Where does confidence in China's manufacturing come from?

By Ning Nanshan Source:Global Times Published: 2018/5/21 22:08:40

Illustration: Luo Xuan/GT

After the ZTE incident, many people in China have begun to question the level of the nation's manufacturing. Some of these people formerly thought highly of it. How can we see the position of China's manufacturing in the world objectively?

In terms of manufacturing added value, China is already first in the world. China's per capita manufacturing added value also significantly exceeds that of major developing countries.

Compared with developed manufacturing powerhouses, China lacks advanced manufacturing capabilities. In 2015, although the added value of China's manufacturing industry accounted for 26.7 percent of the world's total, it was mainly in the low-end segment, with only some high-end manufacturing.

Meanwhile, the added value of manufacturing in the US, Japan and Germany accounted for 30.5 percent of the total, but it was mainly concentrated in the high-end manufacturing segment.

Integrated circuits and vehicles are the two most commonly imported industrial products in China. In the field of integrated circuits, in 2017 China's domestically designed chips accounted for only 7.8 percent of the global market.

In the automotive sector, which is the largest in the industry, in 2017, China's own-brand passenger cars accounted for only about 14 percent of the global market.

Regarding construction machinery, China's nine largest machinery engineering companies accounted for only 13.9 percent of the global market in 2017, which was not as much as that of US-based Caterpillar.

However, we can still have full confidence in the future of Chinese manufacturing, for several reasons.

First, China can carry out large-scale concentrated manufacturing. Due to the advantages of mass production capacity and the world's largest single market, the low-end market share can be replicated at the high end of the industry. This assumes that technological breakthroughs are achieved, costs are cut and mass production is carried out.

Second, China has continuously increased investment in research and development (R&D). Last year, China's R&D expenditure totaled 1.75 trillion yuan ($274.37 billion), up 11.6 percent year-on-year, far more than Japan and Germany and second to the US.

Third, China's manufacturing strength has fed through to the entire industrial chain. wTake smartphones as an example: China's global share of smartphones exceeded 50 percent in 2017. Owing to the advantages of communication, service and cooperation, the proportion of domestic mobile phone component makers in China's mobile phone brands is significantly higher than for Apple, Samsung and other international brands. This has driven the rise of domestic smartphone supply chains.

Moreover, because of the rise of the global share of Chinese-branded smartphones, the global market is further concentrated toward China, attracting more upstream companies in the industry chain to set up factories in China.

The gradual formation and improvement of the industrial chain ecology will greatly enhance China's ability to affect high-end manufacturing.

Most importantly, the realization of high-end manufacturing in China requires government-industry coordination. In two areas, the ability of companies to solve problems independently is weak.

One area is where massive and long-term capital investment is required, and technical research and development are extremely difficult. Such areas could be display panels and integrated circuit manufacturing, which often cost billions of dollars. However, these areas often have a vast market and it's easy for them to attract government attention.

The other area involves small markets that have high entry barriers. Because the input-output ratio is not cost-effective, enterprises will not invest in such areas. These areas are also easily overlooked due to their small size. However, their importance can't be ignored. If an embargo similar to the ZTE incident occurs, it may shock the entire industry chain. A typical example involves vacuum evaporation machines, which are core equipment for OLED display panel production. Even the world's largest manufacturers can only produce about 10 of these machines a year, and because of the R&D difficulties and high costs, companies are not always willing to invest in these products.

These areas are like blind spots on the high-end manufacturing floor. They need attention both from the government and companies so that Chinese manufacturing can become more powerful in advanced areas.

The author is a Shenzhen-based economics commentator. bizopinion@globaltimes.com.cn

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