The rising cost of labor, overcapacity and falling brand influence are the three major challenges facing the future development of China's manufacturing sector, according to experts at an entrepreneur forum held in the central city of Wuhan, reports the Beijing Business Today newspaper.
At the 2012 China Entrepreneur Forum Summit, which kicked off on Saturday, a group of industry experts discussed the future of China's manufacturing sector. The general consensus was that China has long relied on a business model characterized by low costs, high consumption and high emissions, but that this model will not be sustainable moving forward.
Minimum salaries in China have increased by an average of 15% a year over the past three years, and in some areas the rise has been has high as 30%, said Cao Yuanzheng, chief economist with the Bank of China. Average salaries in China's cities and towns also increased by 13%, he added.
Rising labor costs have not been the only problem. Raw material costs have also increased by 13%-30%, placing enormous pressure on the cost of production for Chinese industries. Susanna Chiu, director at Li & Fung Development (China), said that while her company does not manufacture, it does have many close partnerships with manufacturers. For them, the problem is the increased difficulty in linking Chinese manufacturers with European and American customers who are unwilling to pay more, which has significantly increased the amount of coordination work involved, she said.
The panel also considered overcapacity a serious problem for Chinese industries. Of China's 24 industries, 21 are said to have overcapacity issues, with the textiles, clothing and iron and steel industries being the most obvious examples.
Industry in the country — long characterized by low-cost and high-resource consumption — is changing, said Cao. Overcapacity results in backward production, which can only be reduced with advancements and improvements in technical capabilities, he said, adding that this is what Chinese industries will have to focus on as their next step.
On the final challenge — low brand influence — the forum highlighted the fact that 64% of Chinese companies in the Global 500 have not taken adequate steps to fully protect their brands. For large-scale firms, the proportion is even higher, at 80%. The panel also acknowledged that China has fewer internationally famous brands than rival countries, and that most Chinese brands lack the ability to influence consumers.
Establishing a brand is an important aspect of competition, Cao said. Chinese brands lack influence because firms in the country prefer vertical integration. Western companies, in contrast, like to focus on building their most important brands and outsource what is left, Cao said. This is something Chinese companies can learn from, he concluded.