Wednesday, Mar 29, 2017, 7:01 PM CST – China

Economy

Economic Forecast

MANUFACTURING OVERHAUL

Manufacturing is shrinking in terms of its share in China’s GDP. While 2016 promises to be a time of change for the industry, its importance remains unshakable. Deputy Minister Feng Fei tells NewsChina what the upcoming ‘industrial revolution’ will look like. What old sectors will drop away, and what new industries will take their place?

After more than 30 years of running at top speed, machines in China, the “world’s factory,” are slowing down, in turn stalling the country’s entire economy. In dealing with this aging equipment, China has decided on replacement rather than repair. The purpose is not just to maintain steady economic growth. It is also to win the latest round in the international competition for resources, technology and markets, a contest that has become increasingly fierce since the global financial crisis hit in 2008.

But it’s costly to dispose of old machines and install new ones. It can be particularly difficult when the market is shrinking, as it is now. This pressure also means there is no time to waste.

Feng Fei was a research fellow at the Development Research Center of the State Council before he assumed office as the deputy minister of China’s Ministry of Industry and Information Technology (MIIT) in early October 2015. He is in charge of the departments of industrial policy, industrial operation monitoring and coordination, small and medium-sized business affairs and consumer products manufacturing. He also co-manages the departments of policies and rules, energy conservation, production safety and raw materials industries.

In an exclusive interview with NewsChina, Feng detailed the national goal of making China not only the biggest manufacturer in the world, but also one of the most powerful, as the country tries to define its own role in the world’s new industrial revolution.

 

NewsChina: China’s manufacturing sector accounted for only 40.6 percent of GDP in the first three quarters of 2015, down from the 43.7 percent recorded after the first half of the year. What accounts for the change?

Feng Fei: There are three reasons behind it. Firstly, it reflects China’s economy’s improved economic structure. China’s service sector, particularly services that are oriented towards the manufacturing sector, has been accelerating in recent years. The service sector outweighed manufacturing in 2012 in terms of value-added output, and made up 51.4 percent of GDP in the third quarter of 2015, 2.3 percent higher than it did during the same period in 2014. This is because better productivity in manufacturing has allowed more of the labor force to transfer to the service sector.

Secondly, the service sector has received a boost from new policies, especially those encouraging business startups and innovation. In the meantime, many services that used to be part of the manufacturing sector, including R&D, design, logistics, branding and IT, have spun off to become independent industries. The rapid growth of these production-related services has added momentum to the tertiary sector.

Thirdly, overshadowed in the complicated and difficult economic climate both in and out of China, some of the country’s conventional industries, already grappling with overcapacity and a lack of innovation, have experienced a significant slowdown in 2015. This has also reduced the manufacturing sector’s share of GDP. In the first three quarters of 2015, the added value of the secondary industry [manufacturing, mining and public utilities] was up by 6.2 percent year-on-year, which was 2.3 percent slower than the growth recorded the previous year. By contrast, the service sector rose by 11.6 percent, a 0.8 percent increase year-on-year.

 

NC: The decrease in the secondary industry’s portion of China’s GDP, however, has also led to the assumption among some observers that China’s manufacturing sector is losing importance. Do you agree with this?

FF: I don’t buy this idea. Manufacturing has always been the foundation of human survival, the comprehensive power of a nation and the wealth of a society. The status of the real economy, with the secondary industry at its core, as the pillar of our national economy, is unshakable, despite its decline in GDP share in relation to the service sector.

Even the development of the service sector itself has to be built on the progress of technology, on the efficiency and division of labor in manufacturing. If the former is “fur,” then the latter is the “skin” on which fur grows. This is true even in industrialized economies. Germany has successfully resisted the global economic recession largely thanks to the importance Germany has always given to its manufacturing power.

Manufacturing has already returned to the high ground for which every country is competing in the game of international economics. The deep integration between information technology and manufacturing is greatly transforming production methods, production organization and the whole supply chain, which in turn is transforming the competitive structure of world manufacturing.

