China’s leadership transition and impact on trade and global economies

Recently,China has gone through a leadership transition, a once in a decade event. We asked Zintro experts to provide us with their insights into the types of change businesses might see and how the transition of power might affect trade, global economies, and emerging economies.

David Alexander, an expert in Chinese supply chain and manufacturing, says that China will continue to be an ideal manufacturing destination in light of the new regime changes. “We can expect increased focus on the domestic economy, improved international standards for intellectual property rights, and innovation, but little in terms of bold changes from a governmental standpoint. While there are now new millionaires and even billionaires as a result of China’s economic gains over the past 10 years, some say usual cronyism persists in what people refer to as a prehistoric model of government,” explains Alexander.

China is certainly at a tipping point when it comes to a balance of new industry scions though under the umbrella of traditional communist policies. “The current agenda does not necessarily match a new sophistication and heightened intellectual standard—not just from a scholarly perspective but an industry and economical one. Corruption, environmental issues, and banking controlled by state-owned monopolies constrict the opportunity to be on the same playing field as the West,” says Alexander. “There is no apparent will en masse to break from a one party model but a growing movement and optimism toward experimental trial and error. Because state-owned enterprises have translated into huge profits for a limited few, namely those with party influencers, there could be a growing unrest by the next generation of business leaders, many of whom have received an education in the US where study of free enterprise practices in a capitalistic yet democratic environment are so pervasive.”

Alexander predicts that we will continue to hear about dynamics affectingChina’s place as the factory to the world. “Increased labor costs, currency fluctuations, and shipping cost increases have affected decisions about whether or not offshoring strategy makes sense,” he says. Below, Alexander outlines five reasons China will continue to depend on an export driven economy.

Labor vs. other countries: “Labor costs may be up to 30 percent lower in other countries like Vietnam and India; however, this is offset by superior supply chain advantages such as roadways and utilities. Skill levels are also higher thanks to Western training and a little osmosis over the past 15 years. This means China’s productivity continues to rise other countries in Asia are less efficient overall,” Alexander says.

Flexibility: “Because China’s manufacturing base tends to be cellular, meaning a production or assembly line can be producing one thing today and another tomorrow, Chinese workers are frequently adaptable to ever changing tasks. Much of this can be attributed to the highly seasonal nature of Western retail needs such as Christmas lights or plush toys,” Alexander explains. “China also presents many options for qualified suppliers whose initial minimum order quantities are less than traditional manufacturers. Often, a Chinese manufacturer will begin with molds having less cavitations than is generally required until volumes reach a critical mass. This all translates into less startup costs, quicker return on investment, and greatly reduced risk.”

Availability of materials and manufacturing: “China now makes a fifth of the world’s manufactured goods. There is a ready source of supply for various components, parts and necessary materials.China is also home to thousands of industrial parks thanks to investment by not only the Chinese government but also foreign direct investment by Western firms.Shanghai and Guangzhou are known manufacturing hubs and have some of the heaviest investment and infrastructure along with some of the largest work forces in the country. Special Economic Zones created by the PRC have attractive tax incentives for FDI and are given more independence on international trade and economic activities,” says Alexander.

China innovation and investment: “China’s skill levels have vastly improved; China is now focusing more on innovation and creative manufacturing practices. Also, with labor increases comes increased capital investment in the form of automation—something that used to be last resort if a task or function could be completed manually,” he says.

Ideal product development: “China continues to be an ideal partner for new product developers and innovators. While labor costs have increased over the past five years,China’s productivity has increased tenfold.China offers the flexibility required to take on a variety of new projects and with lower minimum order quantities,” Alexander notes. “There is a steady supply chain for materials and different manufacturing services and China continues to invest in technology, facilities, and innovation. While China may not be suitable for some manufacturing due to increasing freight costs and currency fluctuations, every project must be carefully weighed and evaluated on its own merit.”

Alexander says that business will need to look for additional checks and balances in the evolution of China’s new political process. “As technology has provided enhanced views of what freer societies enjoy, there will be an increased movement to protect the interests of a broader number of China’s citizens. If such an evolution is met with resistance, there may be more chaos in the next ten years,” he says.

Adriána Lajdová, a translator with professional relations in translation and localization agencies in China, says that China will be the superpower of industry in producing and developing. But, “The Chinese government must better address the localization of human troubles and issues, especially the demand of people for higher salaries, better competencies, and rights,” she says. “I think that investors and Western companies will look into the rights and conditions of workers, and demand customization for their needs.”

By Maureen Aylward

 


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