By Jiawei Li, Junhan Xu, Yicheng Yao
“Manufacturing relocation is inevitable; Southeast Asian and South American countries will take over low-end manufacturing industry in the near future.” Mr. Guo, the founder of iLilace, a multi-platform, multi-million housecare product exporting business, stated. “Nations such as India and Malaysia are indeed catching up in terms of low-end manufacturing, but their capabilities are yet to match ours.”
Indeed, according to data from the World Bank, high technology exports accounts for 31% of China’s total export ($964 Billion), whereas, in India, high technology exports only consist of 11% of total export ($27.45 Billion).
Southeast Asian nations, however, made exceeding improvements in the production of low-end products. But China’s decades-long experience in foreign trade laid a solid foundation for upcoming challenges, securing its stance as the prominent global exporter of such goods remains unchanged. “The efficiency of a single Chinese worker could outmatch that of ten Vietnamese or Indian workers combined,” said Mr.Chen, who has been engaged in tableware international trade for more than ten years.
Photo: Manufacturing
China acquires the ability to produce both low-end and high-end products through the flexibility of manufacturing capabilities and innovative characteristics. China’s industrial solid chain ranges from front-end which involves research & development, design, procurement, and purchasing of raw materials. Manufacturers in China benefit from the vast scale manufacturing sector which reduces the cost per output, enhancing the competitiveness of Chinese products on the global market; The mid-end consisting of processing and manufacturing is managed by a skilled workforce and efficient manufacturing process, allowing products produced in a short period while ensuring quality; finally, reinforced with digital platforms, the back-end is supported by China’s extensive logistics network and robust domestic market distribution and sales, helping it to operate in a safe environment for both manufacturers and clients. These factors helped China to secure its position as the powerhouse for trading in the global economy, helping the country cater to a wide array of market demands — the low-cost product and efficiency secure its positive on in the low-end product market; for high-end products, China’s continual investment in research and development, coupled with a skilled workforce, ensures the delivery of quality and technologically advanced goods.
Combined with a variety of product styles and high efficiency, China continues to secure the majority of orders for low-end products. According to Mr.Shi, a former employee of the cross-border e-commerce platform “Alibaba1688”, most Yiwu merchants remained in low-end product businesses.
“Manufacturers in Guangdong and Shenzhen are willing to pour millions of dollars of funds for product design,” said Ms. Huang, the second generation of an electronic button factory that has been in business for more than thirty years. Places in China outside of Yiwu are developing new technology and designs for their product. With China’s continual investment in research and development, Chinese manufacturers can ensure the delivery of quality and technologically advanced goods, securing high-end product orders.
Due to the excellence of Yiwu’s efficiency, some factories in Yiwu have produced more than they can normally sell. This has caused a serious accumulation of unused products that are slowly collecting dust in warehouses. This is one of the main reasons why China is more capable of global trading, due to China’s high productivity——China’s immense exporting supply and, not to mention, the cheap prices due to the large production.
But this may not be such a good thing as we may think of the Chinese economy. As a result of overproduction, many low-end producers cannot receive any orders and are forced to exit the market, upgrade the industry, or broaden sales channels.
While it might appear that exporting surplus goods to global markets is an effective short-term solution, it can potentially hinder the advancement of premium manufacturing.
Over the course of the three-year pandemic period, the global economic landscape has experienced a significant downturn. This includes heightened inflation, escalating interest rates, and a surge in uncertainty. 2 As per the World Economic Outlook Report issued by the International Monetary Fund (IMF) in October 2021, the global economy shrank by 3.1% relative to 2020, with advanced economies contracting by 4.5% and emerging and developing economies shrinking by 2.1%. Given these circumstances, numerous individuals and businesses have suffered substantial financial losses. Consequently, the primary concern has shifted from quality to affordability. In such a climate, high-end products won’t sell as well as low-end ones. This shift could disincentivize business owners from investing in the development of premium goods.
