China’s Manufacturing Enters New Era

The country needs to adapt to stay internationally competitive, according to a new report from McKinsey & Company.

BEIJING — As China’s manufacturing growth slows and the landscape evolves, the country has reached a critical point and needs to adapt to stay strong in a an ever-more competitive international landscape, according to new report from McKinsey & Company.


“China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demanding,” wrote McKinsey’s Karel Eloot, Alan Huang and Martin Lehnich. “Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China as it gets richer.”


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In their report, entitled “A new era for manufacturing in China,” the authors see four main challenges for the manufacturing sector: Rising costs, both in labor and raw materials; increasing consumer sophistication; greater complexity in the value-chain, and heightened global economic volatility. The four points combined make change and adaptation imperative for the manufacturing sector in China.


“For years, China’s low salaries; strong supply base; high investment in port, road, and rail infrastructure; and solid engineering and technical skills provided a strong platform for manufacturing exports,” the report said. “Meanwhile, a vast domestic market helped fuel China’s continuing transition to a consumption-based economy. Today’s outlook is more mixed.”


According to McKinsey, China’s manufacturing sector needs to improve in several areas to survive and thrive. First, manufacturers should work toward achieving and maintaining excellence. Around the world, China’s brand has been damaged by scandals from toxic toys and medicines to faulty and cheap goods. Yet the world’s top luxury brands still rely on China as a primary workshop, so the capability does exist here.


McKinsey said the rapid speed of development, cultural differences in the workplace and a lack of efficiency in the value chain have hampered efforts to strive for excellence in manufacturing.


Secondly, the consultancy said manufacturing in China must become more innovative and invest in research and development heavily.


“For industries reliant on innovation, the triple whammy of rising costs, complexity, and competitive pressure means that the old ways of developing products in China now risk becoming liabilities,” the report said.


“Staying competitive will require domestic companies and multinationals alike to change, starting with the mind-sets and attitudes that have pervaded product-development activities in China,” it added.


Finally, the manufacturing industry in China should “tame supply-chain complexity,” said the report. Factories need to better anticipate changing consumer needs and tastes, and become more flexible in meeting demands.


“While the effects of value-chain complexity vary by manufacturing subsector, most Chinese consumers are changing faster than supply chains are adapting,” said the report. “Indeed, supply chains in the country — both multinational and domestic — are generally set up for a low- labor-cost environment that is quickly disappearing.”