GEARINGUP

As Trump calls on man­u­fac­tur­ers to re­turn to the US, what are the prospects for China's in­dus­trial strat­egy?

China Daily European Weekly - - Front Page - By AN­DREW MOODY an­drew­moody@chi­nadaily.com.cn

Where next for man­u­fac­tur­ing? The geo­graphic lo­ca­tion of fac­to­ries and pro­duc­tion has be­come one of the more hotly de­bated is­sues in re­cent months.

At an ex­ec­u­tive meet­ing of the Chi­nese State Coun­cil, chaired by Premier Li Ke­qiang on Dec 28, a guide­line was is­sued to en­cour­age more for­eign in­vest­ment in high-end man­u­fac­tur­ing in China.

This would un­der­pin the “Made in China 2025” strat­egy for the coun­try to be­come a global leader in such ar­eas as rail trans­port, ro­bot­ics, mo­tor­cy­cles and in­dus­trial de­sign within the next decade.

Mean­while, US Pres­i­dent Don­ald Trump has called upon US man­u­fac­tur­ers to re­turn their pro­duc­tion from China and else­where to the United States to cre­ate jobs there.

“You have, on the one hand, what he (US Pres­i­dent Don­ald Trump) wants to come back to the US and on the other hand, the re­al­ity of what can ac­tu­ally come back.” PAUL NI prin­ci­pal, Roland Berger

“One of the ad­van­tages of the Chi­nese mar­ket is that it is the fastest grow­ing, and in many cases the big­gest, mar­ket in the world.” PETER WIL­LIAMSON pro­fes­sor of in­ter­na­tional man­age­ment at Cam­bridge Univer­sity’s Judge Busi­ness School

“There are still lim­i­ta­tions as to what Chi­nese semi­con­duc­tor com­pa­nies can do.” ERIC THUN Peter Moores as­so­ciate pro­fes­sor in Chi­nese Busi­ness Stud­ies at Ox­ford Univer­sity’s Said Busi­ness School

“The big­gest im­pact on man­u­fac­tur­ing jobs in the US has not been off­shoring to Asia or China, but the ad­vance of tech­nol­ogy.” JEF­FREY TOW­SON pro­fes­sor of in­vest­ment at Pek­ing Univer­sity’s Guanghua School of Man­age­ment

Ford has al­ready can­celed plans for a $1.6 bil­lion plant in Mex­ico and will build one in the US in­stead.

Ar­guably, with la­bor costs (once the pri­mary driver for off­shoring) now a smaller com­po­nent of over­all pro­duc­tion costs be­cause of in­creased au­to­ma­tion, man­u­fac­tur­ing is be­com­ing in­creas­ingly mo­bile and can be lo­cated in de­vel­oped coun­tries with higher la­bor costs.

In Oc­to­ber, Fuyao, the Chi­nese au­to­glass maker, opened the world’s big­gest glass plant in Mo­raine, Ohio, where la­bor costs are eight times higher than in China.

It wants to get a larger slice of the US mar­ket and some be­lieve that this might be part of a trend of Chi­nese man­u­fac­tur­ers play­ing a role in Trump’s so-called jobs rev­o­lu­tion.

The Chi­nese gov­ern­ment wants its own com­pa­nies to in­vest in man­u­fac­tur­ing in China, partly to stem the flow of cap­i­tal out of the coun­try which has a weak­en­ing ef­fect on the coun­try’s cur­rency.

The State-Owned As­sets Su­per­vi­sion and Ad­min­is­tra­tion Com­mis­sion is­sued a no­tice in Jan­uary say­ing it was to mon­i­tor over­seas in­vest­ment by state-owned com­pa­nies in cer­tain sec­tors.

Peter Wil­liamson, pro­fes­sor of in­ter­na­tional man­age­ment at Cam­bridge Univer­sity’s Judge Busi­ness School, says China is aim­ing to build an ad­vanced high-end man­u­fac­tur­ing sec­tor which will be a core plat­form for the over­all econ­omy.

“It knows full well it can’t build a high-in­come econ­omy based on low-cost, la­bor-in­ten­sive man­u­fac­tur­ing,” he says

“It needs to build a more high­value in­dus­trial base, some of which it will be able to do it­self, but some of it will rely on in­vest­ment by for­eign com­pa­nies.”

