High-tech products accounted for just 19 per cent of China’s exports in 2000. In 2009, they accounted for 25 per cent, Mr. Freeman said. At the same time, the share of primary and basic manufactured goods has declined and the share of manufactured goods excluding electronics, transport equipment and machinery, declined even more rapidly.
The GaveKal report said that during past decade Chinese exports of capital equipment have risen from 2 per cent of the global total to 8 per cent, while the U.S. and Japanese shares of the market declined.
The manufacturing shift is being supported by both the central and local governments in China as the move complies with China’s 12th five-year plan – which sets out the central government’s key economic and social goals – and represents higher revenues and GDP for provinces and regions. That means that capital-equipment manufacturers are, in some cases, being given preferential placement near ports and better access to credit from state-controlled banks.
GaveKal believes Chinese production of more capital equipment and machinery is a positive for business and customers in the West because it will lower prices for higher-end goods and increase productivity.
“China does not just flood the world with cheap consumer goods. It also exports capital equipment that improves productivity abroad … The story of China’s export deflation is far from over,” Mr. Freeman said.
David Reid, a Canadian living in the interior mega-city of Chongqing, has seen China’s move up the manufacturing value chain firsthand.
He moved to Chongqing three years ago to work for The Silian Group, a massive Chinese state-owned enterprise that, among its many business units, produces LED lighting systems.
Silian had just purchased a company based in Victoria which was owned by U.S. giant Honeywell International. The B.C. firm had developed a technology to produce synthetic sapphire wafers in a laboratory. The sapphire wafers are then used in LED lighting systems.
Mr. Reid has helped transfer the Canadian-developed technology to a new Silian plant in Chongqing. The operation is now the only plant in China producing sapphire wafers. He says the quality of the Silian wafers from Chongqing is already equal to most overseas competitors in more-developed hi-tech manufacturing markets.
“If I didn’t put a Made in China label on it, they wouldn’t know where it came from,” Mr. Reid said in an interview. And because it is based in Chongqing, Silian’s production costs are far cheaper than competitors.
While overall manufacturing is slowing slightly, China’s production of higher-end products is surging.
In the first quarter of 2011, the machinery sector saw its output and sales increase by about 40 per cent from the previous year.
Jing Ulrich, chairman and managing director for JPMorgan in China, believes the production of higher-end goods will increase productivity, offset labour shortages and boost domestic consumption.
“The Chinese manufacturing sector’s labour productivity is still relatively low in global comparison, leaving much room for mechanization and more efficient processes that will allow for comparable levels of output with a thinner work force. Moreover, Chinese manufacturers face a booming domestic market, where demand for consumer goods is still in the process of being unleashed,” Ms. Ulrich said in a report.
The Celestica plant is another case in point. Ten years ago, the factory produced simple circuit boards and consumer-grade electronics. The Canadian company’s high-end products were still designed and built primarily in the West.
But the crash in technology stocks in 2001 forced Celestica and other electronics firms to find cheaper places to produce nearly all of their products, said John Peri, Celestica’s chief operating officer.
Like most of its competitors, Celestica looked to Asia – and specifically China – for cost relief.
In addition to Suzhou and Shanghai, it also has manufacturing facilities in Dongguan in southern China. Of the company’s 35,000 employees, 6,000 are in China. Celestica also has plants in other low-labour-cost Asian countries, including Malaysia and Thailand.
At the Suzhou plant, the major initial challenge was working with local component suppliers to be able to produce the correct parts for the next generation of products.