On China’s Manufacturing Catch Up—Part 2

In my last post I started to talk about the remarkable increase in the Chinese manufacturing industry over the last decades, and how China is nowadays the manufacturing workshop for the world. Yet, in addition to opportunities, there are also challenges ahead. In my last post I described that it gets harder to catch up on technology the closer you come to the front runner (example chip making), but that there are plenty of opportunities in new industries (electric cars, solar cells). I also mentioned that past quality flaws also still have an impact on Chinese reputation. In this post I will continue with more challenges and opportunities for Chinese manufacturing. This series of posts is a mixture of facts and a lot more opinions, so feel free to disagree.

The Challenge of Its Reputation on Quality

Another problem for future high-tech manufacturing of China is its reputation on quality, or—better phrased—its lack of quality. In the past, quality from Chinese makers was very mixed. I know of plenty of purchasers in Europe that will buy safety-relevant gear like crane hooks only made in Europe or the USA since too many Chinese products failed to meet expectations. The slang word “Chinesium” is sometimes used as a synonym for low quality.

Note that there are plenty of companies in China that make high-quality stuff. I, for example, am a fan of Anker chargers and cables. However, to protect its brand, Anker does not really advertise the “Made in China,” and even the name is the German word for Anchor. Even then, its smarthome device Eufy was supposedly sending much more data home than what was necessary. Overall, there are still too many companies in China that believe that as soon as the product is out of their door, it is no longer their problem. China will have to control these companies to protect the higher quality ones, so that over time the reputation of Chinese products improves. Note that when I say “over time,” I am not talking years but rather generations. Ruining a reputation is easy; improving one is a long and hard journey.

The Challenge and Opportunities of a Heavy Government Influence

The Chinese government, and hence the Chinese Communist Party, has by its design a heavy hand in its economic policies. This is a double-edged sword. It can support and improve industries. At the same time, it can also damage others. I personally am a big fan of Adam Smith’s “Invisible Hand,” with only limited exceptions. Companies should seek their own fortune (within the boundaries of the law), instead of getting directed by a government.

The Challenge of Geopolitical Tensions

This heavy hand of China is not only within its own borders, but also on a geopolitical scale. I’m not sure if it’s cultural differences, but China is stepping on a lot of toes in the rest of the world. Many manufacturers seek to reduce their reliance on China. They actively move manufacturing away from China to other countries like Vietnam, India, Mexico, and Malaysia. This is also supported by many Western governments, who are also worried about economic or even military conflicts involving China. This “anything but China” diversification is in full swing, and even if it is hard to remove existing plants from China, new plants and suppliers are now often established elsewhere. At the same time, Chinese manufacturing is heavily entrenched in the world economy, and the world (as of now) cannot function without Chinese products.

The Challenge of Protecting Intellectual Property

As mentioned above, in the past it made total sense for China to have a… ahem… relaxed attitude on intellectual property. It was difficult, especially for foreign firms, to enforce trademarks, patents, copyrights, and other intellectual properties. While the laws themselves were reasonable, they were sometimes difficult to enforce in courts. Foreign companies often perceived a bias in favor of local companies. That assumes you can find the company you are suing, and that the company does not miraculously go bust and an identical company with a different name takes over the business. The process of legal enforcement was also often lengthy, albeit this is a problem many countries, including Western countries, suffer from.

I believe China realizes this problem, and is improving. There are some specialized courts for intellectual property in Shanghai, Beijing, and elsewhere, and the bias against foreign companies is getting lesser. Still, it is a sore spot for some foreign companies.

The Challenge of Transiting to a Service Economy

China will also have to transition from an industrial society to a service-based society. Any country that prospered moved from agricultural to industrial to service. China is now in the industrial phase, but for true prosperity would need to a be service-based economy. Like most other service-based economies, this would mean a gradual reduction of the share of manufacturing within the GDP. For more, see my blog post Manufacturing – A Key Stepping Stone on the Road to Prosperity.

The Opportunity of a Large Internal Market

China is one of the largest countries in the world. By population, it is second only to India, which recently overtook China. By area, it is second only to Russia (and also to Europe as a whole). By nominal GDP, it is second only to the United States (and very similar to Europe as a whole). Hence it has a huge internal market for its industrial output. This makes it less dependent on foreign customers. However, China’s economy still has a gigantic trade surplus, and its economy depends heavily on exports. At the same time, many resources need to be imported, and there is a lack of arable land. Worrisome to China especially is that it is not self-sufficient on food, and requires imports to feed its population. Without going into detail, China also has quite a few internal problems, from an aging population to its real estate bubble, to a slowing economy, to environmental issues, and more.

Overall, China will continue to be a major force in worldwide manufacturing, with a mutual dependency, as the world needs China and China needs the world. Yet, different types of frictions will hurt this relationship. Many foreign companies are “de-risking” by diversifying their supply chain away from China, albeit with mixed success. Barring a major conflict, this change will be slow, but it is currently underway.

I hope this series of blog posts with my opinions was interesting to you.  Now, go out, protect your business from whatever threats it faces, and organize your industry!