How Chinese manufacturers are adjusting to the new normal

December 12, 2015 08:01
Technological innovation is driving the shift to original design manufacturing by Chinese companies. Photo: CNSA

China’s manufacturing sector has to get used to the new normal in economic growth in the next five years.

Amid a shakeup in the global value chain, the industry is getting help from Beijing's Internet Plus and Made in China 2025 initiatives.

Processing companies have shifted to original design manufacturing (ODM) from original equipment manufacturing (OEM).

It’s a sign they are ramping up their internal research and development efforts in order to climb up the value chain.

The relationship between multinational corporations and processing companies determines the profit distribution between the two parties.

In OEM, processing companies are dependent on their multinational partners.

By contrast, factories that have switched to ODM and their multinational partners operate as equals.

Luzhou Shoe Co. is a typical ODM factory for global brands.

The company has established itself as a key partner for these brands over many years, enabling it to grow its order book and boost unit prices by up to 20 percent in recent years.

Luzhou has developed new products on its own and become a sought-after partner for casual and mass footwear companies.

With global brands expanding their market share, Luzhou has found new opportunities to do business with them.

It has an 80 percent market share in the United States.

Meanwhile, the company has established strategic partnerships with global suppliers and is building on consumers’ changing tastes.

Luzhou's example shows that companies can have their own strength in core technology and resources and be in a better position to negotiate profit-sharing deals.

History shows product standards have great significance in product development.

These could be more important than expanding into the value chain.

China Wonderland Co. Ltd. used to be an OEM/ODM manufacturer of baby strollers for leading brands in Europe and the US.

The company is now the world’s biggest maker of baby strollers, accounting for 60 percent of the market in developed countries.

Safety standards are critical in the baby stroller industry.

Wonderland spent a fortune to establish a world-class product safety test center and develop standards that comply with European and US markets.

As a result, the company has been able to build its own brand and tap into the global market through OBM (own branding and manufacturing).

Its sales network straddles dealers, shopping malls and online platforms.

Wonderland has increased its output 10 percent annually through outsourcing and automation, offsetting rising costs.

Also, companies that can quickly adapt to market changes will have longer life and better sustainability.

Dongguan Lite Array Co., established in the 1990s, makes small home appliances and electronic devices, having switched to camera application products from vacuum cleaners amid dwindling sales in the 2000s.

The company is now China's biggest maker of mobile optoelectronics after transforming itself to a national high-tech business.

It has also managed to expand into healthcare, aerospace and automobiles. 

This article appeared in the Hong Kong Economic Journal on Dec. 7.

Translation by Julie Zhu

[Chinese version中文版]

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Professor at South China Business College, Guangdong University of Foreign Studies