The Future of Manufacturing Industry in China

In 1979, China’s one-child policy was proposed by Dengxiaoping, the Chairman of China, and began to be implemented (Nakra. 2012, p. 134). However, because the Chinese population was huge before that time, the rural population is still very large to date and they have a low living standard. Nakra (2012) states that “21. 5 million rural Chinese live below the official ‘absolute poverty’ line of $90 per year, and 35. 5 million citizens live above this level but still below the official ‘low income’ line of $125 per year ” (p.137).

In order to change this situation, more rural people began to move into the cities, and desired to have jobs and live in cities. According to Nakra (2012), China’s urban population will increase by 0. 325 billion in 2025, including 0. 23 billion immigrants from rural areas (p. 137). With large numbers of workers going into cities, labor-intensive enterprises are starting to become more popular because their stable wages and simple operation.

In fact, labor-intensive enterprises are the most basic enterprises in China. According to “Dictionary. com” (2013), the phrase “labor-intensive” can be defined as “requiring or using a large supply of labor, relative to capital. ” Labor-intensive enterprises (LIEs) are just relying on a lot of labor to produce the most junior of products, such as sew, handwoven, and construct (Zhu, 2004, p. 1014). At the same time, another similar enterprise has come into being, called labor-intensive manufacturing enterprises (LIMEs).

The difference between these two enterprises is that LIMEs have scientific and technological base and they normally do the work of assembling, integrating, and producing, and that LIMEs are almost always foreign joint enterprises (Zhu, 2004, p. 1018). Of course, China not only has LIEs and LIMEs, but also has other types of enterprises, such as traditional manufacturing enterprises (TMEs), emerging high-tech enterprises (EHTEs) and technology enterprises (TEs). Among them, technology enterprise is the most popular.

Firstly, according to “Thesaurus” (2013), technology enterprise is “the enterprise based on resembling or making use of highly advanced technology or devices. ” It seems that these kinds of enterprises are similar to LIMEs, but the profitable ways of TEs and LIMEs are, in fact, very different. More specifically, the profitable way of TEs include doing “global integration and collaboration” (Hoekmen, & Javorcik, 2006), and earn money based on their intellectual property rights.

However, the profitable way of LIMEs is mainly consists of reducing costs including labor costs control, and finding more cost-effective resources instead of original ineffective resources; as a result, the benefits of technology enterprises are several times or even hundreds times more than the benefits of LIMEs. Why would they produce different profits in doing similar things? The main reason is LIMEs do not have a brand value; this means they can only assemble for technology or high-technology enterprises, and the ways they can gain money is only from manufacturing.

There is a vivid example about a typical labor-intensive manufacturing enterprise in China – Foxconn. According to Duhigg and Barboza (2012), Foxconn has over 1 million employees. In addition, Luca, Kang, & Li (2012) also claim that the largest factory of Foxconn was called “Foxconn City”, in which over 0. 3 million employees live (p. 91). Also, they reveal that Foxconn produces almost two-fifths of electronics fitting all over the world (p. 91). At the same time, Foxconn is a very famous LIME in the world because of its relationship with Apple.

Perlin (2013) indicates that Foxconn can produce over 135000 iPhones a day, or 1. 5 phones per second; almost 0. 3 million iPad cameras can also be assembled in a very short time (p. 47). The obvious difference in profits between Foxconn and Apple is that Foxconn can only gain below twenty dollars from assembling one iPhone, but that Apple can sell an iPhone for over six hundreds dollars and can gain over three hundred dollars in profit from doing so.

This example explains how both LIMEs and TEs can both profit from their relationship with each other, even if the relationship clearly has a hierarchy. In recent years, China’s economic development has faced many problems such as the rising cost of Chinese human labor and the changes in China’s economy. Nobel laureate Krugman (2013) explains that China’s economy has begun to slow down the pace of development and that China’s allocation of labor costs is balanced, which means LIEs are more difficult to be developed in China.

Integrating the fact that LIMEs’ profitability is far below the TEs’ and that LIMEs’ development space will become more and more narrow, LIMEs could consider upgrading or transforming their industrial model to become technological enterprises, which would have a similar structure as LIMEs. While this is an important topic, the precise method of transforming, LIMEs and TEs has not yet been deeply discussed by scholars because many scholars believe that Chinese LIMEs have no economic value. They have therefore chosen to discuss only the basic programs that many Chinese LIMEs have carried out.

