By: Jackie Liu
Losing competitiveness as a global manufacturing base: What’s China’s next step?
At the end of October, Samsung Electronics, the world’s leading smartphone producer, shut down its last remaining mobile phone factory in Huizhou, China. The factory previously manufactured 63 million phones every year, accounting for about 17% of Samsung’s total global production. Equipment used at the facilities in China have been relocated to plants in other countries with cheaper labor, such as India and Vietnam. The exit of the technological and mobile phone giant is a signal of a major downturn in the Chinese manufacturing industry.
First, Samsung is losing market share in China, which has decreased from 15% in 2013 to 1% . This loss is directly related to fierce competition from Chinese domestic smartphone makers, such as Huawei and Xiaomi. Furthermore, other companies such as Google, Fitbit, GoPro, and iRobot are also in the process of relocating their major factories out of China. CW Chung, head of research at Nomura in Seoul, commented on the exit of Samsung: “The reason that Samsung entered China was its huge market and cheap cost, but the two factors are gone now.” He is pointing out that China has lost many attractive qualities that previously made it a global manufacturing hub, resulting in many foreign manufacturing plants shutting down.
Now, rising labor costs, increasing rental costs, high taxes, and factors related to the US-China trade war, suggests that China is not a suitable manufacturing hub anymore. The latest official data from China shows that the growth of foreign direct investment has decreased from double-digits just last year to merely 3.7 percent this year. The reduction in active factories and overall foreign direct investment has the potential to cause damage to the domestic economy in China and its status in global supply chains.
In efforts to maintain its economic strength, the Chinese government has made promises to welcome and protect foreign manufacturers investing in China. In the past, economic growth was largely driven by the aggressive expansion of manufacturing output; this is not working anymore. China is no longer a manufacturing economy; it is a consumption led economy that relies on middle-to-high end technologies, a well-educated population, and a quickly developing service sector. This is also a great opportunity for China to aim for a more sustainable and greener economy. Instead of trying to grasp at the remnants of an economy that has already evolved, China must transform its economic processes and find new ways to drive economic growth and to continue competing in the global economy.
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