China Works blog: China manufacturing news, analysis and insights

International manufacturing companies active in China are increasingly focused on accessing growing Chinese mainland markets, rather than using the country as an export base, according to a new report.

The 2009/10 China Manufacturing Competitiveness report, co-produced by the American Chamber of Commerce in Shanghai and Boo z & Co, reveals that 83 per cent (up from 71 per cent two years ago) of surveyed companies said their primary objective for locating manufacturing operations in China was to access the rapidly diversifying Chinese marketplace.

As cost and wage differentials in inland areas of China become more attractive compared to the higher rates in coastal areas, 28 per cent of respondents are considering relocating production facilities to central and southwest China. This serves two functions, helping to reduce factor costs and locating facilities closer to rapidly growing markets across China.

“This report is a snapshot in time of a picture that is rapidly moving,” said Ron Haddock, co-author of the report, “but the old paradigm that China is just a place for cheap labour is changing.”

Manufacturing models keep getting bigger and more ambitious in China. Television news has shown images of the nation’s first domestically manufactured large civil helicopter, which completed its first test flight this week. The AC313 helicopter – which has a maximum take-off weight of 13.8 tonnes and can carry up to 27 passengers – completed its maiden flight in Jingdezhen, Jiangxi province.

The helicopter, which has been designed and manufactured by the Aviation Industry Corporation of China (AVIC), has a maximum range of 559 miles, and its uses will include “search and rescue, fighting forest fires, and assisting in fighting fires in cities,” according to state media.

China is investing heavily to upgrade its aviation design and manufacturing capacities. Earlier this week, the government announced that the draft design of China’s first home-built jumbo jet airplane will be completed by the end of 2010. The jet, codenamed C919, will feature a 156-seat and a 168-seat model. It is slated to begin production in 2011, and is targeted to be operational in 2016. The aim is to deliver a jet that is “more comfortable, less oil-consuming and more economical than competitors in the aviation market,” according to Wu Guanghui, chief designer of the Commercial Aviation Corp (COMAC).

As well as developing its own aircraft manufacturing industry, China is also the home to the only Airbus assembly plant outside Europe. Last June, the plant in Tianjin delivered its first China-assembled A320 jet.

The warning signs are being flagged for China’s economy – particularly a rising industrial employment imbalance – even though the government has announced it is aiming for 11 per cent growth this year. In a televised speech, Premier Wen Jiabao said the Chinese economy was “facing difficulties.” Wen added that China must deal with “serious challenges in employment” particularly in coastal cities.

China’s labour supply still exceeds demand, and the urban employment situation “remains severe,” according to a senior Ministry of Human Resources and Social Security official quoted in state media. Some 150 million migrant workers headed to the cities in search of work last year, while the total of urban unemployed officially stands at 24 million. Adding a sense of urgency to China’s job creation programmes is the fact that a record total of 6.3 million university graduates will enter the workforce this year.

One solution, according to a state media opinion article is “for local factories and government to finally make decisions on industrial upgrading.” The article adds that while this will likely result in a short-term fall in revenues for factories and the government, it is “crucial for the sustainable development of factories and for addressing other social issues, such as the ongoing regional employment shortage.”

Chinese sportswear manufacturer and retailer Li Ning, founded by a former Chinese Olympic gymnast, has continued its international expansion by announcing a sponsorship deal for Spanish Primera Liga football club Espanyol.

The four-year sponsorship deal with the Barcelona-based team, currently lying 15^th in the Spanish league, was confirmed at a signing ceremony on February 26.

Li Ning already sponsors several international athletes, including NBA stars Shaquille O’ Neal, Berni Rodriguez and Baron Davis, and pole-vault world record holder Yelena Isinbayeva. It sponsors the Singapore national badminton team, and provides the apparel for the Spanish national basketball team. The company opened its first overseas sportswear store in Singapore in late 2009, and plans a global roll-out in the coming years.

Is the military-inspired Hummer going for good? Following the collapse of a protracted deal between General Motors and Chinese truck and military vehicles maker Sichuan Tengzhong Heavy Machinery regarding the sale of the Hummer brand, the US carmaker seems likely to wind down the ailing Hummer SUV business.

The move is a far cry from last October’s joint statement that Sichuan Tengzhong – despite considerable scepticism from the Chinese government, which has the power of veto on Chinese company acquisitions overseas – had agreed to buy the Hummer brand, trademark, trade names and intellectual property license rights, and would assume existing dealer agreements. The Chinese company had ruled out, however, the possibility of moving Hummer manufacturing operations to China.

In a statement released this week, Sichuan Tengzhong said it had not been able to obtain Chinese regulatory approval for the Hummer purchase. The Chinese government had voiced concerns that as a domestically-focused manufacturing company, Sichuan Tengzhong did not possess the capacity or managerial know-how to control an international vehicle brand, particularly one whose sales have plummeted in recent years.

It’s all about the car in China. Manufacturing news in Chinese state media is currently dominated by stories about Chinese automakers’ profits, new auto industry investments and impressive projections for passenger car sales growth.

Beyond the automobile, however, the other major manufacturing sector to grab the headlines is renewable energy production. Indeed, China has just announced plans to “build a national renewable energy centre to further shore up development of the industry,” according to the state-run China Daily newspaper.

The establishment of the new centre is “in the preliminary planning stages,” according to Han Wenke, Director General of Energy Research Institute, but it will “be responsible for policy-making, key project and programme management, market and industrial operations, database and information platform establishment as well as international exchanges,” according to the report.

Further details are not yet forthcoming, but China’s new renewable energy centre is being heavily supported by the Danish government, which has agreed to invest up to USD18.5 million in the initiative between now and 2013.

China is the world’s third-largest producer of wind power, and produces around 40 per cent of the world’s solar photovoltaic products, according to official figures.

China’s factory output grew at its fastest rate on record in December – a month in which manufacturing activity soared in key Asian production economies.

The HSBC China Purchasing Managers’ Index rose to 56.1, up from 55.7 in November, reaching its highest level since the survey began in April 2004. This growth rate is expected to be sustained, and possibly even accelerated, in the coming months, as export orders improve and domestic public investment remains strong. Also in December, India saw its fastest manufacturing growth for seven months, while South Korea’s manufacturing output was at its highest level since August.

In China, the result of heavy government stimulus spending and the wider availability of bank credit in the first half of 2009 are raising inflationary fears. In December, Chinese manufacturers raised their prices at the fastest rate in 17 months.

Some analysts say, however, that overcapacity in many key industrial sectors and tighter monetary control – last week the Beijing government raised the reserve requirement for Chinese banks in an attempt to drain excess liquidity from the economy – may be enough to stave off the threat of unmanageable inflation. Either way, sourcing and manufacturing companies will need to remain very vigilant on pricing trends in the coming months.