Think Business | 15 Oct 2015 11:00:00 PST
Do you source or have you considered sourcing products from overseas for your business? If so, the first place you think of for product sourcing is probably China.
Why and how did China become the world's manufacturing hub? China's long history as a major trading partner, as well as its human and natural resources, have all helped the country rise to prominence in the global sourcing arena. In the following pages, we'll take you through the long history of Chinese manufacturing, and provide an overview of the historical and human forces behind China's path to manufacturing success.
It Started on the Silk Road
China has been a vital part of world trade ever since the long-ago days of the Silk Road, one of a network of trade routes connecting Asia with Western countries in ancient times. The Silk Road, which got its name from the Chinese silk that was transported along the route, was the most important Eurasian trade route prior to modern times. Trade along this route did more than exchange goods: It linked civilizations including China, Europe, Africa and the Indian subcontinent.
China remained an important source of materials and goods for hundreds of years; economic historians say that in 1830, for example, China's share of world manufacturing output hovered around 30 percent. However, all this changed in 1949 with the formation of the People's Republic of China after the Chinese Civil War.
The government transition to Communist leadership led to a period of economic struggle, especially when the United States barred trade with and travel to or from China after the Korean War.
The groundwork for China's current role as a manufacturing powerhouse was laid in 1971, when then-U.S. Secretary of State Henry Kissinger secretly visited China for a meeting that would eventually reopen trade with the U.S. In 1979, China and the U.S. established normal diplomatic relations; at the same time, China implemented economic reforms that opened it to trade with the Western world once again. Trade and investment ties with the West developed rapidly in the following years; China also opened up to Western tourism and cultural exchange.
Rapid Growth
After its long economic downturn during the period following World War II, China began to make up for lost time after opening to Western trade, and the nation rapidly became a major economic power. Between 1978 and 2005, China's per capita GDP grew from $153 to $1,284. The country also moved from its initial focus on producing low-skill, low-value-added products such as apparel and accessories, to manufacturing more sophisticated products such as computers, electronic components and automobiles.
The Chinese government took steps to make its exports more competitive, which also aided in manufacturing growth. For example, in 1985 China's government initiated an export tax rebate policy that eliminated double taxation on exported goods by exempting them from the value added tax (VAT) many nations charge on imports.
China also took steps to become an official part of the international trade system. In 1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, an organization that seeks to promote free trade in the Asia-Pacific region. And after a lengthy period of negotiations (16 years, in fact), in 2001 China finally joined the World Trade Organization (WTO).
The results of these efforts were impressive. Between 1992 and 2010, China rose from the seventh-largest manufacturing nation in the world to the first. In 2010, China officially overtook the status the U.S had held for over 100 years as the world's number-one manufacturer. In that year, China accounted for 19.8 percent of the world's manufacturing output; the U.S. accounted for 19.4 percent.
This growth trend has continued until very recently. In 2013, China manufactured more than 90 percent of the world's computers, more than 70 percent of the world's cell phones and nearly 50 percent of the world's ships. As of 2014, China claimed 22 percent of the world's manufacturing, while U.S. was responsible for 17.4 percent.
China's Growth Factors
What's behind China's exponential growth to become the world's number-one manufacturer? There are several factors that have contributed to China's success, including:
Population size: China has the biggest population of any country in the world - some 1.35 billion people. Of these, most are poor or lower-middle class and live in rural areas, so factory jobs are appealing to them. As a result, there are more workers seeking work than jobs for them to fill, which enables Chinese manufacturers to rapidly staff up and down as needed while paying wages that, for Chinese manufacturing employees, still are sufficient to lift their standards of living from what they could otherwise expect. Its huge pool of labor gives China a great advantage over many other countries in terms of manufacturing capabilities and flexibility.
Supply chain advantages: China offers many advantages in terms of supply chains. (Remember the Silk Road?) Over the decades, complex networks have evolved incorporating suppliers, manufacturers, distributors and government agencies-all working together to transform raw materials into products, then transport the finished goods where they need to go. Because of its well-developed supply chains, many foreign manufacturers find it more efficient to handle all their production in China, rather than part of it in one country and part in another.
Taxes: The export tax rebate policy mentioned earlier has greatly helped to boost the competitiveness of products made in China. This is especially true for buyers in the European Union (EU) where VAT taxes can greatly affect the pricing and profitability of imports. No wonder that as of 2014, China and the EU were trading over $1 billion worth of products a day.
Facing New Hurdles
In the past few years, however, China has begun facing some challenges to its continued dominance of the world's manufacturing scene. Labor costs are rising at the same time that the country's supply of labor is starting to shrink due to an aging population and China's strict one-child policy. In addition, ever since the global economic downturn of 2008-2009, overall demand for Chinese products has declined. Finally, in recent years the cost of raw materials in China has risen.
In recent years, India has begun nipping at China's heels; earlier this year, the IMF predicted that India's GDP would grow faster than China's in 2015 and would continue to surpass China's growth rate until 2020. In a Deloitte survey, 12 percent of global companies expressed interest in and/or intent to move their outsourced manufacturing operations from China to lower-cost countries, most notably Vietnam and India.
However, China is not taking these challenges lightly. In 2014 China took several steps to improve its economy, which at that time was slowing even though it was still growing at more than 7 percent annually. In particular, the government focused on improving the country's infrastructure by building a transportation network of railways, airports and roads next to the Yangtze River.
Continuing the growth efforts, earlier this year China announced a plan to become a world manufacturing power by 2025. Dubbed the "Made in China 2025 Plan," this 10-year strategy aims to transform China from simply being a leader in lower-skilled manufacturing, such as making clothing, to leadership in much more innovative technologies. The program, endorsed by Chinese Premier Li Keqiang is focused on improving manufacturing capabilities in 10 key sectors:
- Information technology: Currently much of the technology China manufactures is based on foreign innovation.
- Robotics: Labor costs are rising in China even though they are still low there relative to most of the world. Becoming a leader in robotics will help keep manufacturing costs down.
- Aerospace equipment
- Ocean engineering equipment
- Railway equipment
- Power equipment
- Energy-saving vehicles
- New materials
- Medicine and medical devices
- Agricultural machinery
Positive Outlook
As China takes steps to become an even more valuable supplier of goods to the world, the opportunities to profit from sourcing in China will only grow. No matter what your business sells or plans to sell, chances are you can find it a manufacturer in China who can make it for you.
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