State of Change: Assessing China’s Competitiveness
China has become very competitive in a relatively short space of time, and now it is aiming to transition to the next development stage, namely innovation-driven competitiveness. China's general trajectory in this regard is clear, and foreign companies are facing the prospect of a competitive landscape significantly altered by emerging Chinese competitors. By Barry van Wyk
China in 2012 is on the verge of transitioning to a third generation of national leadership that is seeking to make China's economy more competitive in the global economy. After three decades of sustained economic growth, China has ambitions not only of being competitive, but of being a leader in innovation and industry. To reach these objectives, China's leadership is considering initiatives and reforms for making China a more developed, more prosperous and more creative country. China's economy and its competitive standing in the world is in a state of change, and in various industries, this is presenting different types of opportunities and challenges for foreign companies.
Measuring China's success
Companies and countries are inevitably drawn into greater competition over finite markets. To gain a greater share of those markets, a company must provide products that are in some way superior to those of its competitors, so it can ultimately increase profit. For a country, the ultimate objective of gaining greater share of global markets is to increase the standards of living of its citizens.
China's rising competitiveness after 1978 was the result of a mobilisation of the factor endowments that the country had in abundance, especially cheap, unskilled labour. Opening parts of the economy to foreign investors drew in technology and allowed China to integrate itself into global value chains. China systematically became a supplier of labour-intensive products and components, combining inward FDI with a policy to develop competitive local companies. The rise in China's competitiveness was conditioned by the concurrence of several factors: a favourable exchange rate, low wages and large labour supplies, the inflow of FDI, the huge potential of the Chinese domestic market, and the opening of world markets to Chinese manufacturers.
China has come to occupy a unique position in studies of competitiveness. Its rapid growth in the last three decades has seen Chinese exports gaining global market share in an expanding range of industries along with China's progression up the value chain. The living standards of Chinese nationals have also clearly improved, so that China's competitiveness has increased at both the national and company levels.
The Global Competitiveness Report (GCR), an annual publication by the World Economic Forum, is the most comprehensive assessment of national competitiveness. It defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country, where productivity leads to economic growth and prosperity. The report measures a wide range of factors grouped into 12 pillars1, and it evaluates the importance of these pillars to individual countries by dividing the latter into three stages of development:
- Factor-driven, for countries still competing based on factor endowments such as unskilled labour and natural resources;
- Efficiency-driven, for countries developing more efficient production processes and increasing product quality to account for rising wages;
- Innovation-driven, for countries where wages have risen so much that businesses can only compete by producing new and unique products
In the latest edition of the report (2011-12), China, which has improved its ranking each year since 2005 and is now ranked 26th overall2, is categorised in the Efficiency-driven stage. The report notes that China has improved its performance in most of the pillars, yet notable ones where its standing is much lower than its overall position are Institutions (due mostly to occurrences of corruption), Financial market development and Technological readiness.
To benchmark national industrial performance for evaluating the competitiveness of companies, the United Nations Industrial Development Organisation (UNIDO) developed the Competitive Industrial Performance (CIP) index, which measures an economy's competitiveness for producing and exporting manufactured goods. Measuring a set of eight key indicators using manufacturing value add (MVA) data as well as population and trade data from 2005 and 2009 for 118 economies, the 2011 CIP index ranked China in 5th place overall, rising from 6th in 2005, and trailing only Singapore (1st overall), the US, Japan and Germany. In analysing the data used for the CIP index, the UNIDO report found that China had increased its share in overall global MVA from 6.7% in 2000 to 15.4% in 2010, when global MVA amounted to USD 7.39 billion. Reflecting the shifting landscape of global manufacturing towards Asia, in 2010, developing economies accounted for 35.6% of global MVA (up from 20.7% in 1990), and China accounted for almost 75% of the latter total.
