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The Driving Force, Models and Policy Options for Restructuring and Upgrading Traditional Industries

Dec 28,2012

By Lv Wei, Research Team on "System and Mechanism Conducive to Technology Reform of Traditional Industry", Department of Techno-Economic Research of DRC

Research Report No 141, 2012

The restructuring and upgrading of traditional industries is not something that can be accomplished overnight, but takes a fairly long period of time. According to a survey conducted by the research group on the technological reform of traditional industries, enterprises in traditional industries have been constantly restructuring and upgrading to adapt to market changes and national industry policies. In recent years, the increasing factor prices and the pressure from resources and environment have driven forward another round of restructuring and updating in traditional industries. Below is an investigation into the driving force, models and policy environment for restructuring and upgrading traditional industries such as apparel, building materials, displays, computer numerical control (CNC) machine tools, textiles and machinery.

I. Increasing Factor Costs and Competition Pressure Jointly Drive Forward the Restructuring and Upgrading of Traditional Industries

The driving force and models of restructuring and upgrading vary in different industries due to their difference in competition environments and technical and economic characteristics.

1. Apparel, footwear & headwear industry: increasing factor costs drive forward the restructuring and upgrading of enterprises

This industry is typically labor- and export-intensive. It has lost the low-cost advantage and a significant portion of revenue due to a combination of factors including the increase in labor price, raw material price, water, electricity & gas prices, in financing and logistics costs, and the appreciation of renminbi. Enterprises engaged mainly in export business are under a heavier blow due to the lost some of the orders for export, and some foreign brands have begun to move their OEM (original equipment manufacturer) operations to low-cost regions and countries around. In response to market changes, some competitive enterprises have restructured themselves and launched technical reform. According to a survey on apparel enterprises in Jiangsu Province, the models of enterprise restructuring and upgrading include the following:

First, updating equipment to improve labor productivity, product quality and grade. For example, such apparel enterprises as Jiangsu-based Bosideng International Holdings Limited and Zibo-based Lutai Textile Co., Ltd. have increased the pattern varieties and the added value of products and greatly improved the work efficiency by updating the equipment. Shandong Ruyi Group developed the "high-efficiency and shortened-process embedding spinning technology" on its own, a breakthrough from the traditional spinning technology, reducing the consumption of raw materials yet increasing the added value of products.

Second, moving from low-end manufacturing to the high end of the industry value chain with the aim to increase the added value of products. Measures include increasing investment in R&D and design and building up brands and marketing channels of their own. Some branded enterprises have made efforts to develop e-commerce and outlets to reduce business costs.

Third, integrating domestic and foreign enterprises and factors of production with branded enterprises taking the lead, for the purpose of industrial restructuring. On the one hand, some branded enterprises have improved their production organization and reformed their business model, such as processing outsourcing, merging with and restructuring SMEs, or relocating plants to low-cost regions. On the other hand, some enterprises such as Bosideng have increased the export quota of their own branded goods.

Fourth, adjusting industrial distribution and developing strategic emerging industries. For example, some enterprises such as Wuxi-based Hongdou Group and Taicang-based Xiangtang Group have entered the fields of biotechnology and new energy, while some have stepped into the real estate industry, using profits from non-core business to support their business of apparel, footwear and headwear.

2. Building materials industry: energy-conservation and environmental-protection regulations as well as resource prices drive forward industrial restructuring and upgrading

The building materials industry is an energy-intensive industry with comparatively apparent economies of scale. With increasing pressure from the environment and energy conservation and emission reduction, the country has raised the standards on environmental protection, energy conservation and emission reduction and reinforced law enforcement, forcing enterprises to make technological innovation in energy conservation and emission reduction. Meanwhile, the drastic increase in raw material and energy prices drove enterprises to take the initiative to accelerate the transformation and upgrading to reduce energy consumption and costs.

