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This article was originally published by 中信出版集团 (ID:  citicpub)

A sudden pandemic and it’s continuous changes have evolved into a global public crisis. In addition to the capital market, which has been deeply affected, there is also an industry that has also experienced considerable fluctuations in this pandemic. It is — China’s manufacturing industry.

In this crisis, we are seeing two extreme sides of the Chinese manufacturing scenes.  On one hand, the manufacturing industry is showing the speed of China and the superb efficiency where an automobile factory turned into a mask factory.  On the other hand, massive delay in production leads to the departure of foreign funded factories and rising costs.   Also the uncertainties in production schedules has resulted in loss of orders.

According to reports, although the work resumption rate in Yangtze River Delta and Pearl River Delta has reached more than 90%, there is very little real work, especially for export-oriented industries, which are hardly receiving orders due to foreign pandemic conditions.

If there is a word that can describe the current situation of China’s manufacturing industry, it is ‘pressure’, and a tremendous amount of pressure!

But in times of trouble, there are opportunities.

How does a car factory turn into a mask factory in just 76 hours?

Due to the escalating pandemic spread, masks became a tight supply commodity. To meet the large demand for supply, many factories turned into mask factories. Automotive maker SAIC Wuling, not only manufactures the Wuling brand masks, but also goes one step further and invented mask production machines.

Automaker Wuling turn it’s auto factory into mask making factory to help ease a tight demand in market supply

Wuling brand mask packaging with the wordings ‘Whatever the people needs, Wuling will produce.’

Why are the car factories, diaper factories, mobile phone foundries, shoe factories, which are all seemingly unrelated yet are all able to switch to mask factories in just a few days?

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Wu Ling brand mask

Before answering this question, let’s look at a small example.

Prior to the pandemic, global mask production was 40 million, of which 20 million were produced in China, 10 million in South Korea, 5 million in Japan, and 5 million in other countries.

When the pandemic hit China, most factories were shut down due to the Spring Festival. Faced with a surge in demand, mask factories in South Korea and Japan should accelerate the production of masks, but in fact, the production of masks in Korea and Japan was also late. Why is that so?

This is because almost all the nasal bridge strips required for masks in the world are produced in the PRD region of China. Without a nasal bridge strip, a complete mask cannot be produced at all.

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Above: the nose bridge strip is almost only produced in China

There may be questions such as the since the nose bridge is such a simple accessory in the mask, therefore why can’t South Korea and Japan produce this?

But this is not the case, the reason is that the nose bridge strip is too simple and cheap.

Well, the logic behind doing business is to either sell at a high price to make a profit, or to take a small profit and sell more. The nose bridge strip is obviously the latter. And when it comes to volume, it depends on the market size. Which country in the world can scale with the Chinese market?

Therefore, Chinese nose bridge manufacturers can keep the prices extremely low and the market competitiveness is strong. Japan and South Korea can’t make money making nose bridge strips, and naturally they won’t do it.

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China ’s super-large scale has created a strong cost control capability, with a “cost black hole” effect, that is, those extremely basic parts may not be available in other countries, but it will certainly be available in China, and it is also the cheapest!

Masks, in many people’s perceptions, are products with little technical involvements, but the production of a mask ranges from the most upstream oil, to the separated polypropylene, spunbond, melt blown cloth, to the bridge of the nose and ear bands, to the sterilization rooms.  There are dozens of industrial chains involved in the process of making a mask.  Additionally, they need the support of logistics, plant, power and other infrastructure.

Behind a small mask is a huge modern industrial system. From upstream to downstream of mask production, this supply chain is complete in China.

On 2nd March 20202, the China News Network published a piece of news which says mask production in China broke it’s own record with 1 billion pieces produced per day.

Why, during the epidemic, almost any manufacturer can be transformed into a mask factory overnight, making the production capacity of masks soar in a short time to more than 100 million per day?

Speculations of a shift in China’s manufacturing industry, is this a false proposition?