Furthermore, it’s crucial to recognize that research and development (R&D) for high-end products can be both time-consuming and costly. It’s important to remember that most businesses operating in Yiwu are small-scale and sometimes struggle to turn a profit. As such, they may not have the surplus funds necessary to invest in the production of premium goods, which often demand superior equipment, more sophisticated technologies, and higher-quality materials. If these businesses are already generating profit through the production of low-end goods, which are simpler to manufacture, they might question the wisdom of diverting their scarce resources towards a potentially risky investment.
To tackle this escalating issue, the Yiwu City government has introduced a variety of measures intended to incentivize the production of high-end goods. For example, the “Policies on Promoting High-Quality Economic Development”, enacted on March 1st, 2023, stipulate:
Provision of subsidies to businesses engaging in high-tech development. Each year, a bonus of ten thousand RMB will be awarded for every million RMB borrowed and repaid within a minimum period of one year by these businesses, with an annual maximum limit of fifty thousand RMB. Additionally, the tax burden for such companies may be lightened by up to 15%. This strategy is designed to coax small and medium-sized businesses out of their habitual practices and inspire them to invest in the creation of high-end goods.
Enticing capable technicians and researchers to join businesses and aid in their advancement. A similar subsidy of five hundred thousand RMB will be bestowed upon individuals who pass qualifications that foster technologies instrumental to industrial enhancement. The government’s aim with this incentive is to draw talented and qualified graduates from across the nation to participate in Yiwu’s research-needing businesses, thus invigorating the R&D process.
The icon of various well-known cross-border e-commerce brands Photo: Shutterstock
A further approach to address the overproduction conundrum involves utilizing online platforms to expand the consumer base and further optimize trading efficiency within Yiwu.
Previously, the procedure for international trading was quite complex. Customers had to locate the manufacturer through the trading company, and then evaluate a sample of the products to decide on a purchase. If they intended to import the goods for resale in their target country, they also needed governmental authorization. Plus, the risk of deception – either from manufacturers delivering substandard goods, or buyers not honoring payment agreements – was always present, given the challenge of ensuring fair dealings under domestic law. This entire process was typically quite laborious, time-consuming, and expensive.
However, the advent of digital platforms has revolutionized this process, removing unnecessary steps and enabling direct communication between buyers and sellers. Customers can expedite their search for the perfect product by simply browsing digital platforms, instead of trudging through vast, crowded markets. The process of obtaining import permits is completely sidestepped as it’s typically managed by the platforms. Producers can rest easy about potential damage during shipping, and perhaps most crucially, the platform ensures the integrity of a transaction, mitigating the risk of fraud for all parties involved.
Consequently, the global online economy has facilitated an efficient pathway for Chinese manufacturing industries to reach international markets, in turn, opening up significant overseas opportunities and promoting the export of Chinese goods. Compared to the previous year, China’s online exports have seen an 11.7% increase, a figure that is projected to rise further this year.
As articulated by Bruno, Senior Global Partner at Bain & Company, “The impact of the CKP outbreak on China’s FMCG market has been profound, most notably in the sharp shift in consumer confidence. Consumers are purchasing more low- and mid-range products, and increasingly turning to online channels.” As a result, the demand for lower-end products grew, allowing many manufacturers to offload the excess products that had previously been piling up and were unsellable.
Even though the profit margins on these products are likely to be low, the sheer volume of sales can offset this. The more items the producers sell, the more commission the platform can gather. To facilitate producers in exporting their goods, online platforms like Temu determine the product pricing. After calculating the production cost and expected profit from the producers, the platform sets the final selling price on its platform. To expedite sales, the platform prices the goods 10%-20% lower than the popular online platform 1688. With this strategy, Chinese low-end products can readily penetrate the European and American markets.
The cross-border e-commerce platform, Temu, has soared in popularity among consumers, amassing over five million installations in the US as of November 2022.
However, cross-border e-commerce is not without its drawbacks despite the evident benefits it offers to merchant development.
The dynamics of market development can effectively root out subpar factories or push such factories to elevate their industrial standards. On the contrary, these very platforms can enable struggling merchants, who otherwise might have exited the business, to linger, thereby possibly bypassing prime opportunities for product enhancement.
