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China’s emergence as a manufacturing powerhouse has been astonishing. In seventh place, trailing Italy, as recently as 1980, China not only overtook the United States in 2011 to become the world’s largest producer of manufactured goods but also used its huge manufacturing engine to boost living standards by doubling the country’s GDP per capita over the last decade. That achievement took the industrializing United Kingdom 150 years
Today, however, China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demanding. Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China as it gets richer.1 1. Empirical evidence suggests that manufacturing’s relative contribution to a national economy tends to peak when it reaches 20 to 35 percent of the country’s GDP. Today, China’s manufacturing sector accounts for roughly 40 percent of its GDP. Manufacturing growth is slowing more quickly than aggregate economic growth, for example, and evidence suggests that the country is already losing some new factory investments to lower-cost locations, such as Vietnam, sparking concern about China’s manufacturing competitiveness.2 2. In 2011, the growth rate of China’s manufacturing GDP had slowed by 34 percent from its precrisis peak. Overall GDP growth slowed by 20 percent over the same period.
Competitiveness, of course, is a broad term that can confuse more than clarify. During the 1980s, for example, there was much hand-wringing in the United States about declining manufacturing competitiveness versus Japan. In the following decade, however, those concerns faded, replaced by a focus on the failings of “Japan Inc.,” the SUV-fueled resurgence of the US automotive sector, and the boom in US high-tech manufacturing. In the United States then, as in China today, there isn’t just one manufacturing sector; there are many, each with different competitive strengths and weaknesses
In this article, we move beyond the hyped hopes and frantic fears for Chinese manufacturing as a whole, to gain a more balanced picture of this diverse sector. We start with a summary of four key challenges that affect different types of manufacturers in different ways and then move on to a discussion of competitive priorities whose importance again varies for players of different stripes. Despite the variation across manufacturing subsectors, companies—Chinese owned and multinational alike—can’t escape the need to raise their game and move up the value chain by boosting productivity, refining product-development approaches, and taming supply-chain complexity. Those that do should prosper in the years ahead, while those that rely on yesterday’s model of rock-bottom wages and stratospheric domestic growth rates are likely to fade
For years, China’s low salaries; strong supply base; high investment in port, road, and rail infrastructure; and solid engineering and technical skills provided a strong platform for manufacturing exports. Meanwhile, a vast domestic market helped fuel China’s continuing transition to a consumption-based economy. Today’s outlook is more mixed. Here, we review four core challenges and the types of players particularly affected by each of them. In doing so, we draw on a set of global manufacturing archetypes established recently by the McKinsey Global Institute (see sidebar “The makeup of Chinese manufacturing”).3 3. Sectors were grouped according to the intensity of the following: capital, energy, labor, R&D, trade, and value. For the full McKinsey Global Institute report, see Manufacturing the future: The next era of global growth and innovation, November 2012.
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