and India‘s services
Updated 25 March, 2014
There is a persistent view that China is focused on manufacturing and India on services. This may have been so 10-15 years ago. But today, both countries are moving into each other’s ‘specialities’.
China has focused on manufacturing until recently
As more and more western firms moved their production facilities to China to take advantage of the ‘China price‘ helped by preferential treatment in the Special Enterprise Zones, China has become the factory of the world. Initially they made low-priced consumer goods such as t-shirts, trainers, and plastic toys. In her book The China Price: the True Cost of Chinese Competitive Advantage, Alexandra Harney asserts: “The forces that will shape China’s manufacturing sector in coming decades are already clear: rising wages and material costs, greater demand for unionization, a higher risk of litigation, a dwindling supply of cheap workers, calls for better product quality and safety, and substantial downward pressure on margins.” In 2007 it manufactured £1.1 trillion worth of products.
Over the years as quality and competence of Chinese factories and workers improved, luxury goods such as Mercedes and BMW are being manufactured in China, along with high-ticket electronic goods. Indeed, VAG entered China in 1978 and is now one of the top car makers in China and exports to other Asia-Pacific markets.
Consequently, China is amongst world’s top consumer of cement and steel. Another example is that of chemical plants: in 2005 50 new plants worth over $ 1bn were installed. And that has not slowed much in the years since.
There is also local enterprise. Take for example Zhong Guancun. Thirty years ago it was a quiet suburb of Beijing with mostly green fields and some universities. Twenty years ago, small computer companies appeared outside the universities probably run by ex-students. Ten years later it grew into largest and most vigorous IT Park in China. 77% of companies set up here die in 3 years and many of rest die in another two, but nothing can stop more from starting and trying to grow.
In 1984, a Liu Chuanzhi started a small company there called Legend, with only $25,000 and 11 employers. Today, after taking over IBM‘s PC division in 2005, it has grown into 25,000 employers and turnover of $15bn. Its name was changed to Lenovo. It has over 35% of China’s PC market and 7% of the world market in 2009.In 2011 it grew to become the world’s third largest PC maker.
Although not in the same league as Boeing or Airbus, the Commercial Aircraft Corporation of China (Comac) has started to deliver 60 to 100 passenger jets competing with Bombadier and Embraer. These sircraft will be the workhorses as most of the new aiports in China will not be in large cities and hence will not be designed to take super jumbos.
At the other end of manufacturing is the story of Yiwu. It was a small town in Zhejiang one of the most densely populated provinces, which includes Shanghai. It was early adopter of market economy and from 1982 it gradually turned itself into a huge manufacturing and marketing centre of consumer goods, from needles to pencils to Christmas kitsch. There are very few things you can’t find here. Those you can’t find and want will be made for you. With over 60,000 vendors stocking 400,000 varieties in 1,700 categories of commodities made and sold here, things here are incredibly inexpensive. The Yiwu Index is now one of the main deciding factors on the world price for the small commodities. Even so Yiwu makes $5.4 billion profit a year.
So, the majority of the goods made in China are relatively low-priced consumer goods such as t-shirts, trainers, toys and consumer electronics. One of the world’s largest container ships, Emma Maersk used to ply the route from China to Europe, can haul 11,000 containers filled with these goods. According to one source, in 2006 it carried from China: glasses, sports gear, shower gel and shampoo, clothes, furniture, carpets, laptop computers, make-up, toys, Christmas decoration, mobile phones, shoes, trainers games and puzzles, and TV sets. And it took back from the UK: plastic scrap, waste paper and card, waste electronic equipment, scrap metal and repairable electrical goods! But as one senior Chinese politician said: “We need to export many container ships of toys and trainers to afford a single Boeing aircraft (B747-400 costs $250m before bulk discounts)! ”
In between, China is no 1, 2 or 3 in most categories apart from aerospace and high-tech. For example it is no 1 in pianos, guitars and even ‘panama’ hats – though purists would say, real panama hats need to be made from an Ecuadorian reed. The name, incidentally, arose because engineers building the Panama Canal found these hats excellent for the equatorial climate. Of course many of the pianos and guitars are made under famous labels: such as Steinway and Yamaha – a consequence of contract manufacturing due to the ‘China price’.
Even in the matter of western suits, one firm, Trands, makes 5 million suits pa for labels such as Gap, Banana Republic and Marks & Spencer. But as in other sectors, more and more competition is coming from Vietnam, Philippines and Bangladesh, along with east European countries. Of course, Dalian Dayang Group, the world’s largest suitmaker and maker of Trands suits, got a boost when Warren Buffett replaced his wardrobe by Trands suits and – it is said – so did his friend Bill Gates!
According to a paper presented by Jean-christophe Iseux von Pfetten, at the Global Service Industries Summit in Washington DC in Oct 2009 organised by the Coalition of Service Industries, based on China’s national statistics; the service industry in 2008 accounted for 40% of GDP (<30% of employment) while manufacturing accounted for 49% (>30% of employment, with agriculture at 11% (40% of employment. The target is for services to reach 50% of GDP by 2020. Hong Kong is seen as the model with services accounting for 90% of its GDP.
After the 2008 recession
China took the opportunity of the 2008-09 recession to reduce low end: 1,000 of 5,000 cheap shoe factories closed in 12 months; 500 out of 600 cigarette lighter factories closed in 18 months; and so on sector after sector.
It is amazing that that with 2m migrant workers laid off (out of c220 migrant workers) in 2008; with 40% of GDP attributed to export, China not only survived the recent recession, but IMF estimates it grew by 8% in 2009. This is because it stimulated the economy with nearly $600bn over two years – including increases in infrastructure spend, plus subsidies to replace old cars at 10 x the level of UK support. It also encouraged retail/consumer spending as well as encouraged bank lending.
The India-China bilateral trade was $74bn in 2011. But, China’s export is 8 times that of India. In 2009 it overtook Germany to become world’s number 1 exporter.
March 2014 update:
In recent months, Chinese manufacturing seems to have slowed down substantially; while US and European manufacturing are gearing up. Only time will tell if this is a serious problem or a short term correction. See http://chindia-alert.org/2014/03/25/why-chinas-manufacturing-sector-has-hit-a-wall-businessweek/