China Needs To Develop ‘Systematic Manufacturing’ – Analysis

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By Kung Chan and He Jun

After formally joining the WTO in 2001, China deeply engaged in globalization, connecting cheap labor among the Chinese people, their diligent work ethic, and aspirations for a happy life with the world market. Against the backdrop of globalization, China successfully assumed the role of the “world’s factory”, producing inexpensive goods for the entire world and accumulating wealth for its development. As a result, the country’s economic development experienced a “golden decade” of rapid growth after joining the WTO.

However, the flourishing days proved to be short-lived. Less than 20 years after China’s entry into the global economy, the tide of deglobalization disrupted its trajectory. Starting in 2017, former U.S. President Donald +Trump initiated an unprecedented trade war with China, extending it to various sectors such as investment, technology, finance, education, cultural exchange, and tourism, attempting to promote a comprehensive “decoupling” between the U.S. and China. Those who have deep faith in globalization were skeptical that the two countries could completely decouple, given their bilateral trade volume of up to USD 700 billion. Yet, from the Trump to the Biden administrations, from deglobalization to geopolitical frictions, the gradual occurrence of decoupling between China and the U.S. is evident.

For the once “world’s factory”, one significant and direct impact of deglobalization on China is the massive relocation of manufacturing industries outside the country, forming a reconstruction of global supply chains beyond its borders. Among the relocated enterprises, there are those from Europe, America, Japan, South Korea, ASEAN, as well as from Hong Kong and Taiwan. Some companies moved due to concerns about geopolitical risks, some due to multinational corporations adjusting their global industrial layouts, and others as part of the supply chain, compelled to relocate in line with downstream end enterprises and “chain-leading” companies.

Regardless of the reasons, it must be acknowledged that in recent years, as the global supply chain undergoes systematic restructuring, China has lost a considerable number of manufacturing enterprises. This transformation is just beginning, and in the future, there may be even larger-scale and more widespread industrial relocations. It should be noted that in a market economy, while corporate investment migration is a normal phenomenon, excessive migration can undoubtedly cause significant losses to the economy and employment of the departing region.

Given the trends of deglobalization, geopoliticalization, and the restructuring of global supply chains, how should China, as the “world’s factory”, adapt to and cope with these changes?

ANBOUND’s founder Kung Chan believes that China needs to vigorously develop “systematic manufacturing” and enhance its capabilities in this area to build its competitiveness in the international market. Systematic manufacturing refers to a manufacturing model that revolves around complex industrial products, emphasizing intricate supply chain relationships and coordination of industrial processes. It involves multiple industries and requires close collaboration along the industrial chain, placing certain demands on the efficiency and ecology of the supply chain. The contrasting concept to systematic manufacturing is “singular manufacturing”, which involves manufacturing activities centered around a single product, such as producing chips, cups, tools, or mineral water. Singular manufacturing is a straightforward comparison – either it has what it takes to produce the products, or it does not.

In contrast, most modern manufacturing is systematic manufacturing. For instance, producing a car requires 25,000 components, while manufacturing a large commercial aircraft requires millions of components. Therefore, building cars or airplanes are typical examples of systematic manufacturing. It can be argued that in such manufacturing activities, the integration of various complex systems and components is far more intricate and critical than the production of singular components. This is not to negate the significance of singular manufacturing but to emphasize the importance of systematic manufacturing capabilities for modern industrialization. The emergence of systematic manufacturing reflects the changing times, and in the era of increasing specialization in globalized industries, the ability for systematic manufacturing is becoming more and more crucial.

Researchers at ANBOUND believe that developing systematic manufacturing presents both an opportunity and a model that can enhance China’s competitive capabilities in the context of ongoing corporate relocation. In the development of systematic manufacturing, there is a certain path to follow, and if the direct route proves challenging, an indirect path can be pursued. The key to successful systematic manufacturing lies in creating an assembleable “machine.” For example, China’s high-speed rail initially incorporated technology and products transferred from companies like Siemens, Alstom, and Kawasaki Heavy Industries. However, these components were ultimately “assembled” and integrated into the Chinese high-speed rail market, forming a systematic product known as China’s high-speed rail.

Final analysis conclusion:

China has a robust industrial foundation with a diverse range of industrial categories, making it more suitable for systematic manufacturing and the integration approach to produce systematic products. From the perspective of an independent think tank, ANBOUND is not supportive of China concentrating resources on a few strategic and important products. Instead, it suggests that China should concentrate resources on building the capability for systematic manufacturing. Of course, for China, this often involves significant strategic investment decisions.

Kung Chan and He Jun are researchers at ANBOUND

Anbound

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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