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China's manufacturing machine powers on

Growing competitiveness a compliment to ongoing resilience

| China
Workers manufacture electric fans on an assembly line in Jiujiang in March 2018: China's momentum is showing little signs of slowing.   © Imaginechina/AP

William Bratton is author of "China's Rise, Asia's Decline." He was previously head of equity research, Asia-Pacific, at HSBC.

China's current regulatory crackdown may have focused attention on its technology and service sectors, but this should not distract from the continued robust performance of the country's other growth driver: its hypercompetitive manufacturing industries.

For despite all the apparent headwinds faced by Chinese manufacturers, including much chatter about the need to reduce the dependency of global supply chains on the country, the aggregate data available demonstrates not only their persistent resilience but, more importantly, their growing competitiveness.

This is most visible in the country's continued strong trade performance. It is true that the pandemic has complicated international comparisons, but in contrast with most of its economic competitors, China successfully grew its manufactured trade over the last two difficult years. This resulted in its share of global manufactured exports surging to a new 20% high in 2020, significantly higher than Germany's 9%, the U.S.'s 7% or Japan's 4%.

The world has not seen such clear manufacturing leadership since the U.S.'s post-World War II primacy. And China's momentum is showing little signs of slowing. There are some examples of internationally orientated low-margin production shifting out of the country, but such anecdotes do not make factual trends and they should not distract from the underlying reality of China's unprecedented manufacturing competitiveness.

This strength is remarkably broad-based with its importance as a supplier increasing over recent years across the majority of product groups. It has embedded its status as the world's primary supplier of goods as diverse as household appliances, office machines and clothing accessories. As its industrial base becomes more complex and advanced, it is also achieving substantial export gains across numerous more technologically advanced products, including medical instruments and complex industrial machinery.

In addition, China's share of manufactured imports increased in more than two-thirds of countries around the world over the last three years, with many of these gains occurring before 2020. Even countries frequently cited as potential longer-term manufacturing or geopolitical rivals to China, including Vietnam, have steadily become more, not less, dependent on Chinese imports over recent years.

Yet, despite all these trends and associated evidence, many still argue, or hope, that China's manufacturing competitiveness is in actual or imminent decline, driven by a toxic combination of higher costs, greater trade frictions and evolving geopolitics.

The problem with this argument, however, is that China's manufacturing peak has already been frequently and confidently predicted on numerous occasions. But all too often, such forecasts excessively simplify the complexity of the factors and interrelationships involved in determining a country's industrial competitiveness. They have, therefore, reached conclusions that were misleading at worst or premature at best. The current predictions are no different.

For example, it is simply not valid to argue, as many do in the case of China, that higher labor costs automatically lead to reduced international competitiveness. Such a simplistic view ignores the importance of relative productivity. Nor do higher trade tariffs necessarily increase costs so substantially that existing supply chains are dislocated. In fact, from a more holistic perspective, there are multiple factors that suggest China's manufacturing position remains very secure.

The first is China's unprecedented scale. Its size supports a larger domestic industrial ecosystem with greater product specialization, technological innovation and lower per-unit costs as a result of larger production runs. More importantly, though, the country's internal diversity allows it to maintain superior competitiveness across the full spectrum of manufacturing activities. This is in contrast with other smaller and more resource-constrained countries, including its neighbors.

The second is China's ability to organize and direct its resources through exceptionally aggressive industrial policies. It may no longer publicly state its ambitions to capture global market share but there can be no doubt that the country remains focused on displacing foreign competitors from its domestic markets while using trade as a means to secure influence. No other country, including its potential rivals such as India, develops its manufacturing industries with such ideological zeal. This gives China a significant relative advantage.

Workers labor on the assembly line at an automaker in Fuyang in July 2020: there can be no doubt that China remains focused on displacing foreign competitors from its domestic markets.   © FeatureChina/AP

The third factor is China's near-complete dominance of the Asian economic system. Trade flows are essentially regional in nature, not global. China will, therefore, benefit disproportionately as the global economy shifts toward Asia, especially given its competitiveness versus its neighbors as well as more distant partners. It is notable, for example, that despite efforts by European countries to strengthen trade relationships with Asia, their products have, in fact, been increasingly displaced from the region by Chinese exports.

It is possible to argue that China's manufacturing dominance will be eroded by American and European policies to reduce their dependencies on Chinese inputs. But any impact of Western initiatives to bring home manufacturing will take time to be felt. Furthermore, such efforts will reduce international demand for all Asian products with subsequent longer-term implications for their relative competitiveness. This will, perversely, accelerate China's regional ascendancy, with its manufacturing powerhouse underpinning its Asian economic hegemony.

So it is not a sensible response for China's neighbors to deny or wish away its supercharged manufacturing competitiveness. Commentators may point to Vietnam's industrial advances but this is an exception to the overall trend and for the rest of Asia, the regional superpower's manufacturing strength will create serious long-term economic and geopolitical challenges. Policymakers across the region have to recognize the reality, however unpalatable, that today's trade flows with China will lead to tomorrow's economic stagnation, dependencies and vulnerabilities.

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