Is this the beginning of the end for ‘Made in China’?

economy to their manufacturing portfolios. Diversification also isn’t just about costs either. Some companies want to spread political and geographic risks that could impact costs, everything from changes in government regulations and taxes to natural disasters.

According to a survey of key global trade management players in East Asia that was conducted by Thomson Reuters ONESOURCE and KPMG, almost two-fifths said that risk avoidance was the area where global trade management could best enhance its value to the company, while almost a quarter pointed at cost savings.

While this shift should be considered a blow for China’s economic growth, which has been slowing in recent years, experts say the transition is part of a healthy shift in the country’s manufacturing sector. It’s helping China make a much-needed move towards more value-added manufacturing processes with more sophisticated tools and technology, and to develop higher-skilled workforce.

“Manufacturing has become a bit of a curse for China,” says Daniel Trefler, a professor of business economics at the University of Toronto’s Rotman School of Management.

Trefler argues China’s economic policy has been dominated by manufacturing interests, which needs to change if the country wants to open up its economy to the world and become the world’s largest economy (up from second place today, behind the United States).

“The change is good for China because it’s telling them that they can no longer be low-wage competitors. They have to start to become more innovation-based competitors,” Trefler says.

Taneli Ruda, senior vice president and managing director of ONESOURCE, describes China’s manufacturing shift as “part of a natural transition for an economy that is moving into higher value added, higher GDP per capita model.”

He notes countries such as Japan and South Korea underwent similar shifts year ago, albeit at a much smaller scale.

Opportunities for other Asian nations

The diversification away from China also creates huge opportunities for Southeast Asian countries such as Vietnam, Malaysia, Indonesia as well as India, Ruda says. Many of these nations have been proactive in trying to lure business away from China through tax incentives, as well as partnering with multinational companies to build infrastructure to help smooth out logistics across the supply chain.

Ruda points to the aggressive “Make In India” campaign being pushed by Indian Prime Minister Narendra Modi, which is a play to boost its manufacturing base. General Motors recently announced it was doubling its commitment in India through a $1-billion investment to make Chevrolet vehicles in the country, and cited the “Make in India” government program. GM says the market for passenger vehicles in India is expected to expand to about eight million units by 2025.

“We intend to be part of the growth,” said Phil Kienle, vice-president manufacturing for GM International Operations and GM China in an email. He said the goal of the India investment is to double its market share and establish India as an export hub. “We see significant opportunity in India and we believe it is critical that we position. GM for sustained success in India, both for the domestic market and for export markets.”

In 2013, GM decided to spin off its international business into separate entities: GM China and GM International. It said the separate GM International business was done to focus on markets in the Middle East, Africa, India, Southeast Asia, Korea and Australia. The company said its global growth markets strategy includes investing $5-billion to develop an all-new vehicle family “to meet the rapidly changing demands of customers” in countries such as India, as well as Brazil, China and Mexico. GM also has a major manufacturing presence in Korea. Its GM Korea division produced 1.65 million vehicles for 140 markets worldwide in 2014.

New vehicles are seen on the assembly line at GM's Talegaon plant in India. (PUNIT PARANJPE/REUTERS)

“GM remains confident in the long-term potential of Southeast Asia, “said Kienle, noting the region has more than 600 million people. However, he said that Southeast Asia doesn’t behave as one economy and that local regulations “make it very difficult and costly to build a vehicle in one ASEAN country and export it to another. So it is very difficult to achieve scale.”

“At GM, we take decisions to invest our capital where the opportunity for growth is greatest,” said Kienle, “The company’s investment in China continues to perform strongly. As we look to position the company for further growth into the future, it is critical that we participate in growth markets like India, which has both the domestic scale and the potential for exports that can allow us to achieve scale.”

Don’t count China out

China isn’t sitting idly by as the landscape changes, even if a move towards more higher-value manufacturing in the country is needed. China has developed its own “New Silk Road strategy,” which is a set of trade and infrastructure agreements meant to foster free trade with its neighbours.

Ruda says China is also guiding a manufacturing shift from the higher-cost coastal region into the lower-cost interior parts of the country, which hasn’t seen the same level of economic development to date. The recent end of China’s one-child policy is also expected to exacerbate the need to do so.

A worker operates a machine press at a plastics factory on the outskirts of Shanghai.
(ALY SONG/REUTERS)

“China needs to ensure freer flow of labor across the country to ensure it is putting its shrinking labor pool to the most efficient use possible,” Ruda says, given that it will take about two decades for the new child policy to kick in.

He also notes that a lot of Chinese labour is tied up in inefficient companies, many of them state-owned or backed.

“This will hold down overall productivity of the national economy,” Ruda says. “Allowing freer flow of capital would have the side-effect of shifting labor pool toward more efficient companies, helping lift aggregate productivity of the national economy.”

Until then, more low-value, labour-intensive manufacturing will move elsewhere from China, Ruda says.

“This is not a negative for China if its pace can be managed, as this frees up Chinese labor pool to work on higher-value activities, such as higher-value manufacturing, research and development, and professional services.”

Myers of the CME says Canadian companies are still doing business in China because they see the benefit of operating in the country. Many are partnering with Chinese companies to help them sell into the local market as it shifts its focus towards a consumer driven economy and away from one focused heavily on infrastructure spending.

A growing Chinese middle class also means more potential customers for companies selling in the country.

“That’s the type of company that will stay in China, rather than move their production offshore simply because it’s lower cost,” Myers says.

Further reading:

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