China: world factory or mere processing plant?
China: world factory or mere processing plant?
Over the years, the Chinese economy has maintained sustained and rapid growth. So, where now does China stand on the road of industrialization? What are the factors that are promoting the country's economic growth? Based on these changes, which resources are most in demand by private enterprises and transnational corporations? What kind of challenges are they facing? Liu Yingqiu, Executive Vice President of the Graduate Institute of the Chinese Academy of Social Sciences and Director of the Private Economy Research Center at the Chinese Academy of Social Sciences, recently spoke to People's Daily about these issues.
China is a large industrial country, but not yet an industrial power
Q: Where does China stand in terms of its new industrialization goals?
Liu Yingqiu: China has transformed itself from a large agricultural country into an industrial country. However, it isn't an industrial power yet. Relatively speaking, China's added output value is still low, so we have adopted a new industrialization strategy. We need to improve our ability to innovate and develop our own technology. This is currently one of China's weak points. Many people refer to China as the world's factory, which isn't accurate. In fact, China is only a processing plant. According to Premier Wen Jiabao, only when the majority of industries have their own, independently developed intellectual property, can we call ourselves the world's factory. Clearly, China still has a long way to go.
The National Bureau of Statistics reported that during the third quarter of this year, China provided 400 million cell phones to the domestic market. However, if we are currently unable to produce the chips by ourselves; we have to pay an enormous sum for the intellectual property rights to the technology. We started to build our own auto industry 40 years ago however we haven't yet developed a brand of our own. On the surface, China reports large-scale economic development, but its actual competitiveness is not strong enough. In short, China is only a processing plant, not a factory.
Returns from structural reforms decreasing
Q: What factors have been driving China's economic growth in recent years? Have any changes taken place recently?
Liu Yingqiu: China's economic growth is now driven by three primary forces. The first is structural reforms, which have increased productivity. The second is the opening-up policy, which has heavily promoted investment supply. The third is the demographic dividend. It is estimated that China's demographic dividend contributes to about three-quarters of the country's economic growth. Others believe it is closer to one-third. Labor in China is cheap and its demographic dividend is quite high.
However, all the three major driving forces are losing strength. Firstly, returns from structural system reforms are falling. As the overall cost of reform increases, so to does the marginal cost of reform. This has led to a relative decline in the ability of the system to promote economic growth. Secondly, the effectiveness of foreign capital in boosting economic growth is also decreasing. As oppose to the original shortage of investment, China has reported an increasing surplus of capital. The amount of capital inflow and the marginal benefits of investment are dropping off. Thirdly, the demographic dividend is also decreasing. Along with the decline in population growth, labor supply growth has been decreasing and the marginal cost of labor input has been increasing. The income curve, which had remained stable at a low level under the condition of infinite labor supply, has changed and even began to climb, which has led to a rise in output costs and a drop in the competitiveness of China's manufacturing industry. In China, both private enterprises and foreign enterprises have to address these new problems.
Following a path to innovation
Q: In such conditions, what changes should China's private enterprises makes most urgently?
Liu Yingqiu: The first thing enterprises need to do is work towards improving technology and supporting innovation. Given the weakening of the driving forces of structural reform and innovation, the supporting role of capital, and the diminishing advantages of a low-cost labor supply, all enterprises, especially private Chinese enterprises, must explore the role of technology and find new ways to promote technological innovation.
The second change is to increase input into human capital. This is a basic principal in economic theory – if investment in human capital increases, the marginal yield curve will rise.
The third thing to do is to accelerate modernization. Of China's 4.65 million private enterprises, 70 percent or more are family enterprises. Even many collective enterprises which have introduced structural reform have adopted a family-style management approach. We therefore need to explore management operations in modern family enterprises and establish management institutions accordingly.
The final task is to develop international sales and marketing channels. As a matter of fact, a lot of Chinese enterprises don't have access to marketing channels. Without effective marketing channels, it's impossible for enterprises to get into the market even if they produce very good products. We need to open such channels to them and in particular focus on cooperation with multinational corporations. Private enterprises should develop and expand international marketing channels.
Establishing a mutually beneficial relationship with foreign companies
Q: What is the foundation of cooperation between Chinese and foreign companies? What are the challenges ahead?
Liu Yingqiu: Chinese private enterprises have a solid foundation for cooperation with foreign and multinational companies. They recognize and respect business interests, the importance of cooperation in competition and the benefits of exchange, among other things. In the past, multinational and foreign enterprises enjoyed the majority of benefits while Chinese enterprises only saw a limited amount of the processing fee. Now that domestic and foreign enterprises are to be given equal status in the economy, the situation has changed.
At present, multinational companies are still the major initiators of competition and cooperation. However, after China adjusts its policy, if they can no longer judge when, where and with whom to cooperate, they will have great difficulty making the same high profits they are accustomed to in China. For instance, if multinational companies invest in an industry that does not meet China's industrial investment demands, or provide outdated technology to the Chinese market, they won't be so successful. When Volkswagen first set up a factory in China, it did not equip it with the best technology. Despite this, Volkswagen has made tremendous profits in China. However, this kind of situation will never occur again.
Despite their small size and relatively low capability, China's private enterprises show promise. As long as they focus and grasp the opportunity as it comes, they will be able to succeed. China's private enterprises must begin to base themselves around scientific and harmonious development, based on China's needs in the long-term, and the overall direction of its industry policy. They should consider things from a long-term perspective and cooperate with multinational corporations and other foreign enterprises, so that everyone benefits from development.
Date Posted: 11-25-2006 Date Published: 11-24-2006 Source: People's Daily Online
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