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Columnists
Misunderstandings About Industrial Upgrading
Both the government and enterprises need to stay alert
By Mei Xinyu | NO. 17 APRIL 27, 2017
 

A small commodity dealer (right) does business with an African merchant in Yiwu, Zhejiang Province on January 5 (XINHUA)

 
Proponents of globalization chant "no progress simply means regression" as it spreads throughout the world. To pursue continued progress, China has maintained industrial upgrading as its main focus for the past decade when formulating economic development strategies.

To ensure the viability and feasibility of industrial upgrading strategies, policymakers have to avoid being misled by a number of possible misunderstandings.

No blind upgrading

Should all raw material production areas seek to become processing and manufacturing bases? The answer is no. The sustainable development of the manufacturing industry not only depends on the convenient supply of raw materials, but also requires adequate logistics and social environments which support it. Even if raw material resources are exhausted, long-term competitiveness can be forged as a result of convenient transportation links and a favorable cultural environment.

For instance, after World War II, most petrochemical, steel and iron companies chose to settle down in places which had convenient access to water transportation methods but were nonetheless far away from raw material sources.

Another example is the transfer of textile and clothing industries from east to west China. Around 2008, as the cost of labor and land increased, the Central Government encouraged many textile and garment enterprises in central and east China to transfer their production to the Xinjiang Uygur Autonomous Region in the northwest, a

major cotton producing area, in order to build the region into a major manufacturing base for raw textile material and intermediate products.

Even during the 2008 financial crisis, investment in textile industries in China's western region soared more than 40 percent. In 2013, textile investment in the 12 western cities increased 27 percent year on year, much higher than the national average level.

However, after years of development, actual results fell short of expectations. The competitiveness of textile and garment products is still weak. Cheaper imported cotton, higher labor costs, lower productivity and backward supporting facilities and industries in Xinjiang put pressure on these transferred enterprises.

 

Workers make clothes with an automatic hanging system in a factory based in Nanchang, Jiangxi Province, on December 20, 2016 (XINHUA)

No blind chasing high-end

Do all manufacturing enterprises need to undergo upgrading? The answer is also no. The demand for popular consumer goods far exceeds that for luxury goods. For a country populated by over 1 billion people, most enterprises should engage only in the production of popular consumer products.

Reviewing the history of innovative development, one can find that massproduction of popular consumer goods was more likely to spur technological revolution.

In 1716, for example, silk weaving technology was brought to England and a factory was established with hundreds of employees to produce silk. But it failed to spark the industrial revolution because silk was a high-end product that only rich people could afford at the time. Instead, it was cotton textiles that finally initiated the industrial revolution in England. Moreover, in the development of the automobile industry, it was the creation of the mass assembly line by Ford which produced cheap cars that triggered the automobile industrial revolution, rather than the production of luxury brands.

Looking back into the history of China's trade with the West, before the Ming Dynasty (1368-1644), traded commodities were limited to high-value products like silk and spice, which played a limited role in driving China's economic and social development. When it came to the middle-late stage of the Ming Dynasty, staple consumer commodities took up the brunt of maritime trade. This not only fueled China's trans-regional industrial division and organization of its manufacturing industry as well as urbanization in the country's eastern coastal regions, but also laid material foundation for the nation to transform from a material to a monetary fiscal system, and from monetary standard to the silver standard.

As the world's largest manufacturing country, China should avoid being outpaced by its rivals. If a country that temporarily takes a lead overprices its products, its ambitious rivals will have more chances to catch up with and surpass it. Since companies in the West overpriced their products by advertising them as being high quality, Chinese-made products were able to grasp market shares from their European, U.S. and Japanese rivals on a global scale.

No blind pursuing brands

To a large extent, China ensures its position as a large trading nation by virtue of its processing trade industry. Given that, in pushing forward the transformation and upgrading of its processing trade activities, should all enterprises be required to create their self-owned brands and engage in general trade? The answer is no.

The essence of transforming and upgrading processing trade lies in improving the level of commodities, increasing the added value within China, elevating China's share of profits earned from the global processing trade value chain and reinforcing China's control of the whole industrial system. However, all the above-mentioned goals are for the whole region or country, not for a specific enterprise. In other words, not all enterprises need to follow the path.

In fact, only a fraction of enterprises can see their brands survive and maintain development, and most enterprises are only capable of manufacturing and processing. Every successful brand or enterprise is braced by a series of supporting service providing enterprises. Only in this way can an industrial system be elastic, powerful and efficient. If all enterprises are required to establish self-owned brands and engage in general trade, the trading system would be stiff and rigid and can hardly make quick adjustments in accordance with market changes. China's industrial system should be flexible and competitive, rather than clumsy and sluggish.

China is not to change the existing international trade and production system completely, but to change its profit distribution structure. Therefore, the government should not blindly encourage all enterprises to establish self-owned brands, and enterprises should choose their own development path according to their respective strengths and conditions. Enterprises that have accumulated enough strength can opt to establish their own brands and seek expansion both at home and abroad. For those that don't have the muscle, the government should push and encourage them to process products for the former. Some regions can undergo trade transformation and upgrading, while some other underdeveloped regions can start with the processing trade.

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com

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