China’s Xi Jinping Faces Economic Challenges

Most experts agree that the country's next president must focus more on homegrown innovation to shift into a new growth and development model.

Xi Jinping

BEIJING — With a quietly orchestrated trip to the home of modern China’s big economic experiment this month, China’s next president may be signaling his intent to engage in much-needed financial reforms to revitalize the country’s growth.

This story first appeared in the December 28, 2012 issue of WWD.  Subscribe Today.

While it remains unstated and largely unclear what direction the country’s new leadership is heading with the economy, most experts agree that China must focus more on homegrown innovation to shift into a new growth and development model, moving its products and manufacturing up the value chain into a new stage.

When Xi Jinping, new head of the Communist Party of China and the country’s next president, made his first trip outside Beijing Dec. 7 to 11 after taking on the party’s top post a month ago, he went to Shenzhen and spoke of a renewed commitment to economic reform. In that city three decades ago, the reform-minded Chinese leader Deng Xiaoping signaled the opening of international trade and the beginnings of China’s modern capitalism.

RELATED STORY: Chinese Brands Look to Enter Western Markets >>

Deng’s reforms burgeoned into the economic growth that has made China the world’s second-largest economy. But Xi’s challenge may be even bigger, as the new leadership must grapple with turning a country that has mastered mass manufacturing into one that creates, designs and innovates.

In a business survey report earlier this year, the research firm KPMG said continually rising costs and emerging challenges are already forcing China to move up the value chain, with some success.

“Labor costs have increased by 15 to 20 percent per annum on average over the past four years. This, together with an appreciating Chinese currency, has meant that China is no longer a low-cost manufacturing base,” wrote Aaron Lo, a KPMG partner.

“This in turn has forced the pace of transformation and a transition to greater levels of automation and innovation in order to drive margin growth,” Lo said. “This is a positive change and is also in alignment with China’s current policies.”

The report noted an increasing prevalence of a “China +1” strategy for many multinational companies, where they keep a major production base inside the country, but expand to lower-cost nations at the same time to save money and broaden their options.

China’s government has been relatively open in recent years about wanting to eliminate low-cost manufacturing and instead move toward becoming an economy based on innovation and higher-end manufacturing within the next decade. But innovation and creation still remain far off for the vast majority of Chinese manufacturing companies.

In the textile and apparel manufacturing sector, companies and government industry groups are well aware of the problems, which analysts note are the important first steps toward changing the system and making reforms. They said brand-building is critical, but acknowledge it will take serious investment and time.

“Only a few textile companies have started innovating,” Zhai Xiaoping, director of the Shenzhen Textile Association, told WWD. “The only way out for this industry is to improve high-added value products.”

Li Shenping, marketing manager of a large denim producer in Guangdong province, said firms like his are keenly aware of the need to create, but research and development are far more costly than basic manufacturing.

“At this stage, we don’t have the funding to work on R&D, although it is something we wish to engage in,” said Li.

Chinese industry analysts said branding is part of the key to success, as Chinese brands are still largely absent from the global radar. And where they are present, made-in-China brands often suffer from reputational problems in the world marketplace, where complaints over poor quality and counterfeiting still run rampant.

Xiao Jiancheng, secretary general of the Guangdong Home Textile Association, noted that developing an innovation culture and a manufacturing industry around it will not happen overnight. Xiao said a few large firms are beginning to innovate, and to move their production up the value chain. But the majority of producers are still working the same cycle, looking for new markets and upgrading their offerings.

“The production of high-value products doesn’t merely mean high-cost material and following suit blindly,” said Xiao. “We need to provide systemic and well-organized upgrades which means taking advantages of the synergy effect of marketing, advertisement, material and styling.

“China now lacks classic and timeless styling serving as an icon in the [fashion] industry, which puts us at a disadvantage,” he said. “We need to strengthen market analysis and brand commercialization. We also need to build up the unique image of brand so as to attract loyal customers.”

Though he has not revealed specifics on how it will be done, Xi referred to China’s original economic reforms of three decades ago as “the great awakening” in the history of the Chinese Communist Party.

“We came here to revere the statue of Deng Xiaoping to show that we’ll unswervingly push forward reform and open up and strive to achieve new progress, new breakthroughs and new steps in boosting reform and opening up the country’s modernization drive,” Xi said on his Shenzhen visit, according to state-run media.