The CEQ on FT.com: China’s export conundrum

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China’s exports will approach $1,000bn this year, twice what they were as recently as 2003. The extraordinary growth of the export economy, from what is now the third-largest base in the world, is not in dispute.

But the question of what is happening in qualitative terms in the export sector is much harder to answer.

There are two apparently contradictory stories - one anecdotal and one statistical. At an anecdotal level, domestic Chinese companies in many industries are making more rapid progress in their export strategies than has been expected.

In automotive, China became a net exporter of vehicles in 2005, largely through the efforts of local companies. The country accounts for two-fifths of world motorcycle exports, a rising share of light trucks and is beginning to export cars – only 17,000 in the first four months of 2006, but the number was up 460 per cent year on year.

In mobile telephony, Chinese technology bellwether Huawei landed a major deal in February to supply the world’s biggest wireless operator, Vodafone, with handsets based on third-generation technology. Not long ago, foreign companies doubted that China would ever master the technologies required to break into the handset market; Huawei’s five-year deal covers 21 countries in which Vodafone operates. The value of export contracts booked by the Chinese company rose from $244m in 2001 to $4.8bn last year.

There is now a small, but growing, core of domestic companies that export more than $1bn of goods a year. Most are privately held and concentrated in the areas of machinery, electronics and transportation, not the traditional light industrial sector producing apparel, shoes and house wares.

Their emergence is a source of competitive concern for multinational business. Chint Group, for instance, China’s leading manufacturer of low-voltage electrical products, competes with Sweden’s ABB and France’s Schneider. Chint only recently began to focus on exports, and shipments last year were $200m. But that figure was up two-thirds on the year before and the growth momentum is being maintained.

It is no surprise that non-Chinese companies in a range of industries are worried. US and European manufacturers of telecommunications equipment are already under serious pressure from Huawei and its Chinese peers like ZTE. And this is not just in third-world markets. As the Vodafone deal and others like it show, the battleground is shifting to developed country markets.

Yet despite all the nervousness at the micro level, macro data on China’s exports do not readily support theories of a burgeoning competitive threat from Chinese producers. Instead, figures for exports by ownership of the exporter point to ever-increasing dominance by foreign interests.

Since 2000, the share of Chinese exports attributable to foreign-invested enterprises increased from 48 per cent to 58 per cent. The foreign share of what China deems to be high-tech exports is now 88 per cent.

Are the anecdotal and macro evidence compatible? The answer is that they are. China’s private companies are making faster progress than competitors expected in producing more sophisticated exports. But foreign-invested exporters – most of them Asian firms supplying final demand in the US and Europe – are achieving extraordinary scale, and thereby pushing the foreign share of aggregate exports ever higher.

Across their different mainland factories, leading Taiwanese and South Korean electronics companies, for instance, are exporting $10bn or more of goods a year each from China. A single Taiwanese facility, Shenzhen Foxconn, a subsidiary of Hon Hai Precision Industry, shipped $8.3bn of exports in 2004.

The single biggest driver of foreign exports from mainland China in recent years has been the relocation there of global personal computer (PC) manufacturing. The dependency ratio of branded Japanese PC firms like Toshiba and Sony on output from factories in China ranges between 50 and 100 per cent, for the US PC firms the ratio is 90-100 per cent. Dell, the world’s biggest PC seller by revenues, will outsource nine-tenths of its manufacturing to China this year, spending $18bn with Taiwanese suppliers.

With numbers like Dell’s, it is easy to see how the scale of globalised, foreign-financed export processing in China dwarfs the lesser story of a small number of Chinese companies’ arrival on the international stage.

What is happening in the foreign processing sector reflects a global revolution in manufacturing whereby international trade in parts and components (P&C) is an ever greater share of total trade, with an ever more sophisticated division of labour across countries. In this revolution, China is the final assembly point of choice for a broadening array of products, as well as an increasing supplier of P&C.

For now, the commoditisation of global manufacturing is a much more significant phenomenon than the development of globally competitive Chinese firms, and export data by ownership reflect this. But make no mistake: the challenge of Chinese manufacturers is for real.

The China Economic Quarterly is an independent newsletter devoted to analysis of the Chinese economy and business environment since 1997. It draws on the 25 years of combined experience of its editors, veteran financial journalists Joe Studwell and Arthur Kroeber, and also publishes articles by leading China-focused economists and journalists. This column appears exclusively on FT.com on alternate Mondays.

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