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China: shifting to

China: shifting to advanced manufacturing but not abandoning its low-cost capabilities With a steady target of growth for 2018, China is more focused on evolving its manufacturing capabilities, achieving high-quality growth and tackling environmental issues, than delivering aggressive numerical growth targets. Author: Sushen Doshi, International Correspondent for World of Industries NEWS AND MARKETS C hina is today the world’s largest manufacturing economy and one of the most competitive nations in the world. Driven initially by its ability to deliver low-cost labor and materials, China has quickly developed its infrastructure, policies, a large consumer base, and established a deep supplier network – over the past 10 to 15 years, which has helped China to evolve its manufacturing capabilities from low-cost goods to more advanced products. Currently, China is at crossroads as it works to maintain its cost advantage and core low-cost production base while also building the more complex capabilities that are required for advanced manufacturing. The economic growth momentum that China gained by opening markets and enacting reforms has weakened, and now it needs breakthroughs to spur a new round of economic growth. To deliver this boost, China’s “Made in China 2025” plan and its focus on certain strategic emerging industries are moving in the right direction to revitalize the economy. 2018 for China China announced it’s annual economic growth target for 2018 at 6.5 %, unchanged from last year, and signaled that policy would focus on containing financial risk and tackling quality-of-life issues. The parliament also announced a lower fiscal deficit target of 2.6 % of GDP, down from last year’s 3 %. At a Communist party congress in October, President Xi Jinping declared a “new era” in which achieving high-quality growth and reducing pollution, would take precedence over numerical growth targets. But China remains committed to a previous goal of doubling its per-capita gross domestic product by 2020 from its 2010 level. Actual growth last year exceeded the official target, reaching 6.9 %. The government seems content to allow economic growth to soften a little this year while guarding against financial risks continues to remain high on the agenda. China’s bottom line for economic growth is likely to be 6.3 %, which 8 WORLD OF INDUSTRIES 4/2018

is the minimum average it needs in 2018 to 20 to ensure achievement of the doubling target. Economists have widely predicted a growth slowdown this year, following an unexpectedly strong performance last year driven by property and infrastructure, as well as a solid contribution from the trade surplus. All growth driving factors are expected to be moderate this year amid a crackdown on debt and production curbs on dirty industries such as coal and steel. China’s economy started 2018 on strong a footing. Contrasting earlier expectations, data for January–February showed that the ongoing campaign to crack down on pollution did not hit industrial production growth, as global demand is fueling manufacturing activity. Retail sales were also strong in the first two months of the year, suggesting healthy private consumption. On 11 th March, the National People’s Congress (NPC) paved the way for President Xi Jinping to stay at the country’s helm indefinitely with the abolition of the constitutional two-term limit. In the same venue, the NPC left economic targets mostly unchanged, while rolling out further economic reforms. China’s global trade The world’s largest exporter, China shipped more than $ 2 trillion worth of products around the globe in 2017. That figure represents roughly 20 % of overall global exports. From a continental perspective, half of China’s total exports by value are delivered to Asian countries. North America purchased more than 20 % of Chinese shipments while 18.5 % worth arrived in European countries. Whereas Africa bought 4 % of Chinese exports. Amongst China’s top trading partners in terms of export sales are United States $ 390 billion representing roughly 18.3 % of total Chinese exports, followed by Hong Kong $ 290 billion, Japan $ 125 billion, South Korea $ 95 billion, Germany $ 65 billion, India $ 60, Netherlands $ 57 billion, United Kingdom $ 56 billion and Singapore $ 45 billion. It would be unrealistic for any exporting nation to expect acrossthe-board positive trade balances with all its trading partners. China incurred the highest trade deficits with the following countries, Taiwan $ 99 billion, South Korea $ 65 billion, Germany $ 20 billion and Japan $ 16 billion. These deficits clearly indicate China’s competitive disadvantages with the above countries, but also represent key opportunities for China to develop country-specific strategies to strengthen its overall position in international trade. Impact of US trade war China recently announced it would impose retaliatory import tariffs on 128 U.S. products, goods that amount to $ 3 billion — targeting products like California wines, fruits and almonds. The move follows President Donald Trump’s decision to slap tariffs on about $ 50 billion worth of Chinese goods, triggering a potentially damaging trade confrontation with Beijing. China’s tariffs would first hit U.S. products such as avocados and nuts, with 15 % duties. Beijing, if officials deemed it worthwhile, could also place 25 % tariffs on American-made goods such as pork and aluminum. Analysts struggled to immediately understand why items such as wine, a product from the Democratic stronghold of California, would make the list but not top U.S. imports such as sorghum and soybeans. Chinese officials last month launched an inquiry into American sorghum imports, and both agricultural products come from regions more supportive of Trump. The U.S. is essentially demanding that China provide as much market access to the U.S. as the U.S. provides to China. While these tariffs could hit certain sectors, its macro impact on China’s GDP is still minimal. Trump’s steel tariffs would affect China even less, as the nation accounts for only 2.5 % of U.S. steel imports as a result of existing regulations. But these moves hint at the start of what could become a tit-for-tat battle that cracks the global supply chains and increases costs for consumers. Made in China 2025 With the “Made in China 2025” plan, China has been moving from low-cost, labor intensive manufacturing to high-end, technologically advanced manufacturing. As China’s competitiveness in labor-intensive sectors fades and new manufacturing destinations such as India and Vietnam gain ground, this makes the move towards advanced manufacturing even more imperative. China needs to overcome multiple challenges in a short amount of time if it has to avoid being squeezed by both newly emerging low-cost producers and highly efficient advanced industrialized economies. Made in China 2025” is an initiative to comprehensively upgrade Chinese industry. The initiative draws direct inspiration from Germany’s “Industry 4.0” plan, which was first discussed in 2011 and later adopted in 2013. The heart of the “Industry 4.0” idea is intelligent manufacturing, i.e., applying the tools of information technology to production. It is Beijing’s blueprint to transform the country into a hi-tech powerhouse that dominates advanced industries like advanced IT; automated machine tools & robotics; aerospace and aeronautical equipment; maritime and high-tech shipping; modern rail transport equipment; electric vehicles; power equipment; new materials; bio-pharma and advanced medical products. The ambition makes sense within the context of China’s development trajectory: countries typically aim to transition away from labor- intensive industries and climb the value-added chain as wages rise, lest they fall into the so-called “middle-income trap.” Its guiding principles are to have innovation-driven manufacturing, emphasize quality over quantity and achieve green development. The goal is to comprehensively upgrade Chinese industry, making it more efficient and integrated so that it can occupy the highest parts of global production chains. The plan identifies the goal of raising domestic content of core components and materials to 40 % by 2020 and 70 % by 2025. The plan also calls for relying on market institutions, strengthening intellectual property rights protection for SMEs and the more effective use of intellectual property (IP) in business strategy. Impact of “Made in 2025” on other manufacturing countries Made in China 2025 lays out targets for achieving 40 and 70 % “selfsufficiency” in core components and basic materials in industries like aerospace and telecommunication equipment by 2025. That could devastate countries like South Korea and Germany, where hi-tech sectors constitute a large share of industrial output and exports. The supply chains for hi-tech products usually span across many borders, with highly specialized components often produced in one country and modified or assembled somewhere else. Rather than abiding by the free market and rule-based trade, China is intent on absorbing the entire global hi-tech supply chain through subsidizing domestic industry and mercantilist industrial policies. Photograph: Fotolia z WORLD OF INDUSTRIES 4/2018 9


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