By some standards, 2015 has been a tough year for China. Rising wages within the country, environmental and ethical lapses in several industries and the factory explosions in August together painted a rather grim portrait of a manufacturing star that might be losing its luster. International businesses have become alarmed at the economic downturn in many of the country’s industrial sectors. At some point in time, those developments may drive them to seek wholesale goods and materials from other Asian nations. On the other hand, many observers have commented favorably on the evolution within China’s borders, and see it more as a necessary reality check than evidence of failure or crisis.
In large part, the “ringing of alarm bells” is because today’s Chinese manufacturing sector is constantly being compared to its former self of five, ten and 15 years ago. When China re-entered the global market place in 1979, it did so carrying many of its former ingrained cultural mainstays coupled with the hardships endured during occupation, civil war and 30 years of change under the party. The industrial behemoth that emerged over the next 35 years was not only created by long-term strategy and careful implementation of sound practices. Instead, the country quickly became a world manufacturing center because it had a plethora of cheap labour and a desire to engage with the western buyers as quickly and profitably as possible. Physical facilities were built to get the next contract online as fast as possible; building codes and safe construction practices were often set aside to pursue immediate corporate gains. And the people, newly exposed to the western world of consumerism, were eager to get to work and build their version of ‘the good life”, despite the dangers that may have existed in their workplaces. The explosive growth in the Chinese economy that resulted from these efforts was huge, fast and, in many ways, uncontrolled.
According to the World Bank, China’s growth slowdown is “not unexpected and is desirable from short and medium-term perspectives”. In the short term, the government is implementing policies that are aimed at the vulnerabilities created by the 2008 global financial crisis. Its financial sector had experienced rapid credit growth, a rise in “shadow” banking, and an unfettered borrowing of capital by local governments, all of which undermined national efforts to control government credit and spending, and improve the credibility of its overall banking system. And, as manufacturing orders began to shrink, there was a rise internally in China’s services sector. The country began consuming more of its own products and services, and domestic spending became a force which is starting to compete with exports as a generator of growth.
Also, quite simply, no industrial complex can sustain over time the steep growth percentages that China experienced in its first 30 years as an industrialized country. What is being seen now is an appropriate (albeit somewhat staggered) shift toward an overall more stable economy. China’s economy will survive these growing pains and thrive long into the future.
So what can off-shore producers look for in the future from their Chinese supply chains? The national governments’ “Made in China 2025” program, launched in May 2015, seeks to address the challenges in the country’s economy that were caused by such rapid growth. The necessary restructuring of its economic base should repair many of the gaps experienced in the manufacturing sector, such as environmental breaches and ethical oversights. At the same time, an increase in high-value manufacturing is expected, as Chinese companies are encouraged to upgrade and improve their technologies.
China’s vast economy (GDP equaled RMB 58.8 trillion in 2013) wasn’t built in a day, and won’t repair in a day. President Xi Jinping’s government is taxed with both developing future growth while, at the same time, overhauling much of its industrial infrastructure. Necessary adjustments may cause slow-downs today, but they are aimed at improving tomorrow’s production numbers through heightened ethical and safety practices and enhanced technological abilities. To me, that sounds like good news for the world’s industrial manufacturers who rely on China’s resources to produce their materials and goods. To discuss how these evolutions might impact your supply chain, give me a call today.
To better understand how you can validate your suppliers you can also download a free checklist “New Supplier OnBoarding Checklist” here.
These checkpoints are not only for new suppliers, in fact they should be checked and verified regularly for all suppliers.
This blog was written by Carsten Primdal, an independent consultant who helps businesses that have manufacturing done overseas – especially in China – minimize supply chain risk.Drawing on years of on-the-ground experience and a strong understanding of the cultural and commercial context, Carsten is passionate about helping his clients gain greater control over the risks most companies face knowingly or unknowingly.
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