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Domestic and International Environmental Changes in the Development of Manufacturing Industry in China


By Li Wei


General Secretary Xi Jinping made a speech at the opening ceremony of the symposium on studying and implementing the spirit of the Fifth Plenary Session of the 18th CPC Central Committee for provincial leading cadres. He stressed that the focus of supply-side structural reform is to liberate and develop social productive forces, promote the structural adjustment by reform, reduce the invalid and low-end supply, increase effective and high-end supply, strengthen the adaptability and flexibility of supply structure to demand changes, and improve the total factor productivity. This thesis has a special significance for China, as China has a huge manufacturing industry which is urgently to be transformed.

The domestic and international environmental changes in the development of manufacturing industry in China are as follows.

In recent years, the domestic and international environment for the development of manufacturing industry in China has been witnessing drastic changes.

Viewing from domestic environment, China's economic development has entered the period of new normal with the following characteristics. First, the develop speed shifts from a high growth to a mid-to-high growth. Second, the industrial structure has been optimized, the tertiary industry and consumer demand have gradually become the main part, the gap between urban and rural areas are gradually narrowed, and the development results will benefit more people. Third, the driving forces for development have transformed from factor-driven to innovation-driven.

The new normal of China's economy is in accordance with the general development rule of pursuant economies and later developers. The process of industrialization and urbanization in has not yet been completed, and China is moving from an upper and middle-level income country to an upper-level income country. The economic new normal is the direct embodiment of the late stage of industrialization, and the inevitable stage for China’s economy to evolve into a new mode with a more advanced form, a more optimized division of labor, and more reasonable structure.

The core of economic new normal is to realize the transformation of driving forces. Under the new normal, the key whether the economic development can smoothly step into a higher stage and a higher level is determined by the smooth replacement between the new and old driving forces. After more than 30 years’ rapid development, the basic impetus supporting the economic growth and by relying on cheap and high-quality labor in the past has fundamentally changed. Under the new conditions, the supply and demand have changed obviously, and the constraint conditions are different, which mean that the original growth momentum must be adjusted, so as to realize the transition of economic development mode from scale-and-speed-based extensive growth to quality-and- efficiency-based intensive growth, and the transition of economic development impetus from mainly relying on the large-scale elements input to innovation-driven growth.

Viewing from global perspective, the pattern of the manufacturing industry has changed profoundly. In recent years, with the profound changes in the international economic, trade and investment environment, manufacturing industry is becoming an arena that big powers have a finger in the international division of labor, fight for the industrial chain and the high-end value chain. On the one hand, after the international financial crisis, developed countries in Europe and the United States have launched the "re-industrialization" strategy, trying to seize the commanding point of the international competition. On the other hand, emerging economies such as India, Vietnam and other countries, also use their relatively cheap labor force to quickly promote the process of industrialization.

In addition, a new round of technological revolution and industrial revolution also has a profound impact on the global division of labor.

In this context, China needs to find a new way of development. To form a new impetus for China's economic growth and create new advantages in international competition, the key, the difficulty and the way out all lie in the manufacturing sector. It can be said that promoting the development and upgrading of manufacturing industry through adjustment has vital significance to the enhancement of comprehensive national strength, national security, the construction of a strong power, and the fulfillment of the two centenary goals (i.e. to double the 2010 GDP and per-capita income and complete the building of a moderately prosperous society by 2020 when the Communist Party of China celebrates its centenary; and to build China into a prosperous, strong, democratic, culturally advanced and harmonious modern socialist country and realize the great renewal of the Chinese nation by the middle of the century when the People’s Republic of China celebrates its centenary – translator’s notes)

The economic transformation and upgrading contain a huge and new opportunity for the development.

As the world's largest manufacturing industry in the world, some of China's manufacturing sectors at present have witnessed decelerated growth with inadequate driving forces.

On the one hand, affected by the decline of labor dividend, the increase of production factors cost, and the intensified resource and environmental constraints, low-end manufacturing industries, such as resource-intensive, labor-intensive, high energy consuming and high pollution industries, lack of increase impetus, which have led to the overall decline of China’s industrial growth.

On the other hand, with the slowdown of economic growth and global industrial transformation, the risks and contradictions accumulated by China's rapid economic growth over the past 30 years have gradually loomed up. For example, most of the manufacturing sectors suffer from serious overcapacity. To resolve overcapacity, it is inevitable to go through asset restructuring and structural adjustment, which will in turn lead to some business failures, job transference and even unemployment.