Wil­liamson, a lead­ing ex­pert on Chi­nese in­no­va­tion, be­lieves China will have lit­tle dif­fi­culty at­tract­ing such in­vest­ment.

“One of the ad­van­tages of the Chi­nese mar­ket is that it is the fastest grow­ing, and in many cases the big­gest, mar­ket in the world. If you take a com­pany like Ap­ple, al­most a quar­ter of its prof­its and al­most all the growth in its vol­ume came from China.”

Eric Thun, the Peter Moores as­so­ciate pro­fes­sor in Chi­nese Busi­ness Stud­ies at Ox­ford Univer­sity’s Said Busi­ness School, says that de­spite progress there are still chal­lenges for China in up­grad­ing its in­dus­try.

He cites the semi con­duc­tor in­dus­try, which re­ceives large gov­ern­ment sub­si­dies but is still heav­ily re­liant on im­ported chips — in par­tic­u­lar from the US — for its high-end gad­gets.

“There are still lim­i­ta­tions as to what Chi­nese semi­con­duc­tor com­pa­nies can do,” says Thun.

The Amer­i­can aca­demic, who is an au­thor­ity on the China au­to­mo­tive sec­tor, says there have been chal­lenges in the past in open­ing up th­ese new sec­tors for in­vest­ment.

“Some­times it has worked and some­times it hasn’t. There

have been th­ese con­cerns in the in­ter­na­tional busi­ness com­mu­nity over the past cou­ple of years about un­cer­tainty,” he says.

“There is frus­tra­tion that the gov­ern­ment wants to loosen things up for in­vest­ment in some ar­eas but makes it dif­fi­cult for ev­ery­one else in others.”

Whether the new US ad­min­is­tra­tion suc­ceeds in per­suad­ing more of its na­tive com­pa­nies to base their op­er­a­tions back in their home­land re­mains to be seen.

There is, how­ever, al­ready an es­tab­lished trend for com­pa­nies mov­ing some of their ac­tiv­i­ties back.

Ac­cord­ing to re­search by the non-profit or­ga­ni­za­tion Reshoring Ini­tia­tive, some 249,000 jobs were moved back in the five years up to the end of 2015. This was more than the 220,000 that left be­tween 2000 to 2003, seen as the peak pe­riod for off­shoring glob­ally.

He Weiwen, vice-pres­i­dent and se­nior fel­low of the Cen­ter for China and Glob­al­iza­tion, China’s lead­ing in­de­pen­dent think tank, be­lieves there is a limit on what can be moved back.

He points to US Depart­ment of Com­merce sta­tis­tics, which show that the value added per em­ployee for US multi­na­tional over­seas op­er­a­tions is 29 per­cent higher than that within the US.

“The only way to bridge that would be for Trump to cut the cor­po­ra­tion tax rate from 35 to 20 per­cent and then im­pose a 10 per­cent tar­iff on goods of th­ese com­pa­nies com­ing back into the US. That would still not ac­count for the higher medi­care and le­gal costs in­volved in em­ploy­ing peo­ple in the US,” he says.

“All this, how­ever, would be a ma­jor vi­o­la­tion of World Trade Or­ga­ni­za­tion rules.”

He, a for­mer eco­nomic and com­mer­cial coun­selor at the Chi­nese Con­sulate Gen­eral in New York and San Fran­cisco, be­lieves it will be a chal­lenge to get US com­pa­nies to in­vest more in Chi­nese man­u­fac­tur­ing.

“In my ex­changes with Amer­i­can busi­nesses in China, they are not con­cerned with man­u­fac­tur­ing, but get­ting more ac­cess to ser­vices, not only fi­nan­cial ser­vices like bank­ing and in­sur­ance but also le­gal con­sult­ing, leisure and med­i­cal ser­vices.”

Wil­liamson at Cam­bridge, who was speak­ing from Switzer­land af­ter at­tend­ing the Davos fo­rum, says the prob­lem with some of the cur­rent de­bate is that it is couched in terms of man­u­fac­tur­ing still be­ing ver­ti­cally in­te­grated and com­pa­nies do­ing ev­ery­thing in one lo­ca­tion.

He says that model be­gan to die out in the 1990s — driven to a large de­gree by China — and now the whole pro­duc­tion sys­tem is built on global sup­ply chains.