In the words of a second-generation inheritor of a family-owned factory, “Given the current economic downturn, certain elements are destined to be phased out and constantly restructured. From a broader perspective, the production capacity has been rather low, and the manufacture of some inferior products that fail to meet societal needs persists. If these many factories were eliminated, it would improve the overall environment, and the allocation of resources could be utilized more effectively.”
In addition, though, online foreign exchange platforms can effectively help manufacturers in Yiwu connect with foreign clients, many Yiwu manufacturers are not prepared for sudden shifts from the orthodoxal Yiwu business model.
A Generation Z successor of a family-owned factory Photo: www.china.com
One of the primary reasons for the slow transition of Yiwu’s low and middle-end industries is the cognitive and ability gaps present in the older generation. The second generation of factory owners (referred to as “Factory 2nd Gen”), display a higher level of proficiency and broader thinking compared to their predecessors.
Yet, Factory 2nd Gen finds itself in a stage of struggle and confusion. Their parents had previously benefited from the dividends of the era, where finding customers was easy, and many could subsist on orders from existing clients without needing to exert effort in finding new ones. However, with the slowing and even decline of growth, many clients have retreated. Factories are left to find clients on their own – a task proved to be extremely difficult and outside of their capabilities. Similarly, many traders also struggle to find new customers due to a lack of demand in the past.
The rise of e-commerce has delivered a significant blow to traditional industries. A once-normal phenomenon of first, second, and third level wholesalers in traditional industries has vanished with the rise of e-commerce. Sellers can now directly connect with customers, causing many wholesalers to lose their clients. Simultaneously, these wholesalers lack the capabilities to find new customers.
When the Factory 2nd Gen are called upon to take over, it often signifies that the factory isn’t faring well, burdened with issues inherited from the previous generation that they struggle to resolve. The rise of e-commerce has disrupted traditional norms of dealing with large orders, causing factories to lose downstream clients and making the search for new customers more challenging. Factories located in remote areas have trouble finding merchants in their city and have to open offices in larger cities, a daunting task, to seek orders.
In these times, cross-border e-commerce serves as a potential solution, offering both online and offline channels. Two strategies are typically adopted: industrial upgrade and market expansion. A positive example of an industrial upgrade can be seen with stress-relief toys, where a factory with excellent product quality is subcontracting for Disney. For market expansion, many are attempting to utilize cross-border e-commerce platforms to boost their factory sales.
Nevertheless, utilizing cross-border e-commerce platforms comes with its challenges. Factories must consider the best outlets for their products, the input-output ratio, and risks such as investing money in advertising without attracting customers. The Factory 2nd Gen often find themselves battling these challenges alone, without any precedent to guide them.
Yet, looking into the future, there’s still immense potential. Developing countries like those in South America and Africa still have a huge demand for low and middle-end products.
The shifting industrial chain — from the UK to Germany, to Japan, then China, and now possibly Singapore or Brazil — poses significant challenges. But how can China navigate through this process?
Firstly, Chinese manufacturers could focus on upgrading their product offering. This can be achieved by investing in research and development, as well as upskilling their workforce to produce higher quality and more technologically advanced products. Secondly, market diversification could prove effective. By leveraging online platforms and digital technologies, Chinese manufacturers can reach a wider array of international markets, thus offsetting the losses in the domestic market.
However, the current status quo, which is heavily reliant on low-end manufacturing, can’t be sustained indefinitely. Overproduction and the consequent waste it creates are not viable long-term. Chinese manufacturers must be willing to adapt and innovate, focusing on creating high-quality products that will allow them to compete on an international stage.
In conclusion, while the challenges facing the Factory 2nd Gen are daunting, the opportunities available to them are also significant. By focusing on industrial upgrading, market diversification, and leveraging the power of digital platforms, the future of Yiwu’s manufacturing industry can still be bright. It will undoubtedly require time, investment, and a willingness to adapt, but if these steps are taken, there’s every chance that Factory 2nd Gen can navigate their way through this challenging time and ensure the longevity of their business.
References
“China High-technology Exports, 1960-2022 – knoema.com.” Knoema, 2 Aug. 2023, knoema.com/atlas/China/High-technology-exports#:~:text=High%2Dtechnology%20exports%20of%20China,average%20annual%20rate%20of%208.06%25.