Does China Really Need to Make Everything by Itself? Chinese Official Asks
Mei Xinyu
DATE:  Jul 31 2017
/ SOURCE:  Yicai
Does China Really Need to Make Everything by Itself? Chinese Official Asks Does China Really Need to Make Everything by Itself? Chinese Official Asks

(Yicai Global) July 31 -- Should China build its own cruise ships? This is the title of an article The Economist published on Weibo. The article sparked a worldwide debate on the question -- does China really need to make everything by itself? 

The present author believes, as a major global economic power heavily reliant on foreign trade and the second largest importer in the world, China should benefit -- and has already fully benefited -- from international division of labor, so it should not insist on producing everything by itself. Having said that, as the most populous country and the second-largest economy in the world, China enjoys a unique advantage -- its ability to accommodate more globally competitive manufacturing businesses positioned across the entire industry chain, which puts it in a better position to create a virtuous cycle driven by manufacturing industry upgrade.

A large population has given the country a competitive edge over other nations ever since the Qin and Han dynasties over two thousand years ago. This is particularly true with the development of modern manufacturing. If all other factors remain unchanged, a bigger population means a bigger domestic market, greater production capacity and greater economies of scale and 'economies of scope.'

Even Elche in Spain, the former 'European shoemaking capital' is no match for Chinese manufacturers, the reason being a typical shoe factory in Wenzhou has 3,000 to 4,000 workers and produces seven to eight million pairs of shoes every year, meaning that it has far greater economies of scale than Spanish workshops that are usually staffed by 20 to 30 craftsmen. Furthermore, Wenzhou factories also enjoy greater economies of scope as they have easy access to shoe parts and accessories producers located in surrounding areas. 

As people's income increased and consumerism rises a continuous transition in China's manufacturing sector toward technology and capital-intensive products is in swing. The range of industries that have achieved considerable economies of scale has expanded to include electronics, telecommunications and automobiles, in addition to traditional textiles, light industry and home appliances. In the past, China was unable to develop certain technology and capital-intensive industries due to the limited domestic market and economies of scale. Today, however, the obstacles have disappeared because of constant growth of the Chinese market. The evolution of the automotive industry furnishes a good example to illustrate this point. Admittedly, room for further developing the Chinese automobile industry still exists, but an enormous domestic market has enabled it to avoid the 'cost penalty' trap, a common phenomenon afflicting many smaller developing nations, where import substitution industrialization in the auto market can result in diseconomies of scale and a vicious cycle summarized as 'cost penalties -- diseconomies of scale -- lack of global competitiveness -- reliance on imports -- further cost penalties.' By contrast, developing countries with a huge domestic market are better equipped to escape the cost penalty trap, and create a virtuous cycle, where substantial domestic sales lead to greater economies of scale, which in turn improves domestic manufacturers' competitiveness in the global market, enabling them to enter foreign markets and thus further enhance their competitiveness. 

The situation in the shipbuilding industry is similar. After continuous development in the past several decades, Chinese shipbuilders can integrate domestic and foreign resources to produce their own cruise ships. In addition, shipbuilding materials, parts and components that they produce have weathered competition on open markets. Some were unable to recoup their initial investments in product innovation, and their independently-developed products do not possess much commercial competitiveness. Nevertheless, if China can upgrade its home-made cruise ship products, the resulting benefits will be shared among many domestic manufacturers. This is because, relative to small countries, it is much easier to spread the spillover effect of an innovation in China to other relevant industries. For the same reason, it is easier for Chinese shipbuilders to recover initial investment, and make their products competitive in the global market.   

The government should therefore create a favorable 'software and hardware' environment, and let our entrepreneurs and engineers give it a go.

The author is a researcher at the Chinese Ministry of Commerce.

[Yicai Global is committed to providing an open forum to air a diverse range of views. The opinions herein are the author's alone. Yicai Global has edited this article to conform to our style and usage, but neither validates the factual nor endorses the editorial content herein.]

Follow Yicai Global on
Keywords:   Made In China,Economy