Although the growth has slowed down, there is much space for enhancing growth quality and efficiency. Viewing from the source structure of total factor productivity, manufacturing industry is higher than that of agriculture and service industry; investment goods manufacturing industry is higher than that of other manufacturing industry; productive service is higher than that of other services; and trade sector is higher than the non-tradable sector. As the efficiency gap between different departments is greater than the average level of developed countries, China has a relatively large room for industrial upgrading and productivity increasing.

It can be said that China's manufacturing industry still boast a huge opportunity for development in structural adjustment, transformation and upgrading. Though economic development has entered a new normal, China's development still enjoys strategic opportunities, and what are changed are the connotations and conditions in the important period of strategic opportunities; the fundamental of China’s economic development is generally sound, and what are changed are the economic development mode and economic structure. There are inevitable pains with the economic restructuring, but the success of the adjustment will enhance the quality of assets, improve the industrial structure, increase the global competitiveness, which confirm the saying that “if you want to see the rainbow, it is only after the storm”.

The advantages behind the problems and challenges cannot be ignored.

At present, although China is a manufacturing power, the industry is big but not strong; independent innovation ability is insufficient; the basic manufacturing level is backward; low-level redundant construction and other issues are still outstanding.

It should be admitted that the most prominent problem is that China’s manufacturing industry is in the mid-to-low-end of the world manufacturing industry chain, many of the manufactured goods are products with low-technology, low-added value, and low price, which are in the dry tree of the international economic and trade benefits distribution. Viewing from the products competitiveness, some technical equipment and products with high technical content and high value-added desiderated in the domestic market are fully dependent on imports for a long time. As the main research and development entities, the large enterprises or large enterprise groups lag behind foreign advanced level in terms of research and development capabilities and their input in research and development is far behind those developed countries in Europe and the United States. Some Chinese enterprises such as HUAWEI, Lenovo and ZTE have made adequate input in research and development and have strong innovative ability, but the overall research and development input of China's manufacturing enterprises is insufficient, accounting for only about 1% of total sales. The backward technology and insufficient innovation ability have become a serious obstacle hindering the industrial structure adjustment and industrial upgrading.

At the same time, although Chinese manufacturing industry is facing many challenges, it is still in the important period with strategic opportunities. Specifically, we have at least the following major advantages:

First, China has the world's largest consumer market. Despite the slowdown of China's economic growth, the economic increment reached nearly $800 billion in 2014. According to the World Bank, such an increase is more than the total amount of GDP of Turkey, a mid-level developed country in 2014; China's import volume each year is about $2 trillion, approximately equivalent to the total amount of the world's tenth largest economy; China has become the world's second largest exporter of outbound tourism. In 2014, Chinese residents made more than 100 million overseas visits, and their overseas consumption amounted to $164.8 billion. This shows that as long as the manufacturing enterprises can develop safe and high-quality products, China has adequate market potential for domestic consumption.

Second, the quality of workers is continuously improved. In China, there are more than 7 million college and university graduates each year, and more than 2 million people receive on-the-job training in the TV University and adult colleges. The quality advantage of human capital will largely offset the decline of demographic dividend. Moreover, a considerable number of people are able to meet the standards of the multinational companies, which is an important reason why more and more multinational companies choose to establish R&D headquarters in China. The high quality talent team has become a new advantage of China's manufacturing enterprises to participate in the international competition.

Third, China boasts the world's most comprehensive industrial system. According to the statistics made by IBM, China is the only country that has all industrial branches in the UN industrial categories. China has 39 large industrial categories, 191 medium categories, and 525 small categories, with the world's most complete industrial system and industrial supporting capacity. This is a precious, rare and solid foundation to build China into a strong manufacturing power.

Fourth, China also has a strong advantage in the development of emerging markets. Many emerging economies are accelerating industrialization, informatization and urbanization, in which the infrastructure construction and the development of industrial parks are the major projects. China has accumulated a wealth of experience in these areas, and has formed a complete industrial system and a strong industrial supporting capacity. As China is at the same stage of development with other emerging economies, their consumption and technology preference are similar with each other, whereas China has stronger competitiveness in the international productivity cooperation and emerging markets expansion, which is conducive to China's industrial structure adjustment, transformation and upgrading in a smooth and stable manner.

Fifth, the manufacturing industry has been highly valued by the Chinese government with a good policy environment. With more development opportunities provided for the manufacturing industry, the tertiary industry will also receive new opportunities for development and offer good service for the manufacturing industry.

Major strategic and policy arrangements are necessary for economic transformation.

