Is China OEM manufacturing business declining or increasing? This is a big question – and one that cannot be answered sweepingly, as there are many facets to the OEM sector that make any uniform discussion too blunt and simplified. Overall, growth in the China OEM sector has accelerated through covid – in part because of the country’s remarkable successful handling of the pandemic and in part because of the greater disruptions Covid has produced in almost every other economy – both in the developed and the developing world.
The process that is transforming China from an industrial/manufacturing giant to an industrial POWER is ongoing and far from complete. The centralised planning that has progressively unleashed the Chinese manufacturing sector has produced a fertile environment in which skills and the exploitation of opportunities are spreading ever outwards and down the supply chains.
Added to this is the rapid acceleration of the local economy in recent years, as Chinese consumers have recognised that their position is strengthening – and as government policy and real-world conditions have increased the buying power of the Chinese urban population and the desire to think globally, but act locally in application of that spending power. The structural belief that ‘imported is best’ is breaking down – and in so doing, it is driving a whole range of China businesses and their OEM infrastructure forwards.
Overall, China has dominated the ‘factory to the world’ role for decades and is set to continue to do so – the country and its industrial infrastructure has seen massive transformation, both of the service quality provided and the fundamental nature of the sector. And the pace of that transformation is showing no signs of diminishing – and has in reality seen a boost during the Covid19 pandemic.
Reforms that began in 1979 were slow to impact both the China economy and world markets at the start – but pace increased exponentially and has resulted in the diverse, energetic and resilient manufacturing sector evident today. Change was the only constant in that process, and the evolution continues.
Industrialization in China the last 40+ years has been differently influenced by two factors that have exchanged significance: initially openness to the international economy and later the rapid domestic market development. Low friction engagement with overseas markets and the development of a wealthy and evolving local market would be considered complementary, in the West. In China the story has been more atypical.
The immediate post-reform industrial developments in China were heavily focussed on more labour-intensive production processes that required only modest capabilities. This fitted with the delayed-development of the China economy and the core poverty of an underdeveloped and largely rural economy – where a willing and well educated workforce was able to work at rates and in ways that the West had grown out of.
China became the cheap labour, low labour cost/regulation region of choice for the majority of labour intensive, low skill and low value manufacturing tasks – textile manufacture, footwear, toys, low grade hand tools and more.
These businesses needed local service providers and support – sewing/knitting/weaving machines, for example – first maintenance, then parts, then copy product, then improved product. This resulted in gradual upgrading of local skills, infrastructure and attitudes, and has resulted in a strong shift into higher skilled labour and capital-intensive products and processes. For example, while the footwear sector has been quite flat for some time, textiles and higher value garment manufacture sectors retain strong growth – in large part because of improved capabilities, improving quality and most importantly automation – breeding a new industrial and OEM sector that is becoming world class.
China’s industrial growth rate has consistently exceeded that of Japan, India and Russia/USSR throughout most of the 20th century – starting from a very low level.
The early focus on raw materials, textiles and light industry has steadily given way to technically more challenging and value added industries. Growth in electronics manufacturing has shown steady rate for two decades – and China has more than kept pace with expanding technologies/services and steadily improved quality of process – while progressively moving from overseas owned OEM suppliers to locally owned.
The state sector has regularly applied social constraints on industrial development, applying attempts at planning and central control through reform initiatives in determining China’s industrial development path. These changes are increasingly focussed on the financial sector, so the more mature manufacturing sector has experienced declining ‘planning’ effects in recent years.
The OEM sector in China
Today, the China industrial services sector encompasses a vast range of SMEs that excel in most manufacturing sectors.
In general product engineering OEM services, China remains dominant – and the pandemic looks to have increased or reinforced that dominance, as China was the only major industrial nation to avoid significant contraction. While the rest of the world’s industrial sector has lost customers, skills and businesses, China retained much of its industrial and growth strength.
Nowhere in the world economies is there such a concentration of skills, expertise and support services as in the coastal arc of Special Economic Zones. There are regional specialisations, which alters the focus of skills, but overall the concentration of skills, the advantageous tax systems and the simple quantity of activity lead to self sustaining momentum.
Highlights in growth are evident in the automotive sector – where annual growth rates of 15% are not exceptional. This is delivering an OEM components/sub assemblies sector with all the characteristics required to serve the world market.
Yes, China built cars WERE lower grade copies of Western models – often being licensed manufacture of retired overseas models. But that situation has changed dramatically over the last decade – as China has taken the lead in EV adoption and development and is now delivering brands that are likely to be world leaders in the next phase. Companies such as Nio do not even attempt to in-house manufacture – opting to OEM their entire production. This sector is resulting in a new stratum of OEM component and sub assembly suppliers, with growth that is stimulated by broadening skills and cluster momentum.
Exceptions to this dominance are;
Aerospace – China has a highly developed military aerospace sector but has failed to enter the commercial aircraft or engine sector (yet). This has rendered the aerospace OEM sector limited.
Semiconductors – several false starts and enthusiastic but poorly targeted investments leave China weak in this sector.
Electronics Manufacturing Services – China suppliers are evident and successful in this sector, but lack world dominance. The largest suppliers remain Taiwanese and Japanese – although this position is subject to rapid change, as the EMS sectors from both countries has done a great (though unintended) job of up-skilling a generation of Chinese entrepreneurs and engineers, by moving their production facilities to China, to access lower labour costs. This is resulting in rapid growth in the local owned EMS OEM sector in China.
Defence is a sector in which government organisations have rapidly developed capabilities – but the OEM sector has not been able to pick up much international client base, partly because of ‘trust’ issues.
Alternatives to China
China based manufacturing is not the only option – and in some sectors it is not the preferred region – often for political reasons, IP concerns, regulatory/certification issues (such as medical/avionics) and value issues (when headline cost of production is not a driving factor).
China is also, increasingly, not the cheapest option in some sectors. The China employment law environment has done a LOT of growing up, through the last decade – to the point where Chinese staff have increasingly Western levels of job security, health a safety support/regulation and increasing standards of living and wages.
Areas in which Central and South Asian countries are seeing increased ability to capture business that would, in past years, have gone to China are;
Low grade apparel – where OEM production in Vietnam, Thailand, India, Pakistan and Bangladesh is showing high growth – because of continuing lax working conditions and low wages
Footwear manufacturing, where China-dominance is diminishing slowly.
Medium and low grade toolmaking and moulding/die-casting, as the skills in this sector develop in the region – often driven by large companies establishing full service, wholly owned factories which result in development of local skills – it is increasingly possible to get good service at competitive prices.
Lower grade manufacturing – in areas that China specialised in, during the early post-reform period, and the country’s industrial base has become less competitive in satisfying, as labour costs and regulation increase.
Overall, the rate at which OEM sectors in China decline due to improved labour conditions has been MUCH more than compensated for by growth in dominance in the mid range – and increasingly in high end manufacture. The toughest, highest volume and most cost sensitive products are very successfully made in China OEMs – with increasing automation and smart (Industry 4.0) manufacturing.
Customers who want the highest grade of services, in complex products can find widespread application of the best skills, in China. Yes, they can certainly find the same (and by some measures, better) in Korea, Taiwan and Japan – although they may well find that their actual manufacture happens in overseas owned factories in China, even then!
Customers who want mid-grade quality/complexity at lowest pricing CAN still find supply in China – but many Central and South Asian countries offer practical and cost effective options, particularly where labour or environmental neglect can bring a competitive advantage.