China’s Manufacturing Industry Amid the China-U.S. Trade Conflict (2/4)
A Summary of the China-U.S. Trade War and the Impact to China’s Manufacturing, Technology and Service Industry (2/4)
First let’s talk about manufacturing. China’s manufacturing industry can be generalized into a split between three stages, first of learning, second of excelling, and third of innovating.
In December 1978, Deng began the Open Door Policy in China. Deng knew that at the very beginning of China’s opening up process, China’s main goal was just to learn. China had been isolated for too long and to catch back up, they would need to learn from whoever was willing to teach them. Therefore, the first set of foreign companies who came into China under the “3+1” policy were asked to build all of the facilities and factories in China on their own. In return, after the initial investment, China would charge these foreign companies a very low, nearly nonexistent incremental cost for each item that is produced. In the 1990’s, China underwent a huge transformation both in its own working capacity and the country’s perception by the outside world. Foreign companies started to not only outsource processing jobs to China but also manufacturing jobs. As China had one of the cheapest labor forces, some of the highest quality workers and a sufficiently developed infrastructure system, China took off as the go to destination to produce and manufacture goods. Products became known for the attributes of “Made in China”. As scale increased, efficiency also increased with further centralization of manufacturing facilities. No other country could compete against China in producing mass goods. Yet despite all of the growth, the term “Made in China” had a negative connotation. It was a symbol of mass, cheap and low quality manufactured goods. For Chinese manufacturers, it was a competition on price, a race of who could cut the cost of production lower, instead of who could serve their clients better. Additionally, companies began to accuse Chinese manufactures of learning the process of how to make the products, and then stealing that knowledge to make counterfeits. In 2009, for example, 90% of all counterfeit goods seized originated from China. This driver was one of the many sparks that increased tension between China and the US, which eventually led to the current trade war.
In recent years, the trade tensions have significantly transformed the manufacturing industry. With the rising appreciation of the Chinese currency, an increase in labor cost and the most recent tariffs imposed by President Trump, manufactures were forced to push the cost of production higher and higher. Purchasers are beginning to consider other options, moving their factories to South East Asian, South America or wherever is the cheapest. These circumstances beyond the control of Chinese manufacturers has given them no choice but to gradually transition into a new stage of innovation. When talking to the representative of Delta Factory, he mentioned that as their margins were being cut year after year, they started to find ways to develop new specialty products that they could take ownership of, a product which other manufacturers in China or elsewhere around the world couldn’t replicate. For the Delta Factory, this new invention came in the form of a micro-fan that could be included in Desktop Computers or Mobile Phones. The micro-fan’s distinctive characteristic was that it could run smoother and quieter than any other fans in the market. Therefore, when Apple and other large scale purchasers came to their booth during a Las Vegas trade show, purchasers were quick to offer a fair deal, with a comfortable selling price at a much higher margin than the factory previously could earn. By differentiating the product based on quality, Delta escaped the entrapment of a price war and could stand above the fray in pushing their product out.
The Delta Factory is just one of many manufactures following China’s “Made in China 2025” Plan to revamp their business model. The “Made in China 2025” Plan in essence is a blueprint for revolutionizing the Chinese economy and achieving dominance in strategic areas such as cloud computing, robotics, aerospace technology and IT. The core proposal set by the Ministry of Industry and Information Technology (MIIT) is calling for manufacturing to be more innovation driven, emphasizing on quality over quantity, achieving green development etc. We are seeing such a transition pan out throughout our visits to these factories.
On the other hand, We visited the Techtronic Industries Factory (TTI), an incredibly technologically advanced factory which is the home to production of power tools such as Milwaukee Drills, Ryobi Mowers etc. However it almost seems that the factory itself was more similar to the early stages of China’s manufacturing boom, where the factory is purely just learning from the operations team at TTI. Based on sustainability, I would argue that the Delta Factory could survive longer and be more successful because they are relying on their own developed process, while the factory hosting TTI is still under the reliance of a foreign company. In our conversation, TTI executives have also highlighted their search for other countries to manufacture their products if the trade war continues.
Unless Chinese Manufacturing facilities can take the first step in building its own competitive advantage based on product quality instead of price, foreign companies will very likely begin moving away from China in search for cheaper alternative.
In the next part to this article, we talk about how the Technology industry has progressed under the pressure of the China-U.S. Trade war.
