Closures, overseas investments illustrate plight facing local factories
Now is not a good time to be a Chinese factory owner. According to recent media reports, a growing number of local manufacturers are opening plants in the US as they seek to avoid the badge that comes with selling "Made in China" products.
Meanwhile, many other local factories are struggling with labor shortages, rising costs, overcapacity problems and thinning demand. In response to such pressures, low-end manufacturers are increasingly investing in Southeast Asia, where production costs are more competitive.
Both of these trends signal the need for change in China's manufacturing sector. Over recent decades, Chinese factories have become synonymous with low-quality, low-value-added products. Local manufacturers need to shake off this image by moving up the production chain. And with China's GDP slowdown weighing on the country's industrial sector, the need to advance is more pressing than ever.
According to reports, several of China's largest and historically most successful manufacturing enterprises have not been immune to the challenges brought by changing times. Silitech Technology Co, a major supplier for Nokia, has suspended production since November. At its peak, the Suzhou-based company had more than 10,000 employees, but has reportedly struggled since Nokia sold off its handset division to Microsoft last year.
In December, United Win Technology Co, also in Suzhou, Jiangsu Province, announced its closure due to a financial crisis. It had previously been a major supplier for Apple Inc and had also cooperated with Chinese smartphone brand Xiaomi. The company's closure is said to have left more than 2,000 workers unemployed.
Similar shutdowns are also said to be plaguing many of China's traditional manufacturing hubs - including Dongguan, Guangdong Province, and Wenzhou, Zhejiang Province.
Of course, not all of the worries facing factory bosses are bad. Improvements in Chinese labor laws have made workers more willing to fight for better pay and conditions. For instance, upwards of 2,000 workers at Yue Yuen, a shoe factory in Dongguan, reportedly protested recently in front of the company's gate for greater social security benefits. Yue Yuen is an assembler and producer for a host of big-name global brands, including Reebok, New Balance, Puma and Timberland.
But while China's manufacturing sector has been expanding at a rapid clip for decades, most local factories remain at the bottom of the technological food chain, where they subsist on rock-bottom unit pricing and outdated technologies. Without upgrades and reforms, producers will become even more marginalized. Those who cannot adapt will be weeded out by the market.
Chinese planners have suggested that the country's path toward a "new normal" pattern of development will necessitate greater innovation in the manufacturing sector. In a report issued Tuesday, research firm IDC described the agonies facing Chinese factory owners, while also putting forward predictions for the year ahead. During 2015, analysts at IDC foresee - among other things - the rise of intelligent factories, cloud computing and industrial robots (the latter of which could soon put many low-skilled Chinese workers out of jobs).
Chinese manufacturers will have to pursue these and other technological innovations if they want to stay in business. Fortunately, China is rapidly emerging as a research powerhouse. In 2012, the country overtook the European Union in terms of research spending as a percentage of GDP, according to a report issued in 2014 by the Organization for Economic Co-operation and Development.
The need to transform through innovation and research is particularly great among manufacturers focused on the highly competitive consumer market. If given the choice, many Chinese will purchase Japanese or South Korean-made goods. Such products typically carry high-price tags but are widely seen as being of higher quality than Chinese-made equivalents.
Chinese manufacturers need to focus especially on technologies that will help them become more specialized. They must also build brand value through higher-grade products. Ultimately, companies will have to choose development models that conform to their own conditions. Finding the right path forward won't be easy, but sitting still in changing times is a surefire way to fail.
China's machinery industry continued to expand in 2014 but at a softer pace due to sluggish domestic demands and piling inventories, new data showed on Wednesday.
The added value of the sector increased 10 percent year on year in the last year, slightly down from 10.9 percent in 2013, data from the China Machinery Industry Federation (CMIF) said.
Chinese machinery enterprises posted combined revenues from main businesses at 22.2 trillion yuan (3.62 trillion U.S. dollars), up 9.4 percent from a year ago. The revenues grew 13.8 percent in 2013.
Chen Bin, executive vice president of the CMIF, said the industry, still plagued by overcapacity, will likely continue to slow as they are confronted with weakening demands and fierce competition at home.
Haixin Iron and Steel Group, the largest private iron and steel enterprise in Shanxi Province, has started bankruptcy reorganization procedures, according to a local court on Monday.
The company, located in Wenxi county, had an annual steel output of five million tonnes and was ranked second only to Shougang Changzhi Iron and Steel Company, another state-owned enterprise, within the province. It is also the largest privately-owned company in Shanxi.
According to public data, the company recorded 10.46 billion yuan (1.71 billion U.S. dollars) in debt compared with 10.07 billion yuan in its account.
Production was suspended on March 18, due to industry overcapacity, a stagnant market, tightened credit and management issues.
