Manufacturing, 'World Factory' or Still a Weak Link?

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Last updated at: (Beijing Time) Sunday, July 21, 2002

Manufacturing, 'World Factory' or Still a Weak Link?

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While Western scaremongers harp on the danger of China becoming a "world factory," Chinese economists are keenly aware that manufacturing remains a very weak link in the country's economy despite its scale.

In order to qualify as one of the world's manufacturing centres, China needs contemporary corporate governance mechanisms, original research and competent personnel, according to a recent report by the Chinese Academy of Engineering.

In 2000, manufacturing accounted for 78 per cent of the aggregate added value of Chinese industries, 36 per cent of tax revenue nationwide and 90 per cent of the total value of Chinese exports.

The position of manufacturing as an engine of the national economy is obvious.

However, in spite of its fast growth and tremendous scale, the manufacturing sector has a long way to go to compete in an international context, the report pointed out.

The manufacturing industry of this country is generally labour-intensive, featuring low technological levels and low added value. Labour productivity, which is measured by the value created by every worker every year, is low in China.

A 1995 survey showed that Chinese manufacturers in the fields of machinery, electronics, metallurgy, were operating at respectively 51.9 per cent, 51.5 per cent, and 35.6 per cent of their production capacity. The situation is similar for chemicals and building materials.

As most of them run below capacity, industrial enterprises see low revenues, high debts and massive numbers of laid-off people, who remain on staff but out of production.

At the same time, the country relies heavily on imports to meet its need for high-tech products and products of high added-value. Some of the imported products have no locally made substitutes. Fifty-seven per cent of technologies for machine building and most technologies for electronic equipment manufacturing are imported, according to the report.

Manufacturers are slow in switching to imported technologies. Most of them cannot develop technologies on their own because of either lack of capital or necessary trained staff.

As a result, they have to either depend on imported technology, or use out-of-date technology.

On the other hand, since many major Chinese manufacturers are State-owned, government offices often direct the management of the enterprises. This is still a major bottleneck to the development of the enterprises, warns the report.

The equipment manufacturing industry produces machinery or electronic equipment to be used in other industries or services.

The average time of developing and producing new products in equipment manufacturing enterprises in China is 18 months, while the time in the United States in 1990 was five months. The slow reaction to market demands makes domestic equipment a frequent loser on the market both at home and overseas.

All equipment for producing fibre optic cable, 85 per cent of equipment for producing integrated circuit chips, 80 per cent of equipment used in the petrochemical industry, and 70 per cent of digitally controlled machine tools around the country are imported.

The significance of upgrading our manufacturing industry reaches beyond just the economy.

The growth of agriculture and other industrial departments, national defence and science and technology all depend on the modernization and prosperity of the manufacturing industry, especially equipment manufacturing.

Statistics show that the manufacturing industry contributed 90 per cent of all Chinese exports in 2000. That illustrates the pillar position of the industry in the country's foreign trade.

The manufacturing industry is also an important engine driving restructuring of our industries. Its development will create many job opportunities, which will help accelerate urbanization and reduce unemployment pressures.

The report forecasts a 7 to 7.5 per cent annul GDP growth for China between 2000 and 2010, and 6 to 6.5 per cent annul growth between 2010 and 2020. In the same period, the manufacturing sector will grow at an even higher speed and the value it creates will take a larger share in our GDP, said the report.

The report sees the possibility that as Chinese manufacturers grow in comprehensive strength, China may become one of the global manufacturing centres in 10 to 15 years.

To realize the target, the report proposes that domestic manufacturers should try to control key resources and core technologies. The emphasis should always be on technologies, it said.

The report also urges the government to offer policy incentives.

Both long-term and short-term plans should be made to lay specific goals for the development of the manufacturing industry, it said, and special institutes should supervise the implementation of the plans.

Efforts should be made to nurture capital- and technology-intensive manufacturing industries. The government should grant priority to domestic products in governmental procurement and support the domestic manufacturing industry by reforming tax systems.

At the same time, the prosperity of the manufacturing industry also relies on further reform of the State-owned enterprises. Only when enterprises can manage themselves according to their own needs, instead of under the direction of government offices, can they compete on an equal footing in the market place.

Manufacturers should be encouraged to establish their own research and development facilities, or to co-operate with research institutes and universities and turn their research results into real products.

Human resources are another vital factor for developing the manufacturing industry, the report said. Training of technological and managerial staff should be carried out on a regular basis.

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