However, in talking about this transformation, we can also find many long-term strategies that can help LIMEs to successfully transform into TEs such as through mergers and acquisitions for diversified development, changing the management to help LIMEs build their firm’s core value and brand value, and relocating the market demand to help them better seize market trends. Firstly, it is difficult for a layperson to distinguish between LIEs and LIMEs. These two kinds of enterprises are very similar because almost all LIMEs and LIEs use simple mechanics to help produce their products.

Unlike traditional labor-intensive enterprises, handmade products have gradually been replaced by machinery in recent years. Therefore, the difference between LIEs and LIMEs really lies on the aspect of using this technology. More specifically, LIEs use industrial robots, but do not update the device themselves. On the other hand, in the process of using machines, LIMEs always update or reform their equipments based on the needs of production. Another angle to explain this difference is that LIMEs always have a technical department, but that LIEs do not.

To sum up, comparing with LIEs, LIMEs have obvious advantages and congenital conditions because these kinds of enterprises are much closer to technology enterprises. Objectively speaking, LIMEs should consider changing their model because of many factors. First, as Krugman said, China’s surplus labor is not enough, and this will lead to the increase in labor costs. For LIMEs, which rely on squeezing labor to obtain benefits, interests will be more difficult to obtain. Moreover, the government raises the minimum wage almost every year, and this will cause LIMEs’ cost to increase rapidly.

Furthermore, Larson (2013) has explained that the CEO of Foxconn has decided to add a million industrial robots to Foxconn’s assembly lines in the next three years (para. 2). In contemporary society, the usage of machine must be more frequent. This indicates that using science and technology is inevitable, and Foxconn using more and more machines shows that the nature of the company is slowly beginning to change. In summary, if Foxconn wants to gain more profits, this company should to consider more profitable points instead of only assembling, which only creates very little profit.

Then, the transformation of LIMEs comes with many developmental issues, which can be also viewed as a social problem because LIMEs’ contribution to society is enormous. According to Perlin (2013), Foxconn can help the government to solve the employment problem which in 10 days to arrange for 100,000 students to practice (p. 49). As a typical LIME, Foxconn can contribute in solving the government’s unemployment problem as well. In this context, if Foxconn or any other LIMEs want to move their factories, not only would this action have a direct impact on the local economy and the employment rate, but also have other indirect effects.

Thus, LIMEs changing their location would not be a good idea for the development of the country. LIMEs also need to consider transforming their original model in order to gain more benefits, and to avoid falling into a passive development, LIMEs also have to consider several of limited factors. However, which type of enterprises that LIMEs can to transform is not much. Technology enterprise is a relatively better choice. There are several points which can be used to support the reason: 1) TEs can quickly enhance competitiveness, depending on stable technology base.

2) TEs can have a different level of customer groups, and TEs can choose their main customer base according to market demand. 3) It can be easier for TEs to build their own brand, and for many companies, the brand has far exceeded the value of the enterprise itself because the brand is an intangible asset. 4) TEs are able to enjoy the benefits of intellectual property rights. Even though only a few Chinese TEs have a regular intellectual property rights protection system, it is better for LIMEs to be without it (Segal, 2003). Selecting the right solve solution is not easy.

Many companies only focus on immediate interest and profit, and often choose a short-term solution to help LIMEs to gain revenue. For a development of enterprises, this is undesirable; in order to aid in a better development, enterprises should target in long-term economic benefits. Therefore, this paper focuses on three long-term solutions. In order to diversify the development of companies, Chinese labor-intensive manufacturing enterprises should consider using mergers and acquisition to expand the competitiveness of enterprises.

Coyle (2000) explains “Mergers and acquisitions (M & A) occur when two or more organizations join together all or part of their operations” (p. 2). This action can help enterprises to directly to obtain all factors of the acquired company’s economic field, like customers groups, technical support, and market share. After M & A, LIMEs can gain multiple benefits. LIMEs can enhance enterprises’ strength. For a single manufacturing enterprise or a single market for business, the development of enterprises has been difficult to stabilize.

