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China’s welcome to foreign firms a boon for manufacturing sector

During the Third Belt and Road Forum for International Cooperation held in Beijing last month, President Xi Jinping announced that China would lift all restrictions on foreign participation in manufacturing. This move demonstrated China’s continuing shift towards inclusiveness when it comes to foreign businesses.

The announcement also put a spotlight on China’s growing confidence in its ongoing “reform and opening up” process. China’s low-cost manufacturing sector has emerged over the past four decades and fuelled rapid growth. Consumers in the West have enjoyed lower-cost products while companies reaped higher profits.

In the past, Western nations outsourced their manufacturing and industrial activities to China. In the 2000s, the Chinese would likely have been the first to admit China had become a large, but not necessarily a strong, manufacturing nation – at least not yet.

Initially, China was known for copying Western products. With the spread of the internet and the associated information sharing, Chinese entrepreneurs quickly developed many innovative products and services.

Along the way, China’s innovations in manufacturing and technology evolved as did its unique blend of capabilities. Basic products, such as toys and clothes, gave way to advanced goods including computers and phones as China excelled in efficiency, quality and affordability.

As a result, China is now a world leader in the manufacturing of electric vehicles, green energy products including batteries and solar panels, smart appliances, ships, advanced trains, and communications technology, just to name a few.

Foreign companies have also made significant contributions to the development of China’s manufacturing sector. By engaging manufacturers such as Foxconn to assemble their products in China, Apple has helped fuel the growth of new suppliers within their clusters. These suppliers are now able to produce other high-end electronics.

Another example is Tesla, with more than 95 per cent of the company’s supply chain for its Shanghai Gigafactory now locally sourced. This suggests a local cluster of suppliers has been established around Tesla in Shanghai.

Apple and Tesla are just two examples of the mutual benefits of China’s opening up to international companies. While the foreign firms are rewarded with lower costs, high quality and quick turnaround, China benefits from a more robust job market while building capable clusters of supply chains and manufacturing capabilities. This has been a “win-win” approach for China and its global partners.

There is now a growing sentiment that China will lead the world into the Fourth Industrial Revolution, which will encompass the ongoing automation and digitalisation of manufacturing and industrial practices, including the use of cyber-physical systems and the Internet of Things. This is a noteworthy development considering the ongoing efforts of some nations towards decoupling, reshoring and “ friend-shoring”.

Of course, some manufacturers and supply chains have left China. Many of these were labour intensive, and their departure continues an exodus that has been under way for more than 15 years as China’s labour costs have increased.

However, some sophisticated supply chains have also been set up outside China in the last few years. Some of these were established to bypass the sanctions and tariffs imposed by the United States, while others were set up to increase diversification and reduce risks.

While some supply chains have left China, others are being built within the country. Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University in Beijing, said he believes manufacturers will remain in China because of the country’s “mature ecosystem” represented by implicit and explicit credit, labour, tax and infrastructure subsidies that manufacturers receive.

The decision to lift all restrictions on foreign participation in manufacturing is therefore not a single isolated action. Rather, it is part of a broader strategy for the overall development and rejuvenation of China.

Despite this positive move, recent actions by the Chinese government have caused some concern among foreign investors. For example, the enactment of the draft state secrets law, which expands the scope and depth of existing legislation, is likely to increase the risks of doing business in China.

The new law could lead to an increase in conflicting legal obligations between China and foreign companies’ home jurisdictions, especially regarding corporate transparency as well as data and information flows. The law also adds travel approval requirements for specific personnel, which could bring uncertainty for foreign firms that employ these people.

Foxconn, the Taiwanese contract manufacturer for Apple, is being investigated for issues related to tax and land use. There have been accusations that the investigation was prompted by Foxconn’s founder Terry Gou’s pursuit of an independent bid in Taiwan’s upcoming presidential election. Regardless of the reasons for the investigation, the concerns around Apple’s supply chain and business interests in China will raise doubts in the minds of some foreign investors.

Assuming Beijing moves to address the concerns of foreign manufacturers, I would expect to see more high-quality foreign investment in China’s manufacturing sector in the years to come. I also anticipate that more Chinese and foreign companies will join forces to find creative new ways to crack the code of building a new generation of truly global companies.

China’s openness to foreign investment in the manufacturing sector has the potential to herald a new era which will bring exciting innovations and capabilities that will benefit China and the rest of the world.

By Edward Tse

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