Developed economies, for example, are racing towards the high ground through their “reindustrialization” initiatives to expand their edge in high-end markets, while emerging economies have made manufacturing a key part of their national strategies.

For China, the path of relying on massive inputs of labor, land and capital is no longer sustainable in the manufacturing sector. The only choice is to grasp the historic opportunity given by this new technological revolution to renovate the manufacturing industry.

 

NC: Then how can China’s manufacturing sector overcome the constraints of finite resources and environmental limits?

FF: Manufacturing is at once the focal point, the challenge and the solution to China’s economic growing pains. This was made clear in the proposal for China’s 13th Five-year Plan (2016–2020) that was published in November. Scaling up the size of the manufacturing industry is no guarantee that it will make it stronger. 

Situations vary within the manufacturing sector itself. Conventional manufacturing needs to find a new way out of external pressures and internal problems. According to the China Manufacturing 2025 strategy [issued by China’s State Council in May 2015], conventional manufacturing should be upgraded on a technical level. As for emerging manufacturing, the key is to explore ways to help it develop. It is also crucial to address fundamental weaknesses of the manufacturing industry as a whole, digging into innovation capability, product quality and some basic industrial manufacturing supplies.

 

NC: How should conventional manufacturing be overhauled?

FF: Conventional manufacturing still serves as the foundation for China’s manufacturing sector as a whole, and it will be an asset in the sector’s upgrading. Information technology can help with this process.

While the market plays the decisive role in allocating resources, the government needs to provide better services through new systems. Specifically, the government can encourage R&D along the value chain.

 

NC: Is there an exit plan for enterprises that are performing poorly?

FF: Industrial restructuring will follow market principles, while keeping an eye on the future outlook of the industry. Disposing of zombie enterprises at a faster pace and in a way that respects the market and the law is the key to industrial restructuring and solving overcapacity. Also, stricter implementation of technical, environmental, quality and safety standards should eliminate outdated capacity.

In the meantime, the pressure these measures place on local economic growth can be eased through a tactic called capacity replacement. This entails giving up outdated production capacities in exchange for updated, more advanced ones. [The MIIT issued this plan in July 2015. Local governments can apply for new projects by dumping old ones on the MIIT’s overcapacity list.] The money saved through this strategy can help to cover the cost of supporting laid-off workers as well as the cost of transitioning to a new, advanced production system. The central government has asked relevant ministries to come up with plans detailing the arrangement of zombie enterprises’ personnel and assets.

 

NC: The Made in China 2025 strategy proposes service-oriented manufacturing. What does this mean and how should it be accomplished?

FF: It means that services will play a bigger part in improving and expanding the manufacturing value chain. This will be realized by the use of information technology to build a smarter, more integrated system of organization and production. The government can help this transformation by providing information to the market.

The government is doing three things [to make the transition to service-oriented manufacturing]. Firstly, the Three-year Action Plan for Developing Service-oriented Manufacturing will soon be drafted and declared a roadmap [for the future of the industry].

Secondly, a few sectors have been selected to be the first to develop service-oriented manufacturing through deep integration along the entire value chain, including new-generation telecommunications, robotics, and aviation and aeronautics equipment. In addition, the government will support the construction of zones that will specialize in service-oriented manufacturing. The areas and industries with the most potential to be shortlisted first are those that fit into national priorities such as the One Belt, One Road initiative, the economic integration of Beijing-Tianjin-Hebei Province and the Yangtze River Economic Belt.

Thirdly, the IT foundation for service-oriented manufacturing will be consolidated and updated. We are trying to build a powerful Internet industry and encourage Internet-based entrepreneurship. This is a good opportunity for us to apply IT to the service-oriented manufacturing industry more widely and deeply. Actions should focus on the construction of infrastructure for smart manufacturing and smart services, including high-speed broadband, smart sensors and mobile telecommunications. 

‘Manufacturing is at once the focal point, the challenge and the solution to China’s economic growing pains.’

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