“When Don­ald Trump talks about bring­ing man­u­fac­tur­ing back, what ex­actly is he talk­ing about? The real ques­tion is what bits of this com­plex global sup­ply chain can be moved and the eco­nom­ics are go­ing to be dif­fer­ent de­pend­ing on which part of the chain you are tak­ing about be­cause some bits are cap­i­tal­in­ten­sive and some la­bor-in­ten­sive.”

“It would be quite some para­dox if the bit that gets moved back to the US is the fi­nal as­sem­bly op­er­a­tion.”

Fuyao was not the first Chi­nese man­u­fac­turer to set up a pro­duc­tion fa­cil­ity in the US.

Wanx­i­ang Group, based in Hangzhou, has made a series of ac­qui­si­tions in the US, in­clud­ing buy­ing bank­rupt A123 Sys­tems, a bat­tery maker, for $256 mil­lion.

Ed­ward Tse, chair­man and founder of Gao Feng Ad­vi­sory, the man­age­ment con­sul­tancy, says a pat­tern is emerg­ing of Chi­nese com­pa­nies do­ing rel­a­tively low-end man­u­fac­tur­ing in the US and buy­ing up high-end fa­cil­i­ties in Europe.

“We have had a lot of clients come to us look­ing to make ac­qui­si­tions in the US, par­tic­u­larly in au­to­mo­tive parts, con­sumer re­tail and ar­eas like build­ing ma­te­ri­als,” he says.

“When it comes to ar­eas like high­end man­u­fac­tur­ing, they are look­ing to make ac­qui­si­tions in Ger­many, the UK and places like Switzer­land and Aus­tria.”

Tse, au­thor of TheChi­naS­trat­egy, says this sep­a­ra­tion has emerged mainly be­cause of US re­sis­tance to Chi­nese tech­nol­ogy com­pa­nies like telecom­mu­ni­ca­tions gi­ant Huawei mak­ing in­vest­ments in the US.

“What you are see­ing in­stead is Chi­nese money in start-up in­vest­ments in Sil­i­con Val­ley, Seattle and on the east coast around Boston and Cam­bridge. They are of­ten part Amer­i­can and part Chi­nese ven­tures and be­cause they are small, they are sub­ject to much less scru­tiny.”

Jef­frey Tow­son, pro­fes­sor of in­vest­ment at Pek­ing Univer­sity’s Guanghua School of Man­age­ment, says even if there is a ma­jor wave of Chi­nese man­u­fac­tur­ing in­vest­ments in the Rust Belt or ma­jor reshoring by US com­pa­nies, it is un­likely to cre­ate the jobs that Trump craves.

“The big­gest im­pact on man­u­fac­tur­ing jobs in the US has not been off­shoring to Asia or China but the ad­vance of tech­nol­ogy,” he says.

“It is wip­ing out jobs far faster than off­shoring ever did. It is go­ing to be an in­creas­ing phe­nom­e­non and is not a trend that will re­verse it­self.”

Thun at Said Busi­ness School be­lieves China is fol­low­ing the right strat­egy in try­ing to up­grade its man­u­fac­tur­ing by part­ner­ing with for­eign firms.

“This has so far in­volved ac­quir­ing Ger­man firms. There is some con­cern in Ger­many about los­ing their crown jew­els, par­tic­u­larly the fam­ily-owned mit­tel­stadt (small to medium-sized) com­pa­nies which are of­ten will­ing to sell out.”

“For China to be suc­cess­ful in high­end man­u­fac­tur­ing, they need to ac­quire some of th­ese Ger­man in­sti­tu­tional and ed­u­ca­tional struc­tures that pro­mote this type of pre­ci­sion engi­neer­ing. If you can’t beat them at their own game, you can al­ways ac­quire them,” he says.

“In my ex­changes with Amer­i­can busi­nesses in China, they are not con­cerned with man­u­fac­tur­ing, but get­ting more ac­cess to ser­vices.” HE WEIWEN vice-pres­i­dent and se­nior fel­low of the Cen­ter for China and Glob­al­iza­tion

LI MIN / CHINA DAILY

PHOTOS BY NICK J.B. MOORE / FOR CHINA DAILY

FENG YONGBIN / CHINA DAILY

ZOU HONG / CHINA DAILY

ED­WARD TSE, chair­man and founder of Gao Feng Ad­vi­sory.

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