For example, in the 2008 financial crisis, over 50,000 LIMEs that specialized in garments closed down in Guangdong Province, China (Warner, 2013). To summarize the reason, the market they were in was too dull and the ability of risk aversion was too poor. In addition, LIMEs’ products can be involved in the a wider field. There are many Chinese companies which choose do mergers & acquisitions overseas. In other words, the LIMEs that are not as well aware of the overseas market can quickly obtain overseas markets shares through mergers and acquisitions overseas.

For instance, Geely auto had a large market in China, but was not involved in the overseas market. However, after Geely acquired Volvo in 2008, Geely now had a direct access to the Volvo’s overseas market share, and Geely could put its own brand of vehicles in the mix. Last, through M & A, enterprises can use resources in a more reasonable way. The mergers occurring in different regions can enable companies to use the existing human resources, technical resources, and public resources in a more effective way.

For example, if two companies are merged in the same industry, the companies’ size will undergo a sharp increase. A more important point is that the reduction in the peer competitor can make a more relaxed production environment, even for accessing raw material will at a lower price. A great example of a Chinese LIME carrying out successful transformation for the last four decades is Wanxiang Group Corp. Wanxiang is known as one of the most successful Chinese overseas mergers and acquisition companies. Before Wanxiang merged in 1994, its status was comparable to that of Foxconn.

Both of them are labor-intensive manufacturing enterprises, with the only difference being that Wanxiang is in the automotive industry and that Foxconn is in the field of electronic products. Another similar condition is that both of them have a technological base, and that they use industrial machines to produce parts and accessories for other famous foreign companies. The development of Wanxiang was not a coincidence because China’s economic environment was not as good as it is now. Lu, Sun, & Goh (2010) state that Wanxiang was found in 1969 with 4000 Yuan, and

developed in 1980s, which was a period that “China started restructuring its automotive industry” (p. 804). They also claim that “Wanxiang’s internationalization began in 1984, when it started exporting its products on behalf of Zeller Corporation, an American auto-parts manufacturer”(p. 805). With 15 years of individual developing, Wanxiang achieved its first international orders, and began its first step of manufacturing. According their article, after Zeller built a corporate relationship with Wanxiang three years later, many more U. S.

companies started to work with Wanxiang, which paved the way for Wanxiang acquiring companies in the U. S. (p. 805). At the end of 1990s, Wanxiang began to acquire bankrupt American car parts factories. In 2002, Wanxiang acquired Scheele company, which had been listed on the NASDAQ. In 2003, Wanxiang acquired Rockford company. In 2007, Wanxiang acquired DANA (Knight & Bond, 2013). In additional, “M&A highlights were the acquisition by auto-parts company Wanxiang Group's successful $257 million bankruptcy-auction bid for electric-battery maker A123 Systems Inc” (Chen, 2013).

All of Wanxiang’s acquisition case shows that Wanxiang constantly improved with its overseas M & A, and started diversified development. At the same time, in China, Wanxiang also developed several new fields, like real estate, new energy, and logistics. M & A can be used as a very effective method to help LIMEs transform or expand diversified development. It can be said that Wanxiang can gained its achievements based on overseas M & A strategy. Now, although Wanxiang is neither a labor-intensive manufacturing enterprise nor a technology enterprise, Wanxiang’s successful case is based on LIME, which Foxconn or other LIMEs can simulate.

The second method can be used to help LIMEs transform to TEs is through changing management to help LIMEs to build brand values. Chinese enterprises’ brand value is not high. According Al-Dmour, Al-Zu’bi, & Kakeesh (2013), the brand is very important in people’s mind, it also can help companies make strategic positioning. This year’s brandZ ranking is: 1. Apple with 185,071 million dollar; 2. Google with 113,669 million dollars;… ; 5. Coca-Cola with 78,415 million dollars… (Cooper, 2013).

Brand value and popularity is relevant, and this is the reason why Apple’s brand value is ranked at the highest. On the other hand, the highest ranked Chinese company on this list is China Mobile, with 55,368 million, at 10th rank of the world (Cooper, 2013). The problem is China Mobile is a state-owned enterprises and it is a monopolistic enterprise, which means that China Mobile has a market of 1. 3 billion people. However, China Mobile’s brand value still only a tenth, which demonstrates how Chinese enterprises’ need to be strengthened. Chinese enterprises’ international status is not high.

