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Where does Manufacturing Fit into China's 5-Year Plan?

Posted by Daves Zandueta | March 24, 2016

If recent findings are anything to go by, China is seeing a big shift: The country’s status as a manufacturing powerhouse is changing.

Li-Kequiang.jpg

China's Premier, Li Kequiang, has high hopes for the country's economic future. 

According to the government statistics bureau, the recent figure of the manufacturing purchasing managers’ index (PMI) shows a 49-down from 49.4 last January 2016. The official PMI figure, which has been decreasing for the past seven months, shows the country’s manufacturing sector is shrinking.

Recent news reports the Pearl River Delta—a major manufacturing center of China—is suffering from numerous factory closures. Some factories in Dongguan, a major city in the Pearl River Delta, advertise on their walls for new tenants while sitting quiet.


Reports say three issues in particular hit the country’s manufacturing sector:


  1. Market Oversupply

Steel and LED chips are among a number of markets currently in oversupply. According to the Economist, China’s steelmaking is bigger than the combined steel production of America, Germany, and Japan. Meanwhile, an oversupply of LED chips is forcing Nan Ya Photonics Incorporation (a Formosa Plastics Group subsidiary) to leave the business of upstream LED EPI-wafer manufacturing.

 

  1. Slowed Construction

Weak market demand at home as well as abroad is creating sluggish processing of raw materials. In particular, China’s construction sector, which influences demand for multiple industrial products, has slowed as building projects decline. As a result, raw materials are in lower demand, and many steel plants have drastically reduced their prices to avoid going out of business.


  1. High pollution levels

In 2015, China saw pollution rise to levels never before seen, compelling factories to stop production. Zero visibility due to the pollution also forced vehicles off the road and people to stay indoors. The event forced the country to issue a pollution level of Red Alert, the highest in a four-level alert system, twice in the same year.

Next Steps

With China going through a manufacturing slump for the past seven to twelve months, how can the country address the situation?


According to its recently released 5-Year Plan, the country’s government expects an era of healthy growth thanks to certain reforms, like reducing the government’s role in business and making the financial systems more market-oriented.


Meanwhile, China is slashing production in the bloated steel sector, reducing the number of workers by up to six million over the next three years. Other industries, like cement and shipbuilding, will also be cut in order to make room for a new economy.

Consumer Driven

Some signs indicate the Chinese nation’s shift towards a “consumer economy” with a focus on the service sector. Corporations such as Apple, Burberry and General Motors reported consistent sales increases. In addition, the new 5-Year Plan incorporates tax reform and ecological measures that better suit a consumer-led economy, with less emphasis on manufacturing.


China will experience “growth pains” as it addresses the issues hounding it as a manufacturing powerhouse. But the government does not expect a "hard landing"—rather, it expects growth in a different way.

No More Manufacturing?

Where China is going to see the most growth in coming years is through sophisticated partnerships between companies and their suppliers. While traditional manufacturing might be slowing and moving to other growing economies, China offers a wealth of potential to businesses whose supply chains are ready to innovate.

 

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