Chinas Manufacturing Moves Up The Value Chain

China’s Manufacturing Moves Up The Value Chain

British Consulate General Guangzhou

August 2013

Summary

China has been striving to move up the value chain for many years. Guangdong Province – China’s leading manufacturing centre – is making clear progress with high-value added products growing rapidly as a proportion of total manufacturing. Poorer areas within Guangdong and across China are also benefitting from this situation by offering preferential conditions for low-end manufacturers. This presents opportunities for British manufacturers and those businesses providing professional services.

Detail

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For decades, Guangdong has been China’s largest manufacturing centre with nearly 12% of the country’s manufacturing output, closely followed by Jiangsu (around 11.5%) and Shandong (11%) . Home to a wide-ranging set of manufactured goods, from low-priced textiles to state-of-the-art telecoms networks, the province’s total manufacturing profits increased by 28.4% (y.o.y) in the first half of 2013. High-value products together account for 43% of Guangdong’s manufacturing output (compared to 30% nation-wide), and are growing at a much faster rate than low-priced goods.  The trends are similar in China’s other leading manufacturing provinces around the developed East coast.

Guangdong set out its steps for industrial upgrade as far back as 2001. In its 10th Five-Year-Plan (2001-2005) it identified IT, pharmaceuticals and electronic products as pillar industries to develop. These steps, initially encouraged by China’s accession to the WTO and the increasing external demand for electronic goods, were further hastened by labour shortages in 2005 and fast rising land costs. Former Guangdong Party Secretary Wang Yang (now Vice-Premier) further pushed this industrial upgrade during his term (2007-2012) with the so-called ‘vacating the cage to change the bird’ programme.

As Guangdong moves up the value chain, Southwest China is following a dualist system: embracing large amounts of low-end manufacturing investment from the coastal area while building up high-tech sectors in certain industrial parks. Chongqing, for instance, is developing aircraft and robot technologies in the Two Rivers New Zone, but it also relies on HP and Foxconn to establish their manufacturing chains locally. The return of migrant workers, attracted by: rising wages in the Southwest, relatively low living cost and shorter distances to their families, helps ensure adequate labour supply. Ambitious subsidies in transportation also lower shipping costs for potential investors.

As always, underneath this broad trend, the picture is more mixed:

  • Not all areas of Guangdong are successfully moving up the value chain. Cities such as Dongguan and Foshan have been much harder hit by the global economic slowdown due to slowness in shift up the value chain.

  • While lower end manufacturing is expanding in inland provinces, often this represents expansion by established businesses taking advantage of tax benefits and cheaper land, not a relocation of existing manufacturing capacity.

  • This inland shift is also partly offset by investment in lower end manufacturing being moved to less-developed parts of Guangdong.

What Sustains the Upgrade?

 While Guangdong’s labour and land costs have been rising fast, this is partly compensated for by efficient transport infrastructure (making it easier to reach more affluent consumers overseas) and the fact that in Guangdong there is a concentration of consumers with relatively high purchasing power compared to inland provinces/Southeast Asia. There are obvious advantages in manufacturing high-value goods closer to your consumers.

In addition IT clusters with efficient supply chains in the PRD region make it highly competitive compared to areas offering cheaper labour and land (e.g. inland provinces and Southeast Asia) but without complete supply chains, or the necessary skilled labour readily available.

These factors mean that Guangdong can remain competitive as a manufacturing hub. Meanwhile, local governments in the wealthier Pearl River Delta region have adopted preferential policies (e.g. tax breaks and easier/faster land approvals) to attract and retain high-value manufacturers while poorer cities offer same benefits to low-end manufacturers relocating from the PRD.

Comment

 China’s manufacturing landscape has NOT yet been significantly changed by all these developments. Traditional centres on the developed East Coast, such as Guangdong (led by Guangzhou and Shenzhen), the Yangtze River Delta (led by Shanghai), and the Pan-Bohai Rim (led by Beijing and Tianjin) remain competitive for high-value manufacturing, while less-developed areas are catching up.

However at the forefront of China’s economic reforms, Guangdong with its current progress and challenges is at the cutting edge and will show the way for the rest of the country. It is likely that less-developed areas would face similar situations in the future.

What does this mean for the UK?  Our British contacts in the high-value manufacturing sector choose to keep their core businesses in the PRD, despite rising costs either determined by the domestic market (labour and land) or global market (commodities). Contacts have told us that they are more concerned about the business environment and commodity prices, than about labour and land costs.

Guangdong continues to present opportunities for manufacturers with technological advantages in pharmaceuticals, electronic and electrical goods, and those providing professional services including: R&D, marketing, and financial services. There is clear demand for financial solutions to industrial upgrade and expansion/relocation, and the Province is actively seeking to attract leading professional services firms to set up in its special zones where preferential policies apply.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Sectors: Wholesale & Retail
Countries: China
Topics: Getting Started
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