According to Mourdoukoutas (2013), in the world’s most respected companies rank, just three Chinese enterprises are found in top 100: China Mobile is at 95, CNOOC is at 96, and China Construction Bank is at 97. It is incredible that China Mobile’s brand value 10th in one list, then 95t in another. The reason Chinese enterprises have a low status in the international arena is because the management of these enterprises cannot lead the enterprises to obtain international achievements. Even if there is no production, managers are still very important.

In recent world’s most respected companies rank, Berkshire Hathaway achieved the No. 1 (Mourdoukoutas, 2013). As people know, Berkshire Hathaway is not a production company but an investment company. Why would this kind of company become the most respected company? The answer may lie behind the fact that it has a good management and great decision-makers-Warren Buffett. A good manager or management could help enterprises to build their brand value, clear their core value as soon as possible, and establish their intellectual property rights.

Many managers of Chinese enterprises have led enterprises obtain good achievement. Ruimin Zhang, the CEO of Haier company, who worked in Haier for 28 years, led this company to be listed as the one of the most innovative company in the world in 2012 (Haier. com, 2013). Chuanzhi Liu, the CEO of Lenovo, led Lenovo to be successfully acquired into the IBM’s PC business, and helped Lenovo to become the world’s third-largest PC vendor (Liu, 2013, p. 576). Changing management or decision-maker is a good strategy to help LIMEs obtain success. In Chinese LIMEs, the management or decision-maker seldom has extensive knowledge.

If these companies can change other professional staff as management or decision-maker, regardless to the enterprises’ restructuring or enterprises’ development both are good things. Even if LIMEs just adjust their management, it can also be conductive in helping LIMEs transform into TEs. The last method which can help LIMEs to transform themself is to reposition the market demand, which would allow them to better seize market trends. According to Coombs, Green, Richards, & Walsh (2001), LIMEs are not concerned about the market demand, but technology enterprises need to follow market demand to build their customers crowd (pp.

61-63). With this point, we can image that if LIMEs are able to begin to pay attention to the needs of the market, they could become technology enterprises. Locating the technology enterprises’ market demand is not complex. Because these kinds of enterprises are based on maximizing the benefits, TEs just need to focus on the public demand and public service, which can produce huge benefits. Also, this is not hard for LIMEs because they would have a change management to help them to build brand value and to build a better direction in development.

Discovering such market demand can become a challenge. Coombs, Green, Richards, & Walsh (2001) indicates that many methods can be used to locate the market demand: 1) market research is the most direct method to obtain market demand; 2) Find the most popular market trends. For example, the electronic tablet has gained a significant market in recent years; thus, TEs can participate in this market; another one is to participate in public equipment or health care facilities, which never be outdated. All of these methods are not complex for LIMEs.

LIMEs can transform to TEs by relocating the market demand to help them transform better. Brand is the key of enterprise. LIMEs transforming to TEs is a lengthy process. If they are successful in finishing transformation, it will become very difficult for LIMEs to collapse. Nokia, Mobile phone giants at the beginning of 21 century, was once the world’s largest mobile phone maker, with its brand value ranked at no. 1 in the world. However, with the emergence of smartphones, Nokia lost almost all of its market share. Although Nokia lost the mobile market, it has not become bankrupt.

The reason is because of its brand value; people believe that Nokia can create better products in the future, so many are still risking their investments to help it develop. In conclusion, the increase in labor costs has led to labor-intensive manufacturing enterprises’ development space to become more and more narrow. Adding with meager benefits from assembling, Chinese labor-intensive manufacturing enterprises could consider upgrading or transforming their model. In addition, compared to labor-intensive enterprises, LIMEs have an obvious advantage, which is the technical base.

When utilized well, this advantage would allow LIMEs to rapidly grow into technology enterprises. From many successful examples, we have been able to see that Chinese LIMEs also can be successful if they use mergers and acquisitions for diversified development, change the management to help LIMEs build their firm’s brand value, and relocate the market demand to help them better seize market trends. References Al-Dmour, H. , Al-Zu'bi, Z. F. , & Kakeesh, D. (2013). The Effect of Services Marketing Mix Elements on Customer-Based Brand Equity: An Empirical Study on Mobile Telecom Service Recipients in Jordan.

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