These days it's not hard to find news predicting the end of China's manufacturing growth, marking the recent slowdown of China’s manufacturing and export industry, with reports showing that China manufacturing activity fell to a 32 month low in November 2011, slowed down by a slump in the global economy. Whilst the key the China’s growth in the past has been the growth of the exporting industry, concern has been expressed about the sustainability of such growth. However, it seems that recently China has been somewhat more welcoming of the change in pace, using it to launch itself in a new direction for the export and manufacturing industry of China.
From ‘Made in China’ to ‘Designed in China’
In early 2011 upon the announcement of the 12th 5 year plan, Li Yizhong, minister of industry and information technology announced, and China made it known, that they would no longer be focusing on low value manufacturing and export, and that they would instead be focusing on investment into research and development. The ambition is to ultimately become known, not as a small goods manufacturer, but rather, as a high value exporter.
The goal is about changing the international image that is held of Chinese suppliers to that of high quality, rather than low quality, low value added goods.
In the past China’s growth has been mainly driven by exports and western world China sourcing of low-end manufacturing good, a model that is not sustainable for growth over the long term. China has increased R&D investment by 10% each year for the past ten years, sustaining this rapid R&D growth even through the recession starting in 2008. The predicted investment figure for 2011 is an estimated US $154 billion, which would place China as the worlds second largest research and development investor, surpassed only by the US.
The Investment- How is China Spending its Money
The focus areas for the new research and development investment were identified as core electronic devices, integrated circuits, life sciences, space, marine, earth sciences and nanotechnology. In general, the overall focus of the wave of new investment will be on what has been referred to as “Next-Generation IT”.
The liberalization of the asian economy accompanied by the educated and technology savvy youth is said to be fueling the new wave of investment. China’s research and development investment is now at 1.6% of the GDP, which has grown from 0.6% in 1995 and is set to reach 2.2% within the next 5 years.
On the global stage China is at the forefront of R&D investment, with investment increasing by 10% each successive year. However China’s industrial value added rate stands at only 26.5%, which is below par when compared to the global average of 35-40%. The restructuring of the economy and continued R&D investment by the government hopes to see the economy and the country become more than just a low value exporter. The government and the country wants the world to see Chinese manufacturers and Chinese suppliers as quality choices, rather than just low cost ones.
The five-year plan for increased R&D expenditure includes investment into education and human resources as well as the technology part of science and technology investment, this rounded approach will ensure stability for the evolution as both the people and the resources will be better educated and funded to take on the challenges and opportunities in the future. The move has been accompanied by legal reforms and better protection for intellectual property rights, aiming for an overall improvement in market penetration and predicted improvement in china sourcing for high value goods from china.
China is already a central location for many international research and development centers, developing the synergy between R&D, manufacturing and local market opportunities in an emerging economy as powerful as China's. For example, the US multi-national Applied Materials has built it’s new private solar research and development facility (the worlds largest and most advanced) in China. Patterns are emerging that reveal that more companies are following this path, with major life science firms like Eli Lilly, Sanofi-Aventis and Merck having established significant research and development facilities in China. Technology orientated research is also moving to China as major corporations and tech leaders such as GE, Intel, Dell and IBM all investing heavily in the region. These moves indicate at the ability of China to be a high value producer.
The move from low value added manufacturing to high value added is a logical move as it follows the growth and transformation of the economy itself. China is now forming quality standards in unison with the US, and allowing itself to become an even larger player in the global market. The Chinese government also announced with its 12th 5 year plan, that they be further welcoming foreign expertise for the implementation of new technologies and not just for FDI.
The Chinese manufacturing industry has thus far displayed the capabilities to produce high-value added exports most recently in industries such as aviation and manufacturing and construction equipment, and with the new research and development investments, China will soon be enjoying the people and the expertise along side the technology to ensure the success of the new venture. All of these factors together seem to point that though many of China's core manufacturing sectors may be experiencing a slowdown, the country is in the midst of a shift that could promise to continue China's dominance in manufacturing despite rising costs.
- Bonnie Roche- CPG Marketing Intern