Media reports about China’s export economy over the past year have invariably focused on low-value products: T-shirts, bras and shoes, for example. But the real threat to developed manufacturing economies comes from China’s growing expertise in the production and assembly of higher-value goods at low prices.

For years it has been a truism that any low-value product could be made in China cheaper than anywhere else. Now that productivity gains are pushing up the price of labour in China, it may be cheaper to manufacture plastic sandals in Bangladesh than in Wenzhou. But the Chinese city is getting better at making more sophisticated products, like low-voltage electrical measuring equipment, which are still not produced in Bangladesh.

At its best, China’s manufacturing model today is already characterised by highly efficient, low-cost workers assembling mid-level products with mid-level technology.

The threat to foreign manufacturers comes principally from China’s machinery and transport sectors. Figures for 2004 show that light industrial goods – mainly textiles, apparel and footwear – accounted for $100bn of China’s $593bn of exports. Yet exports of higher-value machinery and transport equipment were worth a combined $268bn, or 45 per cent of the total.

The swelling ranks of mid-value export manufacturers helped China overtake Japan as a merchandise exporter last year, placing the country third behind Germany and the US. China also became a net exporter of vehicles for the first time, with shipments of 172,000 units, up 27 per cent on 2004. For the past five years, growth in the machinery and transport sectors has consistently outpaced other export categories.

China’s top domestic car manufacturers are marketing themselves aggressively as cheaper alternatives to established brands. Chery Auto plans to export up to 100,000 units to the US in 2008, while its rival Geely has an export target of 1.3m cars by 2015. Motorcycle companies are also hoping to ape Honda’s success by moving into auto production, with Chongqing-based Lifan Motorcycle expecting to export its first mid-size saloons later this year.

Does all this presage a first-world invasion of higher-value Chinese goods? Up to a point. China’s exports of machinery and transport equipment will continue to grow quickly, putting pressure on a number of established manufacturing industries in developed economies. Until 2004, China was a net importer of machinery, but it is rapidly gathering pace as a major net exporter of industrial intermediates.

The success of car components maker Wanxiang, the third largest private business in China with revenues of $2.5bn in 2004, is a good example. Wanxiang has 18 subsidiaries in north America and Europe and is a major supplier to both General Motors and Ford. It has successfully outmanoeuvred more established players by supplying its subsidiaries with components made more cheaply in China.

Chint Group, China’s largest low-voltage electrical products manufacturer, recorded export revenues of $200m last year, up two-thirds on the year before. Roughly 50 per cent of these came in Europe, where the company won an international tender to supply equipment to the Italian national electricity board.

Yet China’s domestic exporters are not ready to take over the world. Yale Zhang, a Shanghai-based analyst at auto consultancy CSM Worldwide, says that the experience of Japanese and Korean carmakers shows that China has many years left of playing catch-up: “Ten years is not enough time for a Chinese car brand to become internationally recognised. I think they will become really well-established domestic brands in this period, but they will need 15-20 years minimum to make it in the international market.”

No one is expecting a world-class car brand to emerge from China over the next decade, but the country will almost certainly cement its position as a key exporter of mid-value products. As it does so, prices will fall. While China’s export juggernaut is not yet ready to obliterate everything in its path, it is gaining momentum from more than just apparel.

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 on alternate Mondays.

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