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| What is Made in China? |
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More than 10 years have passed, more and more Chinese companies, Sino-foreign joint ventures (JV) and wholly foreign-owned enterprises (WFOE) are adopting such an approach: raw materials from abroad, the products sold abroad.
This time, we gradually found that in an industry value chain, foreign companies took away majority of the profits, while Chinese companies only get a minimum, i.e. the meagre processing fees. More seriously, we are starting to taste the bitter fruit of environmental pollution. Chinese companies are getting into a double whammy situation: earning the least, and polluting the most. Historical origins
Back in the 1980s, "two ends abroad, volume in volume out" was once a popular mantra in China. According to this concept, raw materials used by JVs and WFOEs come from abroad, and finished products are also sold abroad. In this way the Chinese companies do not need to pay for the cost of resources, they only need to pay for the cheap and unlimited labour. This was indeed a very attractive concept at that time, and everyone was happy.
In fact, this phenomenon has been proved by economists. The modern industry value chain research suggests that the industry chain profitability exhibits a "V" shaped, the so-called smiling curve. In this curve, one end is R & D and design, the other end is sales and services. Intermediate processing and productions are in the middle. Generally, profit margins in the two ends are about 20% to 25%, while the middle functions are only 5%. |
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Profit or loss?
Let us look at examples of Chinese companies' positioning in this smiling curve. Barbies sold in American market are often made by OEM in Suzhou of China. The retail price of a Barbie in America is $10, but its FOB price from China is probably $2. But this $2 is not yet a profit, as logistics and management consume $1 and raw materials consume $0.65 respectively. The Chinese company only gets the remaining $0.35 as profits. In another example, a cigarette lighter made from Wenzhou of China can only be sold for €2 in European market. However if the same lighter is supplied to and re-branded by foreign companies, it may command more than €20.
Some people have described foreign investors in China like this: They put up 30% of the capital, take a 50% stake, and take away 70% of the profits. So China's capital can only take 30% of the profits. Due to its positioning in the global value chain, some media commentators liken Chinese companies to "international migrant workers". And they are indeed like low-skilled workers, earning a sweat shop wage, while most of the value created goes to upstream R&D and downstream sales.
Daunting costs
It is not just about a minimum portion of the money. As China becomes the world factory, industrial wastes are starting to threaten Chinese people's living quality, health and even life. Environmental expert Mr Liang Congjie said that while China becoming the world factory, it's also becoming the world kitchen. We present the delicious foods on foreigners' table, but wastes from the food cooking process are retained in our own kitchen.
The deputy chief of the State Environmental Protection Administration, Mr Pan Yue, said that China is now the No1 in world daily water consumption, No 1 in world sewage emissions, and No 2 in energy consumption and carbon dioxide emission. For such a huge monster, it would either become world economic engine, or the world's largest pollution source. Currently the energy industry in China, especially the electric power industry, is growing too fast, resulting in a surge in carbon dioxide emissions from coal burning. At the same time developed countries have started to shift a large number of high polluting industries such as steel making to China. Although we have made some progress in introducing better quality projects into China, but in terms resources utilisation and environmental pollution, we are lagging further behind the ever-increasing international environmental standards.
On the one hand, it's in a passive position in the international industry value chain, taking the smallest slice; on the other hand, it is paying a heavy environmental toll for the status of world factory. Chinese companies are getting into a double whammy situation.
Solutions
What can we do? On the issue of industry value chain, Chinese companies have two choices: first, upgrade; second, transfer. It will be a long and hard to way upgrade product qualities and brands. Not only it needs huge amount of capital, but it also takes a long time to train R&D and sales talents. For many companies, they may have to appeal to external forces and assistance to get through the hurdles, Transfer is a more realistic path. The imbalanced economic development between eastern and western parts of China has provided such a possibility. In fact, there have been signs that many firms from developed Jiangsu and Zhejiang Provinces are starting to shift to economically backward central and western regions in recent years.
All the above is easier said than done. It's hard to capture a higher position in the international industry value chain; it is not a long term solution to shift operation from developed regions to developing regions; and it is even more difficult to get on the green economic development path. But no matter how hard they are, we still have to do it, otherwise we will not be forgiven by the next generations. By Wang Yiwei, www.zgc,gov,cn |
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