China's Industrial Development in the Digital Age

A central question in China’s economic surge over the past couple of decades is whether or not such changes will lead to sustained performance on the international stage. The competiveness of indigenous Chinese firms and the ability of the government to foster said competitiveness is vital to that outcome. Certain firms and sectors will be more vital than others for China to effectively compete. The industries highlighted in “Industrial Dynamics” revolve mostly around produce industries like automotive manufacturing, electrical appliances, and electronics, as well as service industries like software development and business process sorting.

Indigenous firms, as opposed to foreign multinationals or foreign-capitalized firms, are considered the proper unit of examination due to their inherent interest in most efficiently interacting with the local market and government of China. Also having a healthy indigenous or “home-grown” business community has historically been an necessary component of the economy in “catch-up” countries’ economies like in Korea, Taiwan, and Japan. Choices in how the indigenous firms choose to develop play an important role in the trajectory of growth. Generally speaking, there are 2 strategies that can be followed: the first involves the firms utilizing largely similar processes and creating nearly identical products and competing with each other on price, while the other involves firms creating their own proprietary assets through the pursuit of innovation. The former is less risky in the short run while the latter, if successful, provides a solid foundation for continued growth in the firm’s market share and makes the firm a leader in technological change within its industry.

An example of attempted transition from the former to the latter strategy is China’s Chery Motors. Established as an SOE in Anhui Province and Wuhu City in 1997, Chery’s founders were 8 former engineers of First Automobile Works. Chery’s original plants were bought second hand from Ford in the US and Seat of Spain. In the short span of a mere 12 years, Chery had become one of the top automobile manufacturers in China thanks to its aggressive copying of foreign automotive firms’ production strategies and designs. It is now trying to more aggressively pursue foreign research and development in order to move into the innovation led strategy outlined above. However there are several barriers to such a shift in strategy and practice. One of main sources of difficulty is the stiff competition amongst Chinese car manufacturers. With 39 competing firms selling similar products, differences are an important factor in the business’ performance. This coupled with the need for new products in such a capital-intensive industry as automobile manufacturing make investing in in-house innovation very costly. The situation becomes a bit of a Catch-22, as homegrown innovation is necessary for firms to differentiate themselves from the competition but the competitive nature of pricing provides inadequate resources for such innovation to take place. Thus firms like Chery end up utilizing outsourced production capabilities and copied designs that are largely available to their indigenous competitors as well.

Perhaps the most important source of indigenous innovation is the human capital developed within a country. China’s education and training programs encompass all of the major areas including primary education, secondary education, tertiary education, vocational and technical training, and graduate education. This was ramped up post 1978 when China began to emphasize vocational and tertiary education and beyond through out its workforce, increasing the enrollment quotas in universities by a factor of 5. The result of these policies has been the creation of what is considered a large, semi-skilled workforce. This has led to workforce that is adequate for the development and implementation of technological standards locally or regionally, but not necessarily globally. 

Take the information and technology services sector as an example. Chinese information technology centers in Dalian, Heilongjiang, and more recently Zhejiang have become leaders in indigenous consumer electronic services.. Dalian’s historical relationship with Japan as a former Japanese colony through out World War II has allowed it to take advantage of the human capital built up as part of that legacy. This has resulted in Dalian’s significant penetration into the Japanese markets via close relationships and servicing of Japanese MNCs. However, this regional role has not necessary translated into global competitiveness. This is partly due to the nature of the work many of the firms in Dalian do for the Japanese firms. When a software firm in Dalian works with a Japanese firm, they are given only a small part of the total product to work on while the truly critical aspects of the project are kept in house at the Japanese firm. This is because, despite the special relationship enjoyed by firms in Dalian with those in Japan, Japanese firms are very wary of risks to their intellectual property when they work with firms in China as well as the relative technical complexity of the more critical components. Furthermore the standards of proprietary process used by Japanese firms differ greatly from their counterparts in Europe and the United States, so informational technology companies in China have a relative lack of expertise in those regions. This is because Europe and the US utilize open standards. Working with open standards would call for Chinese IT firms to virtually retool themselves, which would be both costly and difficult given the longstanding use of proprietary standards.

Chinese firms have certainly come a long way since even the late 1980s in terms of their ability to successfully render locally and regionally competitive products and services. The early stages of this development was do to imitation of industry best practices and production schemes, and have laid a solid foundation on which indigenous innovation can be built. However the barriers for large numbers of Chinese firms to enter truly globally competitive stage across industries are still restrictive to progress. The key to this kind of transition is sparking indigenous innovation while maintaining competitive advantages in price. There are still strides to be made in insuring quality levels of human capital as well as adjusting to international industrial standard before such transitions can be called complete and successful.