Discussions about China’s manufacturing shift have been ongoing. For example, Samsung closed its Chinese factory and moved to Vietnam, Apple built a US $ 1 billion factory in India.  With media reports of similar news, it seems that many multinational companies are gradually shifting their supply chains from China to Southeast Asia.

After the pandemic, more and more voices are beginning to worry that China will lose its “world factory” status and companies will accelerate the relocation of factories overseas.

The U.S. Secretary of Commerce even said that the Chinese pandemic would help manufacturing return to the United States.

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So, in recent years, has China’s manufacturing industry migrated overseas (Southeast Asia, especially Vietnam or India) on a large scale? Is the status of Made in China no longer guaranteed?

In order to clarify these issues, in 2019, Mr Shi Zhan, Director of the Center for World Political Studies and the author of “Overflow” and “Pivot”, and his team conducted an in-depth research on Vietnam, visited local industrial parks, the Chinese Chamber of Commerce, and visited the local entrepreneurs, grassroots officials, scholars and also consulted Vietnamese economists.

From the perspective of Shi Zhan, the transfer of China’s manufacturing industry is actually a pseudo-proposition. Some manufacturers build their factories in South East Asia because of expansion and not a shift of business from China.

First of all, it must be acknowledged that a certain amount of production capacity has indeed gone to other countries. However, the transfer of this small number of factories did not begin in the last two years, nor did it begin during the pandemic period. In fact, this happened much earlier.

Because many upstream brands do not want to rely too much on a single factory, in simple terms, they don’t want to put all eggs in one basket. For manufacturers, this transfer is part of a long-term and reasonable strategy to increase efficiency and reduce risks.

After this pandemic, more foreign companies may want to averse the risk of focusing production solely in China, hence it is practical to spread production or related operations over multiple countries.

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Foxconn’s factory in India

This is a realistic problem that the Chinese manufacturing industry will face, but the impact may not be very significant because what can be transferred out are the first and second-tier contractors.  Operations that are further down the supply chain will be harder to transfer out.  Lower operations in the supply chain are more specialized and more dependent on the collaborative needs in the supply chain network.  They cannot be moved out unless the entire network is transferred out altogether.

Are there countries that can take over the entire network from China? In recent years, there has been a sudden rise of various manufacturing hubs across South East Asia. What about Vietnam?

In the first quarter of 2019, US imports from Vietnam soared 40% year-on-year, while Vietnam’s GDP grew by 7.9%.

In addition, Vietnam has ample population, cheap labor, ports, and low tariffs. It seems to be a good place to build factories and trade.

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But if we look deeper, we will find that Vietnam is still China’s largest import market. This means that most of the “Made in Vietnam” raw materials are not produced locally, but shipped from China.

For example, when producing a sofa in Vietnam, 90% of the leather material comes from Jiangsu, 80% of the sponge comes from China; more than 90% of the plywood used in the production of furniture comes from Linyi, Shandong; 60% of the hardware supporting the furniture comes from China, which are imported and processed into hardware locally in Vietnam.

Due to the inability of the Vietnamese industrial chain to be self-sufficient, during the pandemic period, most of the factory’s stocks of auxiliary materials were only enough for production in January. Previously, due to insufficient raw material inventory, 16,200 factories in Vietnam had suspended operations.

So why doesn’t Vietnam produce raw materials itself?

This is because it does not have heavy industry systems such as metallurgy, steel, chemicals, materials, and energy production. The heavy industry system consists of high investment, low profits, and a very long payback period. It is difficult to develop without the government massive capital investment and support.

From a micro perspective, Vietnam’s labor market is also very different from China’s.

The Chinese have become accustomed to large-scale population migration, and a large number of migrant workers have come to work in coastal areas from inland provinces. Vietnamese people are generally used to looking for work near their hometown, and not many people will move across to other provinces to work. In addition, compared to Chinese, Vietnamese are not very aggressive in the pursuit of career advancements.

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Samsung factory in Vietnam

Although Vietnam has a sufficient labour supply, human resources are still a problem due to the lack of high-quality workers.  Also, the productivity of Vietnamese workers are too low .