Global manufactured exports are dominated by medium- and high-technology products, which have never dropped below 60% of world manufactured exports since 1992. The UNIDO report found that the five fastest-growing sectors globally over 2005-093 were all (except for Basic Metals) in medium- and high-technology manufacturing. In all of these sectors, in fact in 21 out of the total 22 industrial sectors, China has become the first or second leading manufacturer in the world (see table above). In this process, over the period 2001-08, China's total manufacturing exports grew by a staggering 27.9% annually. Developed countries still account for around 60% of global medium- and high-technology exports, yet here also China has made inroads, with the share of medium- and high-technology products of its total exports increasing from 45.5% in 2000 to almost 60% in 2009.
China has clearly dynamically improved its competitiveness, both in the national as well as company spheres. Yet while China's exports have indeed expanded enormously after its accession to the World Trade Organisation (WTO) in 2001, the processing trade accounts for around half of its exports. According to a WTO trade policy review on China published in 2010, foreign-invested enterprises (FIEs) accounted for 84.1% of China's total processed exports in 2009. As export data reflect the gross value of products leaving a country's ports, the very high share of imported inputs in Chinese exports means that export data do not adequately measure the value actually produced in China. The competitiveness of Chinese exports is thus in large part fuelled by foreign multinational plants in China's coastal regions, and not necessarily by world-class Chinese companies.
Furthermore, since 1996, foreign firms have accounted for around 85% of China's high-technology exports4. The technological spillovers that were expected to accrue from the FIEs and many MNCs operating in China, moreover, have largely failed to materialise. For all its export growth and the increasing competitiveness of its industry, and despite the fact that 58 mainland Chinese companies were included in the Fortune 500 in 2011 (the third-most after the US and Japan), China has not as yet been able to produce a truly global brand5: the latest edition of Interbrand's 100 Best Global Brands in 2011 is still missing the first Chinese entry. In terms of the living standards of Chinese people, the ultimate objective of national competitiveness, China is still far in arrears. With a GDP per capita of USD 4,382 in 2010, the figure for China is not yet half that of Brazil or Russia's, countries that rank below China in comparisons of national and industrial competitiveness.
China can theoretically only reach the innovation-driven threshold by raising the skills of its workers and upgrading its domestic technology and institutions to be able to produce innovative products and pioneering technology. The drive for increasing China's competitiveness is currently enveloped in a broad transition of China's economy seeking to develop better paid, more skillful and more competitive workers and industries. In 2012, this is occurring on the backdrop of a national leadership transition.
A vision for a competitive and innovative China was presented in February 2012 in a voluminous study jointly developed by the World Bank, the Chinese Ministry of Finance and the Development Research Centre of China's State Council. The resultant China in 20306 document outlined six key strategic aspects for China to consider in order to become a high-income country by 2030. These focus in part on rethinking the role of the state and the private sector in China's economy to encourage increased competition, innovation, and China's continued integration with global markets.
As the Global Competitiveness Report outlined, rising wages have been instrumental in inducing companies to innovate to remain competitive. Wages in China have been rising rapidly since the mid-2000s. All urban wage growth has been high, yet that of low-skilled workers has been highest among all wage earners, more or less doubling in real terms from 2001 to 2010. China's labour force is expected to peak at around 1 billion workers in 2015, and China may already have passed or is about to pass the Lewisian turning point7. Rising wages in urban areas in China are also regarded as an important means for decreasing the urban-rural income gap and increasing urbanisation in China, thereby stimulating the services industry.
China's competitiveness will decline, however, if rising wages occur without concomitant increases in labour productivity and innovation. With this in mind, China's government has identified improving the quality of China's human capital as a key objective. The core policy framework to this end is the 12th Five-Year Plan (FYP) for 2011-15, which aims to engineer competitive advantages for China based on science, technology and innovation and to make China an industrial leader in certain strategic industries. During the previous FYP of 2007-11, China's expenditure on R&D increased by 22% annually, and in 2011, R&D spending is estimated to reach 1.85% of GDP8.
China's output in academic publications has soared in the last decade, reaching 112,000 in 2008 (8.5% of the global output), and Chinese research publications have become leaders in the fields of materials science, physics, chemistry and mathematics. Chinese patent applications to the World Intellectual Property Office (WIPO) increased from 23,000 in 1996 to 290,000 in 2008. Yet in terms of academic papers, Chinese contributions are reportedly still lacking so-called high-impact articles, and the quality of its patents have not been matched by its quantity as incentives for filing patent applications have produced a large number of minor design and utility patents.