Transformation and upgrading is the only way to enhance the competitiveness of China's manufacturing industry, to prevent the industrial hollowing-out, and to get beyond the middle-income trap. In the long run, China needs to accelerate the transformation and upgrading of manufacturing industry to keep its competitive advantage in the world in the future for a long period of time.

To promote the structural transformation and upgrading, we must make clear the target and direction of structural adjustment. It is held that the goal and direction of structure adjustment is to establish more harmonious structural relations, which could make the relationship between domestic demand and foreign demand, investment and consumption become more coordinated, the high-end manufacturing, modern service industries and traditional industries development become more coordinated, the development of the real economy and virtual economy become more harmonious, to make the economic growth more dependent on the technological progress and the improvement of the labor quality, and to ensure China’s economy could evolve into a stage with more advanced form, more optimized division, and more reasonable structure. For a long period of time to come, the manufacturing industry will take the realization of smart technology as an important strategic target for the transformation and upgrading of China’s industry, and at the same time, we should also improve automation and informatization as well as the ability of Chinese manufacturing industry in terms of technical standards, and quality control.

Achieving these goals will be a difficult task. Under the new normal, we have to deal simultaneously with the slowdown in economic growth, making difficult structural adjustments, and absorbing the effects of previous economic stimulus policies. We are facing the tasks of the transformation of growth mode, structure adjustment and steady growth. We must have a good grasp of the relationship and balance among the three tasks, not only to achieve the rapid economic growth in structural adjustment, but also to achieve structural adjustment by maintaining a steady economic growth. More importantly, we should cultivate new driving forces for economic development through accelerating scientific and technological progress and innovation-driven development; construct the institutional mechanism adapted to the objectives and tasks of structural adjustment by deepening the comprehensive reform; realize the optimized allocation of resources in a wider range of space by accelerating a new round of opening-up; promote China’s status in the international division of labor; and enhance the realization of the manufacturing and economic development to a mid-to-high level.

To speed up the construction of manufacturing power is not only the historical mission of the manufacturing industry, but also a strategic choice in light of China's national conditions. To realize the transition from a big manufacturing power to a strong manufacturing power, it is necessary to implement the following major strategies and policies.

First, we need to strengthen the traditional industries, and enhance the core competitiveness. Chinese manufacturing industry ranks the first in the world in terms of production scale and in the future Chinese manufacturing industry must not evolve from big to strong so as to bolster China’s economy. How to understand this "strong"? What is the standard of building China into a strong manufacturing power? The important bench is "three changes", namely the change from Chinese manufacturing to Chinese creation, the change from Chinese speed to Chinese quality, and the change from Chinese products to Chinese brands. Specifically, we need to promote the development of traditional industry from the processing and manufacturing sectors onto a higher level of development through research and development, design, patent, financing, investment, brand building, business model and logistics system; we need to master the core technology, promote the manufacturing industry onto the high-end industrial chain, and improve the processing trade to evolve from low-added value to high-added value. When China holds the position in the mid-to-high-end value chain and at the core of the industry chain, the core competitiveness of enterprises will really become strong, and the survival manufacturing industry will also become strong. By then can we say that China is a real manufacturing power.

Second, we need to form a number of manufacturing enterprises with international influence and a large number of professional production enterprises with international competitive advantage as well as professional, refined, special, and new production lines. In 2014, among the world's ten most profitable companies, China has four companies in the list, all of which are state-owned commercial banks, and none from industrial enterprise. Now China only has a limited number of multinational companies like HUAWEI, ZTE, Haier and Lenovo. If we can form a large number of enterprises with core competitiveness and strong international influence, Chinese economic transformation can be said to be fulfilled.

Third, we need to create a law-based and fair competitive environment and build a credibility system for the development and transformation of the manufacturing industry. In the future, manufacturing enterprises could no longer rely on imitation to survive. In the new development stage, the enterprises must improve innovation system and market environment, strengthen the protection of intellectual property rights, promote the level of knowledge innovation protection, and improve the policy environment for the innovation and development of the enterprises to form competitiveness. We need to lower the threshold for market access, and encourage social capital to make investment in the manufacturing sector. The government needs to provide supporting policies and policy guidance, and encourage enterprises to make development through innovation in the manufacturing industry. Only when the government really let the market play a decisive role in the allocation of resources, allow the enterprise become the main entity of market innovation, provide more support and make less intervention can China’s economy burst out strong vitality.

Note: Li Wei, President of DRC, Deputy Secretary of the Leading Party Members’ Group and research fellow.