From made in China to owned by China: Chinese manufacturers go global

China has of course already transformed the world economy through manufacturing on its own shores, bringing down the cost of goods across the globe and by putting uncompetitive manufacturers in other nations out of business. The next decade will see this model change once again and in turn bring opportunities and threats to the rest of the world. Having already been shaken up by the vast economies of scale and cheapness of labour offered by Chinese firms, governments and companies will now have to adjust to Chinese firms buying up chunks of the world’s industrial base on their own soil as they go on a giant shopping spree, looking to diversify assets, increase profit and get quick access to the world’s best technology. These are the key trends we can expect to see in the next ten years:

  • A disorientating sight for many – the rise of Chinese offshoring, as wages rise inexorably in China and its industry becomes less competitive, at the same time the government is encouraging high tech manufacturing in a move to become a middle then high income country. Producing shoes and textiles is not the best way to become wealthy, but rather through encouraging advanced manufacturing, robotics and sectors like biotechnology.
  • The race to become the next China or rather next Chinas will heat up across Asia and Africa, as countries compete to take the work China no longer wants to do. One country that could benefit from this trend is Ethiopia; a concerted effort by the government to attract foreign manufacturing investment has meant it has become a destination for Western high street firms such as H&M and Marks and Spencers. Chinese industrialists have set up shop in the country, but while labour is cheap and the government positive there are infrastructure issues and political risk worries as the country has traditionally faced instability and is surrounded by warring and failed states such as Somalia and Southern Sudan.
  • For developed countries there are also opportunities to attract Chinese capital and manufacturers, these firms will be interested in access to markets, technological knowhow and expertise. So whether it is a merger, joint venture or some other way of working together, Chinese firms (like so many other sectors) will be doing this on a wider scale. Access to EU or NAFTA markets can be a key selling point for firms making inward investments, for example the Chinese construction of a Gleely car plant in Bulgaria was built partly thanks to low labour costs in the country, but also for easy access to the EU.

For the countries themselves this provides a unique and rare opportunity to move away from an agricultural or commodity based economy – which is dependent on extraction of raw materials or farm products. The move towards producing “value added” products is key to developing a modern economy, the process of turning raw materials into something a piece of machinery or a consumer product can multiply the value of raw materials. But this process of transforming materials is difficult, as it depends on a wide variety of different inputs depending on the complexity of what you are trying to make, it could be iron, raw cotton, energy inputs, which in turn require a certain level of infrastructure. The country in question has to have relative stability and predictability in order to allow businesses to set up and flourish. Companies need finance to be in place, which means the existence of capital markets or  the possibility of government financing.

Ever since the industrial revolution in the UK, industrialisation has allowed countries to rapidly expand their economies and become wealthier, this model as been replicated in the Europe, North America, East Asia before the Chinese underwent the process at great speed and scale in the last few decades.

If all these prerequisites are in place, then a country has a good chance of attracting foreign capital as well as allowing domestic producers to flourish. Chinese companies will be the biggest fish of all – their size, strength and reach mean that the prize of luring them to a nation’s shores is great indeed.

The negatives around manufacturing should not be ignored though – the pollution caused by factories, the poor working conditions suffered by staff, dangerous factories with poor health and safety standards are the norm in newly industrialising economies. Governments are unwilling or unable due to pressure from the business community to make places of work safer – as they are fearful of losing the competitive edge in terms of labour and capital costs.
China is in the process of losing this competitive edge, as wages rise higher and higher, however this is beneficial in the longer term for the country as it means workers have higher spending power and factories which are more focussed on producing better quality and higher value products.

The Prize

Where once China was a buyers’ market now the prices are not what they were for procurers of textiles, machinery, tools and all the other thousands of manufacture the country produces. For the developing world this represents an opportunity of unparalleled proportions, the race to be another China is on as others see the immense power and wealth created by its boom, there is hope that they can emulate its success and like China rise up the global power and wealth rankings.



Categories: China Goes Global, Geo-Economics

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