24 October 2016
Faced with many challenges, China has unveiled plans to upgrade its manufacturing sector. But success won't come easy.
Faced with many challenges, China has unveiled plans to upgrade its manufacturing sector. But success won't come easy.

Why China’s makeover of its manufacturing sector won’t be easy

A “Made in China 2025″ strategy, conceived as the Chinese version of Industry 4.0, has been spearheaded by Premier Li Keqiang and unveiled by the State Council on May 8. The blueprint has outlined a three-step 10-year plan for a makeover of the nation’s manufacturing sector.

Now, we come to this question: can China afford to wait that long to transform its industry?

It’s worth noting that a growing number of global companies have begun using “not made in China” as a tactic to lure customers. Meanwhile, the number of “Made in China” tags has been declining.

Rising labor cost in China is one reason why companies are looking elsewhere for manufacturing activities, apart from higher energy and electricity expenses.

Cheap labor has been one of China’s key advantages over the last few decades. However, as wages have risen dramatically over the last 10 years in the country, the “world’s factory” has lost its edge to other developing nations. This has prompted many foreign manufacturers to move their factories out from China.

High land cost is another factor that is driving away foreign investors. Industrial land cost in China is even higher than that in the US. And marginal competitiveness in labor cost can’t offset huge disadvantages in electricity, energy and land costs. Also, environmental factors like smog and water pollution are another area of concern for foreign investors.

China ranked in 96 in the “Doing Business 2014″ report released by the World Bank. The annual report measures regulations affecting 11 areas of the life of a business across 189 economies.

Given the ground realities, Chinese companies have to speed up reforms to cope with internal as well as external challenges. Global markets have different thoughts about “Made in China”, a point outlined by a Chinese manufacturing executive in a published article.

“We joined the Hannover Messe exhibition for the fourth time in mid-April this year. It’s the world’s largest industrial fair. I returned to the huge exhibition after eight years, and spent six days to walk through 25 exhibition centers. What I’ve seen was so surprising and shocking,” the executive wrote.

Hannover Messe opened a total of 25 exhibition centers this year, and most of the halls were for traditional products like compressors, electric machinery, machine tools, automobile parts, solar power, wind power, or electric vehicles.

“We wanted to promote the website of ‘Product of Sha’anxi’. Therefore, we visited all the exhibitor booths to explain the website to the people there. But the event provided an opportunity for foreigners to express their views on Made in China,” the executive wrote.

Chinese manufacturing has already become “marginalized” in traditional industrial sector, he added.

More than 6,500 exhibitors participated in the leading industrial trade fair hosted by Germany. The exhibition drew over 180,000 visitors, but there were very few visitors or clients at booths showing Chinese products.

Some visitors even left immediately after they found it was an area for Chinese products. And some were very impatient and passed by when Chinese exhibitors tried to introduce their products, the executive wrote.

And there was no sight of Chinese manufacturers in the hi-tech exhibition hall.

“Many clients still have little trust or interest in Chinese products. As we tried to introduce our website, some even said: ‘We have no business contacts with China companies, please stop’”, the executive wrote in his article, adding that the experience was very embarrassing.

We do not know if the manufacturing executive was exaggerating a bit in his published account of the happenings at the global trade fair. However, it would be a mistake if we do not take his observations seriously.

The executive concluded that the reason why Chinese products are being disregarded or marginalized is due to various issues, including lack of planning, talent training, business ethics and absence of long-term vision.

All these issues can’t be fixed anytime soon. It remains unclear if the “Made in China 2025″ initiative can make a difference given the increased internal and external challenges.

This article appeared in the Hong Kong Economic Journal on Aug 10.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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