A small but growing number of Chinese companies have actually reached or are approaching the 'technological frontier' in their respective industries. These include ZTE and Huawei in the ICT industry, Suntech Power in the solar industry and Dalian Machine Tool Group in engineering. Huawei, for example, has developed the world's first '100G' technology capable of delivering large amounts of data wirelessly over long distances. Chinese companies – both state-owned and private – are excelling in areas such as PVCs, biopharmaceuticals, nanotechnology, stem cell therapeutics, high density power batteries, supercomputers, and shipping containers. Chinese companies have also achieved results with other forms of innovation, for example developing creative business models to suit existing products9.
State of change: The implications of a more competitive China
The current transitions in China's economy and society have broad implications for the new type of competition as well opportunity that a more competitive China can hold. Foreign companies in various industries are increasingly presented with a competitive landscape significantly altered by these transitions in China.
For lower value-added products in industries where China has long been dominant as a Low Cost Country (LCC) producer, China is still to a large extent an attractive option. Yet whereas procurement managers could previously focus their attention solely on China, they are now increasingly considering China as only one of a few options. Foreign companies sourcing textiles and clothes from China, for example, will now find it attractive to source only some products from China, as it still holds comparative advantage in areas such as industrial variety and infrastructure, while increasingly sourcing selected items from other Asian countries like India and Sri Lanka.
One industry that can serve as an illustration of China's increasing competitiveness is heavy industry. In this industry, China has over the last few years begun to provide new options for buyers of construction and mining machinery, challenging the established industry leaders. In the period 2000-10, China's exports of heavy machinery grew by a CAGR of around 30%. Chinese companies have been most successful in this regard in developing markets, and have gained a small degree of market share in countries like Brazil and South Africa, as our next article How to Engage outlines.
This process is still at an early stage, and while China's construction equipment manufacturers, for example, are now able to manufacture a bulldozer or a motor grader by industry standards and make gains in market share on price, these machines do not yet compete with the leading brands in the market. Yet Chinese companies are making investments in these countries and are systematically upgrading the quality of their machines as well as their parts and after sales services to become more competitive, following the example of the likes of South Korea. The logical conclusion of this process will be a Chinese bulldozer that is cheaper and basically just as good as a Caterpillar bulldozer, providing an attractive alternative for mining and construction companies. This gound-breaking development may still be a few years away, yet it is inevitable10.
The globally competitive and pioneering Chinese company and brand are still under development, but the outlines have started to take shape.
Barry van Wyk, Senior Consultant
- The 12 pillars are Institutions, Infrastructure, Macroeconomic environment, Health and primary education, Higher education and training, Goods market efficiency, Labour market efficiency, Financial market development, Technological readiness, Market size, Business sophistication, and Innovation.
- China leads the BRICS in the rankings; South Africa is next in line in 50th place.
- Office, accounting and computing machinery; Radio, television and communication equipment; Electrical machinery and apparatus; Other transport equipment; and Basic metals.
- 'Foreign' here refers to foreign firms and joint ventures. In 2009, for example, the share of foreign firms in this case was 83.2%. See http://www.sts.org.cn/sjkl/gjscy/data2010/2010-2.htm for more details.
- Although Lenovo and Huawei have been suggested as possible candidates.
- With the subtitle Building a Modern, Harmonious, and Creative High-Income Society.
- As China in 2030 points out, "Although the precise timing remains disputed, most researchers accept that China is at or nearing the Lewis turning point of exhaustion of the rural labour surplus, and the remaining rural working age population may be too old, sick, or disinclined due to family obligations to migrate to urban areas."
- The 12th FYP aims to raise expenditure on R&D to 2.2% of GDP by 2015. Some countries have achieved a science & technology 'takeoff' when this percentage approached 2%.
- Broad Air Conditioning, for example, has developed a way to commercialise gas-powered air conditioning systems for large buildings.
- In South Africa, the Chinese company Shantui recently opened a large new facility and has launched an advertising campaign as 'the world's leading maker of bulldozers'.