2012 turns out to be a year of struggle for China’s manufacturing industry. In response to soaring labor and material costs in China, many U.S. and European companies are planning to move their manufacturing facilities back home. For example, Ford has announced that as many as 12,000 jobs will return from Mexico and China.
As developed countries vie for leadership in the next round of global industrial reshuffling, how should Chinese manufacturers respond to the pressures from aggressive international competitors?
The Chinese manufacturing industry certainly faces severe challenges, including a diminishing cost advantage, lack of intellectual property rights, and a shortage of knowledge workers.
So, will Chinese manufacturers be able to leverage the “third industrial revolution” (the convergence of internet communication technology and renewable energies) to displace peers in developed countries and become leaders in their own right, at least in some areas? Technological change is often instituted through an evolutionary process with many contributors. Blind investment without adequate infrastructure or commercial support will result in adverse, rather than positive, effects. One of the requirements of the intensely competitive industrial market is to continually improve the skills and knowledge of employees. A shortage of R&D talent and knowledge-based labor, and its lack of mobility, may prove to be an enormous challenge for China’s manufacturing industry.
In view of the challenges facing Chinese industrial enterprises, their focus should be upon the development and application of skilled labor, along with nurturing critical technologies and building keener market insight. This is at the heart of the “third industrial revolution” and will do most to improve the competitive position of Chinese industry.
Driving Industrial Upgrade through Talent Development
In general, Chinese manufacturers have been less concerned with the improvement of management abilities than with upgrading technology and equipment. This has largely been in response to the enormous demand from global markets. In the past three decades, Chinese companies have spent a lot of money on rapidly scaling up equipment and technologies. However, little attention has been paid to the management of these enterprises. As a result, there is vast untapped potential for producing superior products with more attention to quality control and other management practices.
Manufacturers grow primarily through expanding sales and increasing value added. Innovation and R&D talents are critical core competencies of enterprises. For manufacturers, in particular, managing these competencies is essential to meeting demand and sustaining an expanding business.
Fortunately, more and more enterprises have realized the importance of business management and management talent development. In the manufacturing industry, management talent is normally developed differently than in other general businesses. Some skills are not effectively taught in business schools, as they need a more complex training system that is highly specific to the individual enterprise. However other management talents, such as human resources, environmental factors, and marketing, are within the traditional business school curriculum.
Extending toward Key Value Points
Effective utilization of a more skilled workforce is another challenge. Manufacturing in almost every leading economy, including Japan and Korea, took a path that began at the low value-added end and progressed to higher and higher value. With a large workforce and proper policy support, China has the capacity to transform its manufacturing industry toward the high end. What is needed is sufficient time.
In general, upward movement along the value chain is good. However, the greatest profitability is not necessarily located closest to the final consumer. So this may not be the best strategy in every sector. Depending on the manufacturing sector, the best positioning may be located in different positions in the value chains. For example, in the computer manufacturing sector, the most critical technologies are located upstream. In the automobile sector, the most critical links are located closer to the middle of the process (engine and assembly.) In food manufacturing, processing and distribution links that directly serve the customer are more important than upstream farming.
As general model of the manufacturing industry, latecomers (e.g., China’s manufacturing industry) usually start in non-critical links along the value chain. As they develop and gain influence, industrial leaders usually abandon non-critical links for more profitable niches. Clearly, latecomers often face more competition unless they can identify unfilled niches. Sometimes leading players in an industry cooperate with newer arrivals if it allows them to gain additional market access. With continued R&D investment, latecomers may also be able to break the technology barriers that leaders depend upon, seizing key links along the value chain. However, upward mobility along the value chain is a long-term process that depends upon the right mix of technology, skills and strategy.