese manufacturing has been to the world for the last 25 years. China has become the number one producer of dozens of product categories including apparel, footwear, accessories, toys, auto parts, home wear and of course, consumer electronics.

The last 30 years (Globalization 1.0) have benefited countries around the world. International companies were able to make their goods in China at a price that ensured profitability, while at the same time offering customers much lower prices on the necessities and luxuries of life. Of course, China was able to employ hundreds of millions of people and built the second largest economy on Earth, gaining the nickname "factory of the world." The Chinese manufacturing engine fed Western consumption, and Western consumption fed the China manufacturing engine.

But we live in a Globalization 2.0 world now—a world shaped by borderless e-commerce, high technology production and goods and a world shrunk by sophisticated global supply chains. Companies from China and elsewhere need to reassess the goods they make, where they make them, how they sell them and how they move them.

As countries and regions such as England, Germany, Hong Kong, Taiwan, Japan and the United States have done, it is time for the Chinese mainland to change and grow by building a Globalization 2.0 economy based on the "four legs" of modern prosperity—to wit: increasing domestic consumption and spending, increasing the percentage of the economy based on services (finance, insurance, real estate and healthcare), expanding internationally and transitioning from low cost "dirty" manufacturing to high value-added clean manufacturing.

The roadmap for the first two changes was clearly laid out in the 12th Five-Year Plan (2011-15) and has been building in importance over the last five years.

The third change, international expansion, dubbed "China Going Global," is also well underway. This year, for the first time China became a net exporter of FDI, and Chinese companies, banks, investors, and individuals are making their mark around the world.

That brings us to the fourth change: the transformation of China's manufacturing economy.

The United States, Germany and Japan all have healthy consumer economies, are highly advanced service economies and have spread their investments, goods and services globally. However, they are also major manufacturing powers, despite public perception otherwise. Along with China, each ranks in the top four manufacturing countries on Earth.

The United States, Germany and Japan share the same type of success because countries and economies that succeed long-term and break out of the development plateau or "middle-income trap" are those which shift to advanced production methods, fully utilize hi-tech processes and produce high value-added goods. Countries that completely abandon manufacturing or haven't advanced from dirty, mass market, low value-added products and technologies get left behind.

A useful hypothetical: China currently produces more mass market footwear than any country on Earth. These shoes are made through a combination of manual labor and hi-tech machinery. China was able to dominate in this category because in earlier years, the labor needed was quite affordable and because China could buy the hi-tech machinery needed to produce shoes. These machines were engineered, made and sold from Germany and Japan.

Now with prosperity, the cost of labor in China has increased, so another country like Indonesia could become the largest producer of footwear in the world. By transforming its manufacturing economy, China can evolve to make and sell the hi-tech shoe producing machines that Indonesian factories need. China will also continue to produce footwear but only premium and luxury shoes that their highly skilled and highly paid designers and craftsmen produce.

For a few years now, pundits and others have been stating that the era of Chinese manufacturing dominance is over. During that same time, I have been advising my clients, my readers and those in my audiences at speaking events that China will remain a top five manufacturing economy for the foreseeable future because China will adjust and change its manufactured products and creation methods.

I have also been consistent in pointing out that there is no one country or even group of countries that have the size, manpower, infrastructure and experience to absorb significant portions of Chinese output. Finally, as China has become the second largest consumer market in the world, goods made by foreign and domestic companies for Chinese consumers will continue to make in China.

Confirmation of these predictions and my perspective has now arrived in the form of the Made in China 2025 initiative.

On March 25, the State Council approved the Made in China 2025 plan, which aims to address the country's need for more high-end technology in the manufacturing sector and the need to shift to producing high value-added and technologically advanced products.

The plan will feature numerous incentives and reduced regulatory obstacles that will encourage private sector investment in high value-added manufacturing.

While we have certainly entered the era of China's Super Consumer as described in my new book of the same name, we still live in a made-in-China world as well and like the previous 25 years, that will ensure a beneficial relationship between Western companies, global consumers and China's economy.

The author is vice president at the global consulting firm Tompkins International and author of China's Super Consumers

Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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