Low-cost manufacturing played a huge role in making China the second largest economy, and the modern Chinese economy was built based on this competitive advantage in manufacturing. By Farah Nazurah
China has shifted from a centrally-planned to a market-based economy and has experienced rapid economic and social development over the past few decades. Its gross domestic product growth (GDP) has averaged nearly 10 percent a year—the fastest sustained expansion by a major economy in history—according to financial institution The World Bank.
The country’s manufacturing sector is expected to continue expanding in 2018 despite the slight decline of its purchasing managers’ index in December 2017, with a reading of 51.6, dipping from 51.8 the prior month, according to the National Bureau of Statistics in China.
Ambitious Belt And Road Initiative
Chinese President Xi Jinping’s Belt and Road Initiative (BRI) is an immensely ambitious development campaign through which the country aims to boost trade and stimulate economic growth across Asia and beyond.
The initiative will connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network, using roads, ports, railway tracks, pipelines, airports, transnational electric grids and even fibre optic lines. There are plans for pipelines and a port in Pakistan, bridges in Bangladesh and railways to Russia—all with the aim of creating what China calls a “modern Silk Road” trading route.
The plan at one point included 65 countries, which together accounted for one-third of global GDP and 60 percent of the world’s population, according to market intelligence company Oxford Economics. China plans to invest US$150 billion into the projects each year. In a report by financial services provider Fitch Ratings, it was highlighted that an extraordinary US$900 billion in projects were planned or are currently underway.
Impact Of The BRI On The Steel Industry
With BRI proposals including investments for power plants, new and improved ports, airports, and thousands of kilometres of new road and rail links, the initiative will have a major impact on regional and global manufacturers.
It is anticipated that the building of the route alone will result in an increase in demand for steel produced in China annually. The Chinese government is urging its steelmakers to invest in plants located along the routes in Southeast Asia, West Asia, and Africa, for the ease of transportation in bringing in raw materials and maintaining costs. Investors in the project are seeking out iron-ore mines and planning to build integrated steel mills on these routes. Steelmakers in China are expecting a move of almost 20 million tons of low-cost steel capacity to be transported to Southeast Asia, West Asia, and Africa by 2023.
For steelmakers, there is a stream of opportunities that arise due to the migration of steel production throughout the region. There have already been a number of new mills and upgrades within China’s largest steelmaking groups over the past several years; and more are expected over the coming years. As existing equipment is moved from coastal China along the route, there will be a need for new castings, forgings, and hydraulics to keep production running efficiently.
Moving Into Higher Value Manufacturing
Manufacturing goods in China is now only four percent cheaper than in the United States, according to market intelligence company Oxford Economics. This is due to increases in the average manufacturing wages by 80 percent annually since 2010. As a result of this, manufacturing in China has to move into higher value manufacturing, backed by investments worth billions by the Chinese government.
Manufacturers in China are aiming to capture the opportunity presented by the expanding affluence in the country. And more businesses in the country are moving up into segments where profits flow from high-value product features that command higher selling prices, with the industry rapidly moving into high technology manufacturing.
As an example, Chinese automotive manufacturer Great Wall Motors Company has increased research and development spending to develop premium sport-utility vehicle models that compete with international brands in the Chinese high-end market. Additionally, the automaker is sourcing more components from domestic suppliers, thus decreasing its reliance on imported parts.
China’s Future Manufacturing: Robotics And Automation
According to the International Federation of Robots, China is expected to contribute to 40 percent of total worldwide robotic sales by 2019, an increase from 27 percent in 2015. The country currently holds the largest market share of the robotic global market, at a net worth of US$30 billion, and is currently ranked the first in sales for industrial robots. This is followed by South Korea, Japan and the US.
China is turning to robotics and smart factory technologies to boost competitiveness as it aims to close the gap in manufacturing capabilities with Japan and German. And industrial robot sales in China in 2017 are estimated to reach US$4.2 billion, according to the Chinese Institute of Electronics.
“In the future, new business models will emerge,” said Hongtao Guo, director, industrial application research, Huawei Wireless X Labs, China. “Manufacturers will use automation robots to replace workers.”
New generations of industrial robots are more intelligent, agile and can collaborate with other robots and humans, thanks to advancing artificial intelligence and machine learning technologies. And equipment costs have been decreasing after hitting a peak in 2013, thus lowering the entry barrier for factories seeking to automate or update existing robot operations.
Robots are not China’s only target. The country is also investing heavily into accompanying technology like machine learning and artificial intelligence. All of this is to construct a highly developed automated workforce. More companies are looking towards automation to move up the manufacturing chain and maintain their production rates in the face of the country’s declining labour force.
In the automotive industry, the reliance on robots is driven partly by cost and automation is a competitive necessity. Robots perform tasks like welding in exactly the same way every time, improving quality control. As automakers compete for customers’ attention, they have to utilise the latest technologies, especially in research and development.
The challenge now is for businesses to keep a competitive edge in the changing manufacturing landscape.