China is going up the value chain with a tested formula that is challenging regional competitors already struggling with a slowing global economy.
The world’s second largest economy is creating industry clusters and supplying them with specialized labor, encouraging the exchange of new ideas and developments across different sectors in one location.
More importantly, the strategy allows companies to achieve economies of scale, according to Bloomberg.
Clusters along the eastern seaboard helped China become the global leader in low-end manufacturing, such as with the sock city of Zhuji in eastern Jiangsu province to a shoe hub in Wenzhou in Zhejiang.
Now, new zones for more sophisticated products are gaining scale, from photovoltaic panels in Wuxi in Jiangsu to a pharmaceutical, biotechnology and medical hub in Shanghai, and a computer, semiconductor and information technology agglomeration in Chengdu in the western province of Sichuan.
More is to come as President Xi Jinping’s “Made in China 2025″ blueprint envisions global competitiveness within a decade in 10 industries from machine tools and robots to advanced railway equipment and medical devices.
“Chinese competitors are coming and I think you can hear the footsteps,” said Dante Rutstrom, a Shanghai-based senior executive at Eastman Chemical, which makes specialty chemicals and fibers that are used in everything from car tires and windscreens to medical devices.
“It would be a huge mistake to underestimate the current state of innovation abilities in China.”
Already, the emergence of more advanced industrial clusters in China is helping spur the production of components at home instead of in other parts of Asia, according to HSBC Holdings Plc.
The share of imported components in China’s exports has fallen from a peak of 60 percent in the mid-1990s to around 35 percent today, says Herald van der Linde, HSBC’s head of equity strategy in Hong Kong.
“The growth of advanced industrial clusters is at the center of China’s growing dominance across supply chains,” said van der Linde.
“Contrary to what many people believe, China is actually gaining competitiveness. We might underestimate the threat of this.”
Almost 800 companies with total sales of about 10 billion yuan (US$1.57 billion) have gathered in just one of at least three photovoltaic parks in Wuxi, according to the province’s official newspaper.
The city government has vowed to speed up the development of “strategic new industries” by stepping up policy support to help them expand 15 percent this year, according to it’s annual government work report. Photovoltaic cells enable the conversion of sunlight into electricity.
The progress China is making was reflected in October’s trade numbers, which showed exports of capital intensive, high-technology products recorded a double-digit rise even as overall shipments declined from a year earlier.
China’s shift up the value chain is bad news for economies from Malaysia and Singapore in Southeast Asia to Taiwan and South Korea in the northeast, says Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore.
Companies from industries including auto components in Thailand to hard disk drive makers in Malaysia are likely to feel more competitive pressure from China as clusters in higher valued-added industries gain momentum, said van der Linde at HSBC.
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