Stabilizing the manufacturing sector will be a big step towards ensuring the security and stability of the broader economy
By Xu Hao
As summer is winding through the northern hemisphere, the manufacturing sector is enduring a winter of sorts.
When I sought out representatives of small manufacturing businesses in May, most of the responses asked whether I knew any potential investors. Due to a perfect storm of pressure from different places, many micro and small manufacturers are barely hanging on.
The Manufacturing Purchasing Managers’ Index (PMI), a forward-looking macroeconomic index, also sheds light on this dilemma. From March to May, the PMI was 49.5, 47.4, and 49.6 percent respectively, below the 50-point mark indicating economic expansion. On May 25, the State Council held a national video teleconference on stabilizing the broader economy. There, Premier Li Keqiang noted that since March, especially April, employment, industrial production, electricity consumption, freight transport, and other indicators dropped significantly. Recent difficulties are even greater in some ways and to some extent than those that emerged in early 2020 during the initial outbreak of COVID-19.
Against this backdrop, the manufacturing sector, as well as its special cycle of production, operation, and research and development, has been hit particularly hard. The manufacturing sector is an important foundation and support for economic development and an important means to stabilize employment and move towards the medium-high-end of the industrial chain and value chain. The Central Committee of the Communist Party of China introduced clear requirements for containing the spread of the virus, stabilizing the economy, and securing economic development. Stabilizing the manufacturing sector will be a big step towards ensuring the security and stability of the broader economy.
Domino Effect of Logistical Congestion
“Goods bound for overseas markets are mainly shipped from Shanghai,” explained the general manager of large machinery manufacturer in a mid-May interview. “The strict epidemic control measures in the city posed a serious problem in April and May. With the containers stuck at Shanghai Port, it was impossible for us to deliver goods and recover costs. Furthermore, it was impossible for us to host visits by clients.”
Since mid-to-late March of this year, sporadic COVID-19 cases have been reported around the country. Pandemic response measures have been upgraded in the Yangtze River Delta and Jilin, Henan, and Shaanxi provinces. As a result, freight logistics have been congested with some living and production materials blocked along the way.
The manager of an electronic equipment manufacturing company located in the Yangtze River Delta related a story of a transport “accident.” On April 1, his company tried to transport several tons of raw material from a central province to an eastern province by road. However, because so many provinces and cities along the route were impacted by a new wave of pandemic, the driver encountered many difficulties due to local health control measures. After eight days, he finally arrived in the eastern province. The driver was in no mood to go on any longer. He unloaded the goods and left them for a caretaker. At that time, trucks were not allowed to cross borders between different cities. The company had to hire a truck on either side of the border to transport the goods to its destination.
“An enterprise as big as ours has been able to cope with the situation thanks to our capabilities and big market share,” opined the manager. “However, the situation has become too much for manufacturers at the low end of the industrial chain. If this kind of thing happens to a client, especially a foreign client, we are likely to lose the client. Delayed delivery in foreign trade can result in hefty fines.”
A senior executive of a high-tech manufacturing company in northeastern China raised another issue: Many manufacturing companies, especially electronic technology manufacturers, are most concerned with the supply chain because any “interruption” of the chain would impact the whole economy and society.
“Frequent quarantine and restriction measures leave many companies unable to get raw materials for R&D and production,” said the senior executive, “Without production, they cannot sell their goods or deliver orders. Eventually, the industrial chain will be disrupted, hurting every other link. According to my understanding, many enterprises in the Yangtze River and Pearl River deltas are facing similar problems.”
In mid-April, the State Council Joint Prevention and Control Mechanism Against COVID-19 released a notice with seven measures to ensure smooth freight and logistics alongside pandemic prevention and control, known in the industry as the “Seven-Article Circular.” Since then, logistics companies and truck drivers have been happier with conditions.
However, many people are still concerned that they might find roadblocks after some changes in the policy.
Some have predicted that the continued resurgence of the pandemic will ultimately lead to a new wave of bankruptcies in the manufacturing sector. Operational costs in the manufacturing sector such as site rent, workers’ wages, R&D, and raw materials are all hard. At the same time, the sector faces tremendous pressure from failures in financing, delivery, and cost recovery. The unbearable burdens of disruptions of the industrial chain and shrinking of demand are first laid on players in the manufacturing sector.
