“China Q3 growth rises to 7.8%”, this was what I read on the China Daily’s front page during my last business trip in that intriguing country. For a while, it made me reflect on some applied efforts regarding this nation over the coming years.
First of all, everyone is aware about the status of this country. Since initiating market reforms at the beginning of 80s, China has shacked from a centrally planned to a market based economy and experienced rapid economic and social development. In the early 2000s, many companies were shifted to China and India during industrial technology development due to the globalization process. The main reason was the appealing cost in terms of manpower, also the availability itself. These motivating arguments and many more helped in order to establish a profitable outsourced mass production.
After a few years from that time, some enterprises realized that migrating their manufacturing operations or services to China or India made sense when some factors didn’t have the relevance of nowadays: inventory turnover, travel time, response times to customers, etc. Currently they are not so appropriate to preserve the manufacturing centers of final products in China, where the final product market is North America or Europe. Time to Market or customer preferences now are more restrictive than before. During this crisis, companies made major efforts to become more efficient. Some action items were focused on manufacturing, putting significant pressure on suppliers in order to achieve cost reduction.
So this is the current scenario: China has already begun to lose edge as World’s Factory Floor. It is understood by this huge stakeholder because it knows perfectly its own reality. Manufacturing companies are bypassing China and displacing factories to cheaper locales in Southeast Asia. His structure is losing its competitive edge as a low-cost manufacturing base, new data suggest, with makers of everything from clothes to standard electronic components relocating to cheaper locales like Southeast Asia. However, many others are also looking at moving from China’s coastal manufacturing cities to its lower-cost inland regions. What it’s really true is China’s leaders are moving to shift the economy away from its traditional reliance on low-end manufacturing and heavy investment spending, seeking to build a stronger consumer base at home. “We know we can’t keep relying on a low-cost competitive advantage.We need to accelerate the value-added upgrading of our products,” said one year ago Commerce Ministry Shen Danyang on a relevant media there. The increase in wage costs, the rise of Chinese enterprises focused on innovation, quality and the ever-changing preferences of an increasingly consumerist community just to take profit set up these changes as a real challenge.
In addition, some rules in supply chain have changed too due to current and upcoming preferences from customers who steer so many businesses around the world. A new concept is emerging and it is known as Dynamic Alignment. That comes from an analysis in which it is concluded that all the stakeholders involved in supply chain must change their approach for the profits generation and put focus in order to improve its competitive as much as possible. But this point could be well covered in another post. This topic is not the main focus of the present one.
Anyway, there is one rational thought indeed: if costs go on rising but China is not able to become more innovative or developing in a better way technology internally, then all the jobs migrated will not be replaced. This sentence seems radical, but it is logical at the same time. Apart from that, a shift to other countries doesn’t mean companies are abandoning China. It only means this place will not be the top one election in terms of manufacturing. For sure, it still remains as the largest recipient of the developed world Foreign Direct Investment, attracting U.S. $ 112,000 million last year. But that was 3.7% less than in 2011, although exports are growing at over 10%.It seems doubtful to break this optimist trend, maybe there could be a significant deceleration, but not a break up in this expansion.
Summarizing, as other Asian nations have become more efficient in mass production, China should take the research and production of high technology to transform its economy as South Korea, Japan, Taiwan or Singapore did some years ago. The healthy economic growth requires China to expand its services sector and create manufacturing jobs for highly qualified people at a rapid pace.
China seems it is aware of its reality, it is not carried away by his optimist results of its excellent economic performance. They know life is based on stages, for this reason they must start working on the following one.
Let’s see the behavior of this single giant in the next years…
Francesc Salas is a systems engineer. He joined Hewlett Packard some years ago as an R&D engineer thanks to his background on Electrical Engineering. After two years, he moved to the Operations Department to work as an engineer focused on projects in some Manufacturing Partners located in Asia. He enjoys his leisure time learning french and playing some sports like table tennis or futsal. He also loves writing novels (his next one will be released on November Y14 – stay tuned!).