Besides improving product quality, developing new products and extending the industrial chain, building materials enterprises focus mainly on updating their existing processes and equipment with the intention of saving energy and reducing energy consumption and emission. For example, through the National Development and Reform Commission's international cooperation program on energy conservation and emission reduction, Anhui Conch Cement Company Limited cooperated with Japanese Kawasaki Heavy Industries, Ltd. in developing waste heat power generation equipment, which has not only provided equipment for its internal technological transformation in terms of energy conservation and emission reduction and recycling, but led to the founding of a joint venture–Conch Kawasaki Equipment Manufacturing Co., Ltd. specialized in manufacturing waste heat power generation equipment and providing related turnkey engineering services1. Jiangsu Farun Group, a large private glass producer, has implemented waste heat power generation and desulphurization & de-dusting projects for its nine production lines–with a gross investment of RMB112 million–in collaboration with domestic colleges and universities, research institutes and environmental equipment manufacturers, leading to improved energy efficiency and less waste gas emission.

3. Display industry: the application of new technologies drives forward the upgrading of the manufacturing technology of the entire industry

The color TV manufacturing industry is one of the first Chinese industries with full market competition. From the 1980s to the mid-1990s, by introducing and absorbing advanced foreign technology, China built the complete "color TV set – color CRT – glass screen" industrial chain, becoming a global leading TV producer and exporter. In the early 21st century, the emergence of LCD technologies dealt a heavy blow on the Chinese color TV industry, which would be in the danger of being eliminated if no effort was made to catch up.

The basic feature of technological upgrading in the Chinese display industry is that most enterprises have replaced their old production lines with imported ones, rather than relying on their own research and development. There are mainly the following three models: The first is directly importing Japanese and Korean production lines through joint investment with such companies as Samsung, LG, AUO, CHIMEI and SHARP, and turn them into production capacity as soon as possible. The second is acquiring technologies through mergers and acquisitions, and developing their own technologies based on their own efforts. For example, Beijing-based BOE Technology Group Co., Ltd. built its first G-5 production line with display technologies it obtained by acquiring HYDIS, a subsidiary of Hyundai Corporation, and through constant assimilation and independent R&D, built a G-8.5 production line to add to its capacity for developing TFT-LCD products and building production lines. The third is carrying out independent R&D to develop core technologies and form production capacity. For example, in close collaboration with Tsinghua University, Beijing-based Visionox has developed key technologies for OLED materials, components and processes, successfully produced monochromatic, multicolored and colored PMOLED displays and colored AMOLED display devices, and built a PMOLED display production line in Kunshan, Suzhou city.

4. CNC machine tools industry: the market demand and government support promote technological upgrading and innovation

As a technology-intensive equipment manufacturing industry, the CNC machine tools industry involves multiple industries such as machinery and electronics. For a long period of time, the Chinese CNC machine tools industry has been troubled by the lack of core technologies, week supporting capacity, and the unbalanced product structure with excess of low-end products and shortage of high-end ones, and thus failed to meet the domestic demand. China relies on import for most of the large precise high-speed CNC machines and key functional units, but some developed countries have imposed restrictions on export to China of some precision CNC machines and related components. Over years, the CNC machine tools industry has remained a key area for China to concentrate its resources to catch up with the world level. The Outline of the National Plan for Medium- and Long-Term S&T Development includes the high-class CNC machine tools and fundamental manufacturing technologies into major S&T programs and provides key support to its development.

With the technological transformation of traditional industries, the emergence of strategic emerging industries, and the rapid development of the equipment manufacturing industry, the domestic demand on low-end CNC machines has dropped while that for medium and high-end products increased considerably. The industry is unable to meet the needs for the accelerated upgrading of the market demand structure. As this problem becomes more and more prominent, the CNC machine tools industry is in urgent need of restructuring and product upgrading.

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1Dai Jianjun: "Cement Industry Restructuring through Technological Innovation," Survey Report, the Development Research Center of the State Council, No. 123, 2010 and dated July 27, 2010.