Op-Ed Contributors

Moving up the value chain

By Ang Yuen Yuen (China Daily)
Updated: 2010-06-08 07:46

As a result, officials in Jiangsu are no longer content with sewing clothing. Leveraging a mixture of administrative guidance and monetary incentives, the government plans to reduce the share of garments in the output of textiles products by 25 percent in three years and to increase the industrial applications of chemical fibers, which promise much higher returns than apparel production. Already, the factories have acquired the ability to mass-produce super-thin fibers first designed in Japan.

In fact, the global meltdown may turn out to be a blessing in disguise for industrial upgrading. Slumping orders devastated low-end producers, which barely survived on wafer-thin margins.

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Half of China's toy factories went bust by the end of 2008. Though alarming in the short term, the eradication of small producers spells good news for those that survived the crisis. As firms consolidate market share, they gain economies of scale. Larger firms are more capable of pooling resources for research and development, which is the key to China's aspirations to climb the value ladder.

Less fragmented industries also lobby better. Traditionally, contract manufacturers in China were scattered and fiercely competitive. They had little if any say over domestic and international regulations.

Producers in Jiangsu, for example, were forced to adapt constantly to fickle product-safety and environmental standards in export markets. Compared to producers in the US and Europe, those in China are weakly organized and passive.

This could change. As surviving firms gain in size, Chinese businesses may exercise more bargaining power. Exercising a louder voice in politics at home and abroad could mean reduced uncertainty for Chinese exporters.

Consider the strategy of Lenovo, China's largest computer manufacturer. It has hired a lobbyist in Washington D.C., reportedly the first Chinese company to do so.

In decades to come, China can no longer sustain the cost advantages that defined its initial period of export success. But it is a mistake to think that China's manufacturing will remain in the doldrums. Compared to many developing countries, China's government is stable and embraces foreign investment.

Industrial clusters have been established in many parts of the country, where business connections can compensate for rising costs. Domestic consumption is growing.

Further, as low-end, low-cost labor jobs morph towards higher-end, higher-cost jobs, China will move not only into more valuable manufactured goods, but also into the service industries, such as design. This change, too, could give the US a difficult new run-for-its-money.

When China's labor-intensive industries emerge from their metamorphosis, we should expect to see firms that are larger, that invest more in product innovation and design, and that hold more sway over business and trade policies. So "Made in China" is not losing international dominance yet. It is merely taking on a new - and possibly more refined - shape.

The author is professor of international affairs at Columbia University.

Project Syndicate