Wednesday, July 31, 2013

China’s manufacturing sector has grown to become the world’s largest, (read more).

Curbing the Decline of Chinese Manufacturing

China’s manufacturing sector has grown to become the world’s largest, but it is now beginning to show signs of decline. GDP in China, while still growing, is doing so at a much slower rate than in it was earlier in the decade. A recent McKinsey Quarterly article highlights hurdles that Chinese manufacturers face, as well as possible solutions.

Rising production costs are partly to blame for the sector’s downturn. As wages increase and packaging become more expensive, multinational companies are looking to relocate their manufacturing activity beyond China in order to maximize profits.

Manufacturers are unable to keep up with the demands of a booming upper-middle class, which is expected to comprise the majority of urban households in China by 2020. As Chinese companies struggle to produce sufficiently high-tech and high-quality products, wealthier Chinese consumers largely view Chinese brands as inferior to their foreign competitors.

The article makes several recommendations to overcome these setbacks. For one, manufacturers should shift their focus from technological to human capital. Managers are often inexperienced and tend to focus on treating problems’ symptoms rather than their causes. Furthermore, multinational companies must take cultural differences into account instead of adopting "one-size-fits-all" approaches that, while suitable for other parts of the world, are not quickly embraced by Chinese workers.

Additionally, both domestic and foreign companies must concentrate on innovation rather than simple output, according to the authors. Domestic companies would benefit from investing in new research and development rather than racing to produce cheaper versions of the same products marketed by competitors. Similarly, multinationals should approach their Chinese groups as a potential source of R&D innovation, instead of a source of cheap labor with low production costs.

Finally, the authors urge Chinese manufacturers adapt to new consumer demand patterns and improve demand forecasts. —Keturah Hetrick

Source: "A new era for manufacturing in China" by Karel Eloot, Alan Huang, and Martin Lehnich, McKinsey Quarterly (June 2013).

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