Writing Communication Module

China heading for world dominance

Target Audience: The analysis presented below is for the students of PGP (Batch 2018-2020) of
IIM Ahmedabad who are interested in starting their own venture in the manufacturing domain.
This study will provide them with a holistic perspective on the manufacturing industry in China.

Analysis: The state of the manufacturing industry in China has drastically changed in the last 40
years. Prior to 1978, China’s economy was essentially a closed one- wherein the state-owned
companies were in hold of the majority of the manufacturing sector. However, in 1978, the Deng
Xiaoping government was responsible for bringing major economic reforms throughout the
country. Foreign direct investment led to increase in the production capabilities of China in several
sectors, thereby allowing workers to flee from low-paying ones to the more appealing
manufacturing sector (Wayne, 2009). China was offering a young and cheap labour force, which
was nowhere to be found at that point of time in the world. This led to a rapid increase in the GDP
of China, as well as its manufacturing share. (Fig. 1, World Bank, 2018)

‘China not only overtook the United States in 2011 to become the world’s largest producer of
manufactured goods but also used its huge manufacturing engine to boost living standards by
doubling the country’s GDP per capita over the last decade’ (Karel Eloot, Alan Huang, Martin
Lehnich, June 2013). Currently labeled as the ‘manufacturing hub’ of the world, China has around
40% of its GDP being derived from the manufacturing sector. (CIA, 2012)

However, the recent years have seen a reversal of trends. During the period of February 2015 and
May 2016, China’s PMI (Purchaser’s Manufacturing Index) stayed consistently below 50, which
demonstrated the shrinkage of the manufacturing sector (Trading Economics,2018). This slow
growth must be attributed to a number of reasons.

 Recent years have seen a rapid increase in the wage levels. Labor costs have grown by
280%, which is more than 10 times as it has been for the US, over the last decade. This is
alarming for a country in which the main attraction for foreign investors has been cheap
rural labor since the past four decades. There is a dire need to deal with the issue of
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increasing labor costs (China’s Economic Outlook: How China’s manufacturing and
consumer spending will shape 2018)
 China’s unbeatable manufacturing competitiveness seems to have lost its gleam to other
competitive players, such as Vietnam and India. Factors such as higher mainland wages
and expensive real estate are contriving manufacturing companies to shift their factories
from China, and look for other alternatives. (Summer Zhen, 2018)
 Apart from the rising competition, China currently faces several other challenges to its
economic growth. Rise in consumer expectations because of the increasing standard of
living, volatility in demand, manufacturing costs, and the regular customization that needs
to be done to the production line with rapidly changing markets also add to the trouble.
(Karel Eloot, Alan Huang, Martin Lehnich, June 2013)

The aforementioned challenges reveal a basic underlying issue with this slowing economic growth
- ‘the almost inevitable decline in the relative role of manufacturing in China as it gets richer’
(Karel Eloot, Alan Huang, Martin Lehnich, June 2013).

Future Implications: Talking of the present situation, the practices of the Chinese Government
such as enhancement of domestic production, limiting foreign interference, etc., can impose some
serious risks on its chance to dominate the world trade. These are the same things that had
prevented China from advancing in the global market prior to the economic reforms of 1978. The
government needs to realize that the very reason behind where their economy is today was their
decision of opening up their markets for foreign players. Time and again, Economic liberalization
has proved to have healthy effects on the domestic economy, as well as the participating foreign
entity. The need of the hour for China is to invest in Research and Development, in order to
ultimately cater to the increase in demand of high-end products. Therefore, foreign investing in
terms of technology becomes imperative to meet this shift in consumer demand, failing which,
China dominating the world markets seems like an unattainable state.

Recommendations: Moving forward, China needs to modify certain parameters in order to work
out a way of staying in the market with a competitive edge. Broadly, () suggests a change in focus
in the following areas (Zhang Hangyan, 2016):
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1. Shift from catering of less advanced goods to high advanced goods to meet the current
demands
2. The government needs to step in and address the issue of excess capacity by aiding such
enterprises in reorganization
3. Invest in Research and Development to attain excellence in manufacturing
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References:

1. Wayne M. Morrison, 2018 - China’s Economic Rise: History, Trends, Challenges, and
Implications for the United States : https://fas.org/sgp/crs/row/RL33536.pdf
2. Manufacturing : Value added - China
https://data.worldbank.org/indicator/NV.IND.MANF.CD?locations=CN
3. The World factbook, 2012 - Central Intelligence Agency
https://www.cia.gov/library/publications/the-world-factbook/fields/2012.html
4. Trading Economics - China’s PMI(2011-
2018)https://tradingeconomics.com/china/manufacturing-pmi
5. Karel Eloot, Alan Huang, Martin Lehnich, June 2013 - A new era for manufacturing in
China, https://www.mckinsey.com/business-functions/operations/our-insights/a-new-era-
for-manufacturing-in-china
6. Summer Zhen, 2018- Manufacturers step up search for low cost alternative China
http://www.scmp.com/business/companies/article/1863709/manufacturers-step-search-
low-cost-alternative-china)
7. China’s Economic Outlook: How China’s manufacturing and consumer spending will
shape 2018, December 27th 2017, https://www.prevedere.com/chinas-manufacturing-
consumer-spending-2018/
8. Zhang Hangyan, 2016 - How to revive manufacturing sector?
http://www.chinadaily.com.cn/opinion/2016-12/20/content_27716250.htm
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Exhibit:

Figure 1