Image by Rob Lambert

Blogi | 24.05.2020

China - Becoming the World’s Manufacturing Superpower

China’s Economic Rise: History and Trends

Before opening up to foreign trade and investment and implementing free-market reforms in 1979, China was amongst the poorest countries with gross domestic product (GDP) lower than half of the Asian average and lower than two thirds of the African average. After the economic reforms, China’s real GDP growth was 9.5% p.a in average through 2018, which was described by the World Bank as "the fastest sustained expansion by a major economy in history". 

China's GDP Annual Growth Rate 1990 - 2020

Key takeaways:

 

  • Was amongst the poorest countries before the 1979 economic reforms. Since opening up to foreign trade, China’s real annual gross domestic product (GDP) has grown 9.5% on average through 2018.

  • By becoming the world’s manufacturing hub, China has now become the world’s second largest economy by nominal GDP, the world’s largest economy on a purchasing power parity (PPP) basis. 

  • China has the most comprehensive product availability in the world. Along with the tech industry, China is also able to dominate in the electric, textile, furniture and bags and accessories industries. 

  • Labor costs have multiplied over the last decades in China, so has the quality. China’s producer price index (PPI) has stayed at a modest level despite the rise of wages. In fact, this year the PPI has gone back to the level it held in 1996, forecasting a further drop down in the future indicating China still holds competitiveness in manufacturing. 

  • Automation is offsetting labor cost increases. China’s low robot penetration brings opportunities to cut costs and to remain competitive in the face of steep labor cost increases. 

Such growth has enabled China to lift more people out of poverty than any other country and to double its GDP every eight years on average. The exponential growth over the past few decades has made China the world’s second largest economy by GDP (the world’s largest economy on PPP), attracting the most forein direct investments (FDI) and has made China the second largest FDI provider after the United States. 

 

China has achieved such an astonishing economic growth by becoming the world’s manufacturing hub, specialising in the labour-intensive, export-led production of cheap goods that enabled a gradual increase in product complexity. In a nutshell, its growth strategy was to assemble and sell cheap goods to the world. 

 

As China’s economy has reached the maturity stage, its real GDP growth has slowed significantly, from 14.2% in 2007 to 6.6% in 2018, and that growth is projected by the International Monetary Fund (IMF) to fall to 5.5% by 2024. In order to continue growth, China now has to be able to adopt new resources of economic growth, such as innovation. The Chinese government has acknowledged and acted upon the situation. They have made innovation a top priority in China’s economic planning through a number of high-profile initiatives, such as “Made in China 2025,” a plan announced in 2015 to upgrade and modernize China’s manufacturing in 10 key sectors through extensive government assistance in order to make China a major global player in these sectors.

Manufacturing in China

Nowadays there’s no country that can match China when it comes to product availability. Statista has described China as the world's manufacturing superpower. According to 2018 data published by the United Nations Statistics Division, the total value added by Chinese manufacturing sector amounted to nearly $4 trillion,  manufacturing accounted for approximately 30% of the country's total economic output.

Source: Statista / United Nations Statistics Division

Along with the tech industry, China is also able to dominate a number of the following categories:

  1. Electrical machinery: Made in China 2025’s goal is to upgrade China's Machinery industry to be capable of producing major machine goods using high-tech intensive Manufacturing.

  2. Clothing: There are about 100,000 garment producing factories in China distribution branded apparel.  

  3. Mobile parts:  China houses almost all of the world's leading auto-parts manufacturers and exports products at a higher production efficiency  thanks to advanced technology.

  4. Furniture & lightning:  China has been the world's largest exporter of furniture for years and many of the leading furniture designers produce their furniture in China. Chinese furniture designers have a unique engineering mentality that allows for their products to stay in good condition for many years.

  5. Cases, handbags & wallets:  Revenue in China’s bag and accessories segment amounts to $37,57 million and is predicted to steadily grow 14.5 % every year.

How to find manufacturers in China without local connection?

There are a plethora of manufacturers ready to produce anything you could think of, but due to the huge cultural differences and language barriers, it’s not always easy to find the perfect manufacturer. One of the biggest stumbling blocks in establishing manufacturing chains is finding a reliable manufacturer. Product recalls can be extremely expensive so having a trusted partner who audits and ensures the product quality for you is risk averse. If you are a risk taker, here are a few places you could start with.