Although manufacturing seems to be prevailing, Vietnam has a huge gap with China in terms of population, economy, high-quality infrastructure, the scale of outstanding engineers, and the scale of qualified college students and skilled workers produced each year.

Some companies have moved back to China because of the poor quality and production efficiency of Vietnamese workers.

When asked “Is Vietnam likely to replace China’s World Factory status?”

Felix, Dean of the Institute of Economics and Policy of Hanoi, Vietnam, responded firmly:

“This is impossible! Vietnam is too small. The best we can do is to find Vietnam’s comparative advantage in our economic ties with China, embed ourselves in a suitable position, and take advantage of China’s tailwinds. “

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Therefore, the prosperity of Vietnam’s manufacturing industry is not driven by the outward migration of China’s manufacturing industry, but the external diffusion of China’s manufacturing industry, or “overflow”.

That is, China “outsourced” some of the assembly links in the supply chain to Vietnam, leaving domestic space to industries with higher added value.

The unparalleled supply chain system that supports China’s manufacturing industry

When it comes to China’s supply chain or industry chain, it’s actually not a chain, it would be more accurately referred to as a network. Only by truly understanding this network then can we understand Made in China.

The network, as its name implies, is a large network with multiple “nodes” that intertwined.

The strength of China’s supply chain network is not only due to its large scale, full range and fast logistics, but also because of many outstanding supplier companies in China, which can produce extremely high-quality parts and semi-finished products at lower costs.  These “intermediate products” are not only sufficient in China, they can also be exported to the world.

Today, more than 70% of global trade is semi-finished parts.

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In China, there are many small towns that we may not have heard of, but each are expert producers in certain fields.

These small towns are often the production bases of a certain product or an industry in the country or even the world. They are all nodes on the Chinese supply chain network. Thousands of nodes are linked together, forming a network like Lego blocks, and supporting the huge network of China’s supply chain.

  • Nearly 1/3 of the world’s guitars are produced in Weifang City, Shandong Province
  • Nearly one-third of the world’s and almost half of the country’s swimwear are from Xingcheng, Huludao City, Liaoning Province;
  • 1/3 of the national badminton and supplies to the world are produced in Jiangshan City, Quzhou, Zhejiang Province;
  • More than 85% of the country’s steel tape and more than half of the world’s steel tape measure are produced in Shaogang Town, Yucheng County, Shangqiu City, Henan Province;
  • More than 70% of the national and more than 40% of the world’s decorative oil paintings are produced in Shenzhen Dafen Oil Painting Village;
  • 70% of the world’s lighters are produced in Shaodong City, Hunan Province

The list can go on, there are too many things beyond our imagination.

Maybe you will doubt that these are low-tech products which are nothing great. But if you think about it, you can buy a 5 meter long steel tape measure for 3 or 4 yuan on Taobao. After removing the profit of each link, the production cost of the steel tape measure generally does not exceed 1 yuan.

The production of steel tape measure does not have any technical element to it, but the ability to control costs is not due to the “low technology” factor. The production of steel tape has a complete and mature supply chain system behind it, with an extremely powerful upstream and downstream supporting capabilities.  Thus, every step can be meticulously divided and interlinked to make the finished products

Without this supply chain system, steel tape measure can still be produced, but the cost cannot be controlled so low.

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Although now China’s labor and land costs are no longer so advantageous, these industries still have strong cost control capabilities.

In China, Apple’s supply chain is almost within a 24-hours driving distance; however, many parts of Foxconn’s factory in India still depend on shipments from China thousands of kilometres away. Therefore, although Foxconn is actively building factories overseas, 75% of its production capacity is still in the Mainland.  This strong competitiveness reflects the strength of the entire system.

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Foxconn’s factory in China

It is almost impossible to transfer out any of the manufacturing supply chain system, because no country or region in the world has sufficient production capacity and market volume to undertake the scale.

