China should learn from high-tech sector in Taiwan

June 13, 2015 08:00
An engineer helps produce a chip in a research center in Hsinchu in Taiwan. Photo: Bloomberg

China’s manufacturing sector has to “go out” and tap into global markets if the country seeks to sustain its economic growth.

In regard to the protection of intellectual rights, firms can set up R&D centers overseas to get around restrictions and regulations in China and focus manufacturing within the country.

However, such a structure could lead to the outflow of top talent from China.

To avoid a brain drain, a feasible approach is to establish a technology innovation special zone.

The most outstanding Chinese college graduates now major in either information technology or finance.

And the top Chinese talent can usually be found in Silicon Valley and Manhattan.

By contrast, there is a huge talent shortage in China, especially in the manufacturing sector.

Fewer and fewer people are willing to get involved in manufacturing, because of the thin profits.

Five years ago, manufacturing costs in China were 15 percent cheaper than in the United States, but now the gap has narrowed to 5 percent.

That has forced many foreign factories in China to relocate elsewhere.

The country is facing a dilemma at the moment, with limited high-end technology and intensifying competition from low-cost developing countries in the region.

As a result, the manufacturing sector is contributing less to economic growth and job creation.

Meanwhile, the country's top talent is leaving and helping the high-tech and commercial development of other places, like Singapore.

I believe the manufacturing sector can continue to play a key role in China’s economy despite the slowdown in economic growth and restructuring.

Upgrading the manufacturing industry is critical to the country's push to rebalance its growth.

China could move its manufacturing sector to inland cities away from major cities like Beijing, Shanghai and Guangzhou.

However, the key question is whether the salary will match the technical skills of the manufacturing talent?

And will the products be competitive in global markets?

For example, Foxconn pays between 4,300 yuan (US$693) and 4,500 yuan a month to its employees in the mainland, equivalent to about NT$20,000, which could hire the best technical staff in Taiwan.

That clearly shows China is gradually losing the edge in cheap labor.

The Chinese government is trying to build up a system for protecting intellectual property rights and encouraging innovation.

The regulators should think about setting up a “technology innovation special zone”, which offers global-standard policies in intellectual property rights and encourages big Chinese and foreign firms to set up R&D centers within the zone.

Beijing has already realized that China has to transform itself from a manufacturing hub into a manufacturing powerhouse.

For example, China is one of the world’s top three chip producers, but the country has failed to get hold of the core technology in R&D.

Chip imports reached a value of US$210 billion last year.

But China mainly serves as an assembly center for imported parts and re-exports to foreign markets.

The country makes a profit margin of less than 6 percent although it accounts for over 20 percent of the global manufacturing sector.

Foxconn’s market capitalization is less than half that of Facebook although it has a massive headcount of 1.2 million.

This article appeared in the Hong Kong Economic Journal on June 9.

Translation by Julie Zhu

[Chinese version中文版]

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adjunct professor in the Department of Finance at HKUST Business School