 

Online sourcing platforms such as alibaba.com and made-in-china.com are good marketplace to start hunting manufactures. They provided a very comprehensive range of supplier and product lists. However, it requires some research and experience to tell apart dodgy suppliers and scams. 

 

Another way to find Chinese manufacturers is to attend local trade shows. It's a great place to meet manufacturers face-to-face, which can provide you with greater confidence and peace of mind than emailing back-and-forth with a faceless company overseas. Canton fair, the China Import and Export Fair is a trade expo designed to connect Chinese manufacturers and wholesalers with buyers and exporters, is a highly recommended trade fair to visit if you are planning to visit China. Although, keep in mind that most suppliers are at Canton Fair to sell their finished goods, not to find clients for bespoke manufacturing. 

 

When talking about manufacturing in China, Shenzhen, often referred to as the silicon valley of China, is a must mention. The city of Shenzhen is considered the epicentre of manufacturing in Asia due to the growing hub of highly accessible manufacturers and service providers. You can get almost anything made there within a short period of time with the infrastructure and technology no other places have. Shenzhen is also the only city in Mainland China that offers visa on arrival to foreign visitors and integrates the highly productive factories right next door in Guangzhou, China. 

The rising labor cost is a trade-off for higher product quality

As China has become one of the biggest economies in the world, labor costs have also gone up significantly in line with the GDP increase. This explosion of labor cost is often mentioned as a defining point in China’s overall economic direction and competitiveness, indicating that Chinese producer advantages have already peaked. One would assume that production costs are increasing due to the fast rising labor costs. Yet, China's Producer Price Index (PPI), which records the price of goods when they are sold by the country's factories, indicates otherwise. In fact, it is in the trend to continue decreasing. 

 

According to Trading Economic, China's producer prices declined 3.1 percent year-on-year in April 2020, following a 1.5 percent drop in the previous month and compared with market consensus of a 2.6 percent fall. The damage caused by the coronavirus outbreak has created a drag on demand, noticeable in the lower producer prices, commodity prices certainly account for the particularly drastic drops in recent months. 

 

While wages have multiplied over the last decades, the PPI has stayed at quite a modest level surprisingly. In fact, the PPI has gone down to the level it held in 1996, forecasting a further drop down in the future.  

 

This is a critical (and little noticed) indicator of China's economy, in the current business era when controlling and reducing costs is crucial for business leaders to maintain margins.

China's Producer Price Index: Industrial Products from Oct 1996 to Apr 2020

The rise of minimum salary in China is inevitable due to the market force. Higher wages isn’t necessarily a bad thing, unless rising labor costs are the deciding factor in your business. The drastic increases in labor cost represented below are certainly cutting the profit margin of those manufacturing for low-cost, large quantity, labor intensive items (such as mass market cotton t-shirts, other similar garments, sports shoes, and plush toys). For these companies moving to lower cost countries like Vietnam or Indonesia may be the right decision. 

Source: Statista 2020

Manufacturing labor costs per hour 2002-2019

Many reports overlook the impact of the rising wages on China’s competitiveness, we would say in reality it’s rather the opposite. The rising wages also means increased manufacturing quality and better efficiency. While one may pay more for production run, one gets the advantage of stronger infrastructure, better managed factories, and advanced machinery that improves your overall production process and supply chain.

Shipping Costs

In addition to wages, another cost to consider after production is shipping cost. Under FedEx international Economy rates, we’ve compared the shipping costs to send 1000 kg loaded goods from different emerging countries. We see the shipping costs don’t drastically differ among these emerging countries. The graph shows a standard rate, as a business, a better rate can be achieved through collaboration. Purchasing through an import partner can achieve cost advantage by combining orders from different companies to create economies of scale in shipping.

Shipping costs from selected countries to Finland

Automation is offsetting labor cost increases

Industrial automation through robotics—also known as robotisation—is seeing a new phase of expansion linked to the pursuit of productivity gains, improvements in the quality of finished products and the need to offset wage increases. China’s low robot penetration brings opportunities to cut costs and to remain competitive in the face of steep labor cost increases.

Projected robot penetration in major countries in 2025

Source: Statista 2020

How Oriental Nordic can help you?

Oriental Nordic is dedicated in helping Finnish / Nordic companies to establish production chains working with trusted manufacturers and to find a best deal without compromising on quality. 

 

We have many years experience in importing goods from China and our in-house adept experts in Finland and local experts in major cities in China will guarantee you cost effective results and  seamless experience.

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