A manager of a state-owned manufacturing company studied an industry report to discover that the four-firm concentration ratio of the industry has further increased. “Things have become increasingly difficult for many small firms, many of which have been ‘annihilated’ over time, while the largest firms in the industry have acquired more and more market share,” he explained. Micro and small businesses can hardly withstand pressure due to limited product lines, which makes them highly vulnerable to external risks and industry fluctuations. “The situation is really cruel,” he sighed.
Since late May, central and local governments have released a series of policies and measures to stabilize the economy. The senior executive of a high-tech manufacturer thinks that the most urgent issue for many small and medium enterprises is money. “There is no easy solution for this problem,” he said. “Banks have capital chains. It’s impossible for them to lower interest rates without limits. Lowering interest rates is equal to giving away money to enterprises. There has to be limits. Excessive lowering of the rates will result in problems for the financial system. In reality, supporting policies have unevenly allocated funds. To solve the problem, governments at all levels have to strengthen regulation.”
“For the manufacturing sector, next year will be a make-or-break year,” he said. “Many manufacturing companies will be able to survive this year with contracts they signed in the second half of 2021 or the first half of 2022. If the industrial chain gets interrupted more and people become pessimistic and passive, I don’t even want to imagine what might happen next year.” The big companies, with natural advantages in size, cash flow, and loan accessibility, will probably manage to survive the “harsh winter” while many competing small and medium companies will likely perish.
The manager of an electronic equipment manufacturer thinks that in general, the manufacturing sector has faced a lot of challenges in recent years. Because of the international division of labor in the industrial chain and the impact of the pandemic, some manufacturing companies have transferred to Southeast Asia. Many are at the low end of the industrial chain, but the quantity is huge. But investment platforms are also moving southeast due to escalating trade friction between China and the United States and the manufacturing transfer.
“For companies, relief policies will only solve a few of their problems,” said the manager. “Confidence is more important, the most important thing.” Companies prefer stability and transparent policies. When entrepreneurs are confident and the market is confident, participants can overcome difficulties. “Even the dire circumstances at the beginning of 2020 didn’t cause people to lose confidence because everybody believed that things would get better,” the manager added.
Promoting Industrial Transformation and Upgrading
Despite its location in the Yangtze River Delta, the Tigerbuilder Microcircuit (Suzhou) Company did not suffer much during the latest surge of the pandemic.
“Our company completed a transformation last year to join the semiconductor packaging industry,” proclaimed company Vice Chairman Wang Yuan. “This year, we have joined the supply chain of Samsung and Saul Semiconductor as their primary supplier. We are now directly connected to the international market. So the latest surge of the pandemic had a limited impact on us. Of course, we did experience problems with supply of raw materials, communication with our clients, and timely delivery.”
According to Yang Guoxing, deputy general manager of Dalicap Tech Corporation, the current predicament is forcing manufacturing companies to invest more in R&D. “To secure the industrial chain and supply chain, likely strategies include setting up R&D centers in different regions, increasing investment in R&D, ramping up their supply chains, promoting product upgrading, and developing forward-looking, professional, and focused products,” said Yang.
As it endures the winter, the manufacturing sector is also grappling with an even more important topic.
From the macro perspective, restructuring of the global industrial chain will lead to a new development pattern for the Chinese manufacturing sector. Huang Qunhui, director of the Institute of Industrial Economics at the Chinese Academy of Social Sciences, said that since the international financial crisis and especially after the outbreak of COVID-19, protectionism, unilateralism, and hegemony have been on the rise, causing strong headwinds for globalization, which has resulted in a trend of introverted global industrial division of labor causing huge risks for the restructuring of the global industrial chain.
“A fundamental feature of the Chinese manufacturing sector is that it’s not competitive enough despite its size,” said Huang. As the global industrial chain is restructured, accelerating deployment of new energy and improving the industrial foundation is crucial, including introducing key technologies to solve bottleneck problems.
Huang believes that building a new paradigm for the development of Chinese manufacturing industry requires building an innovation ecology centered around modernization of the industrial and supply chains, the core of which should be scientific and technological innovation.
“Meanwhile, the government should offer incentives to improve competition,” she continued. “Many disruptive technologies have actually emerged within a fine competition policy framework, featuring prominent roles from small and medium companies. In the process of competition, some companies will go bankrupt. However, disruptive technologies will emerge due to the promotion of competition policies.” Huang also suggested other key factors in developing a new paradigm for the Chinese manufacturing sector could include integrating Chinese companies from low value-added links to high value-added links and improving modernization of industrial and supply chains.