Therefore, Shi Zhan said, “Which country overseas has the pre-requisite market conditions to undertake such a large-scale supply chain network transfer? In an era of economic globalization, if you only transfer factories without the supply chain network, it will not constitute a substantial transfer.”

It is not difficult to transfer a factory, but it is not easy to transfer an entire manufacturing eco-system. The devastating impacts of this pandemic on China’s economy is unquestionable, but yet no other countries have gained the ability to take on China’s manufacturing network ecology.

In fact, in the long run, if China’s manufacturing industry wants to move up the value-added industrial chain, it is also necessary to transfer out part of the production links with high labor costs and low profits.

The pandemic has brought all industries across the country to a standstill. It is not easy for any industry to move from stagnation to recovery. The pandemic may have crushed out some businesses; however, market demand still exists and has not disappeared.

These collapsed companies still have their assets, equipment, skilled workers, engineers, and managers. As long as the demand is still there, these companies will be absorbed by the surviving companies, which will rebuild them to be even better than before.

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For businesses that have to shut down due to the pandemic, the entire process is very harsh.  Yet the collapse of some businesses doesn’t mean that China’s manufacturing industry has collapsed.

Under an ongoing pandemic, any information can affect our judgement.  To an individual, it is hard to judge something that is continuously changing, when the dust settled our judgement will be clear.

16 May 2019 –  WiseNet Asia participated in the 2nd Western China International Fair for Investment and Trade in Chongqing to present its Belt and Road HR Solutions. This is the largest trade fair in Western China, and a significant event for Chongqing to carry forward it’s trade opening up through global collaborations.  The trade opening up policy is in line with the Belt and Road Initiative for the Western region.

The 3 days event from May 16 to 18 attracted participants from 95 countries, consisting of 4000 companies and 70,000 visitors. A total of 132 projects with investment value of RMB337.53 billion are signed during the event.

 

12 March 2019 – Representatives from companies that operate in both sides of Chongqing and Singapore met with government officials from the Chongqing Municipal Government to discuss challenges in the course of doing business cross-border. This meeting aims to discuss business issues and possible solutions.

More and more multinationals and SMEs expand their businesses cross-border under the Chongqing Connectivity Initiative (CCI), the third government-to-government project between Singapore and China, which was set up in Nov 2015.  Four priority sectors identified for joint development under CCI are financial services, aviation, transport   and   logistics   and   Information   and   Communications Technology (ICT).

This meeting is hosted by Mr Qi Xiao Feng, Deputy Director, Chongqing Connectivity Initiative Bureau.

Other representatives from Chongqing include Mr Deng Hui Lin, Deputy Mayor of Chongqing Municipal Government; Mr Qi Xiao Feng, CCIB Deputy Director; Mr Pang Li Qiang, Municipal Public Security Bureau Criminal Investigation Corps Political Commissar; Mr He Qiang, Director of Chongqing Public Security, Chengdu Railway Public Security Bureau.  Also in the meeting are representatives from Municipal Government Port Logistics, Municipal Public Security Bureau, CCIB, YuXinOu Railway.

The Singapore based companies in Chongqing that have their representatives present are from WiseNet Asia, YCH Group, City Developments Ltd, Vibrant Group Ltd., Fooyo, Business China, FinTech Association.

The Chongqing based companies in Singapore that have their representatives present are from Chongqing International Trade Group, Zomwork, Xinyi Jimao, Shybuild, Dawn Group, Quanneng Pharmaceutical, Singapore Chinese medicine industry,Rong Teng Technology (Nova), Perfect International School, SECC Holdings, Meridian Industries.

The Singapore companies’ feedback on challenges they are facing in doing business in Chongqing, some of these include work permit validity for 1 year, which can be a hassle to renew yearly.  Other areas where the participants requested for improvements include local corporate governance with better clarity, clearer defined legal protection for overseas companies’ investment and joint ventures.

Wesley & Dep Dir CCIB

From left: Wesley Hui, Executive Director, WiseNet Asia and Qi Xiao Feng, Deputy Director, Chongqing Connectivity Initiative Bureau

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