Author: Yin Li
For a long time, the image of China’s high-tech exports has been linked with consumer electronics assembled in the country’s export processing zones. Within a global production network controlled by multinationals, components made by US, Japanese and Korean companies gathered in China’s coastal cities have been processed, assembled, and exported to the world market. This system is exemplified by the famous iPod model, “designed in California” and assembled in China. Today China continues to assemble iPods, but the overall pattern of China’s high-value-added export has vastly changed in the past few years.
According to a white paper produced by Economist Intelligence Unit (EIU), a consultancy, China is rapidly expanding the exports of technology- and capital-intensive products. In particular, the Chinese are invading the capital equipment export market, the traditional stronghold of US, Japanese and Korean multinationals. Between 2007 and 2010, China’s share of global export increased from 14.4% to 28.4% in shipbuilding, from 18.6% to 26.3% in motorcycles, and from 16.9% to 22.4% in derricks and cranes. As the Chinese export lower costs and higher quality products, they have become even more competitive in the markets of the developing world. In sectors like electric trains, tractors, and construction equipment, virtually all Chinese exports are going to non-OECD countries where the market shares of incumbent multinationals are shrinking rapidly.
While China’s share of world manufactured exports is steadily increasing, the share of China’s exports produced by foreign-invested manufacturers is declining after reaching its peak of around 60% in 2005. Thus, it is the indigenous Chinese companies that are making inroads into the mid- and high-end export market. More surprisingly, the new competitors are increasingly coming from China’s inland provinces instead of the developed coastlines. Take the construction equipment segment as an example. Formidable Chinese competition comes from three companies, Sany, Zoomlion, and Xugong. While the long-running national champion Xugong from coastal Jiangsu province was the first to enter the global top ten in 2009, the private company Sany and Zoomlion from inland Hunan province both leapfrogged Xugong to become the world’s 7th and 9 thlargest in 2010. The domestic leader, Sany is now not only ramping up its production bases in Brazil and India, but also tapping into the German engineering talent pool to produce in the heartland of Europe.
Compared with the electronic assembly lines in the coastal provinces, new competitors in the capital goods segments have developed entire supply chains. Their strong growth is rooted in abundant skills and industrial infrastructure developed in the Mao era. From the 1950s to the 1970s before the economic reform, China’s central planners overwhelmingly favored investment in heavy industry, particularly in inland China. Though most of the state-owned enterprises created at that time ran into difficulties with subsequent mass lay-offs in the 1990s, the significant improvement in business management and the abundant supply of machinists and metallurgists has transformed the industry. As inland China has gained access to the world market by the improvement of transportation infrastructure in the last decade, these indigenous firms quickly took advantage of the demand opportunities provided by first the booming domestic market, and now the whole developing world.
The rapid growth of these new competitive firms is now contributing to an economic boom in China’s hinterland. And indeed, the prosperity of the Chinese economy will be ultimately dependent on the innovativeness of these companies.