In August, four lenders to Haixin filed bankruptcy plans to the Yuncheng Intermediate People's Court, aiming to reorganizing five companies within the group.
The remaking of China's manufacturing sector hinges on production with a higher degree of automation and artificial intelligence, experts said at a two-day manufacturing forum ended Saturday.
China's factory sector needs to undergo a gradual process of shifting away from its extensive reliance on labor, Luo Jun, CEO of the Asian Manufacturing Association, said on Friday at the Seventh Annual Conference of Asian Manufacturing Forum held in Weifang, East China's Shandong Province, as he advocated the modeling of Germany's implementation of "Industry 4.0."
The term Industry 4.0, first introduced at Hanover Fair in 2011, has since become the cornerstone of Germany's industrial strategy pushing for computerization of traditional industries including manufacturing.
With the application of new technologies in manufacturing, the Chinese economy will experience a new round of restructuring and recovery, Luo believes.
His comments mirror rising concerns over China's vast manufacturing sector, with recent data revealing worrisome prospects.
The official Purchasing Managers' Index (PMI), covering mainly big State-owned enterprises, edged down to 51.1 for August from 51.7 the month before, while the HSBC PMI, focusing on smaller private enterprises, shrank to a three-month low of 50.2 in August.
Experts also downplayed concerns about the replacement of manpower by automation and robots in the world's most populous country.
Speaking in an interview with the Global Times during the forum on Friday, Bernhard Thies, chairman of the Board of Directors of the DKE, the official German expertise center for electro-technical standardization, also said the application of automation and artificial intelligence that will be seen in China's industry sector will not cause big job losses.
A robotized factory sector expected in the future may weigh on the unemployment rate during a specific period of time, but it is unlikely to be a cause of sustained unemployment as new ideas and professions would be created to tackle job losses due to the prevalence of automation, according to Thies.
"I don't think it could really be a problem, because for the time being I believe that these new trends will still be [happening in] niche industries," Bernardo Calzadilla-Sarmiento, director of Trade Capacity Building Branch at the United Nations Industrial Development Organization, told the Global Times in an interview Friday, trying to allay fears of the predominance of machine over man.
But he noted that in the meantime the government should be responsible for designing policies and measures that would foster job-creating activities as well as sustainable and inclusive development of the factory sector.
China will close more steel and cement plants this year than originally planned to deal with overcapacity, the industry ministry said.
The nation decided to eliminate 28.7 million tons of annual steel capacity and 50.5 million tons of cement capacity this year, the Ministry of Industry and Information Technology said in a statement today.
That compared with an initial target of 27 million tons for steel and 42 million tons for cement as outlined by Premier Li Keqiang in his government report earlier this year.
The country's crude steel output rose to a record high of 779 million tons last year.
China has been phasing out old and inefficient capacity in its industrial sector as part of efforts to revamp its growth model and fight pollution.
The ministry also said 420,000 tons of annual aluminum capacity and 115,000 tons of lead smelting will be eliminated this year.
China's manufacturers had a mixed performance in March with state-owned companies reporting the first rebound in four months while private firms saw their business plunge to an eight-month low, two separate surveys showed Tuesday.
It was not a surprise that the survey results were divergent, analysts said, generalizing that China's economy remained on the soft side since the rebound was so limited in scale.
The official Purchasing Managers' Index, a comprehensive gauge of operating conditions in China's state-owned industrial companies, ticked up to 50.3 in March from 50.2 a month earlier, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing.
A reading above 50 means expansion, and the latest rate was the first increase since November.
The components showed that production edged up to 52.7 in March from February's 52.6, while new orders rose 0.1 point to 50.6, and employment gained 0.3 points to 48.3. Input prices lost 3.3 points to 44.4, indicating little inflationary pressure for the future.
Zhao Qinghe, an analyst with the bureau, said the indices indicated a stabilizing industrial sector in the world's second-largest economy.
"Chinese manufacturers resumed their businesses after the Spring Festival holiday, which helped push up the official PMI," Zhao said. "The warming-up demand in external markets also bolstered the headline index, with new export orders returning to growth for the first time since December."
However, the HSBC PMI, which gauges conditions at mostly private and export-oriented manufacturers, fell to 48 in March, an eight-month low that was down from 48.5 in February.
It marked the third straight month that the HSBC PMI pointed to contracting activities.
Qu Hongbin, chief economist for China at HSBC Holdings Plc, said the latest deterioration was the strongest since July 2013.
"It confirmed the weakness of domestic demand conditions," Qu said. "This implies that the first-quarter economic growth is likely to fall below the annual target of 7.5 percent."
Li Maoyu, an analyst at Changjiang Securities Co, said China's activities were on the soft side even through the official PMI staged a slight rebound. "The increase in the official PMI was so weak that it can't defy the economic slowdown which was evident in many sectors."
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