China's manufacturing industry approaches critical point

The upgrading of the manufacturing industry has become a key strategy for the ruling party to maintain its political influence. This shift is not only reshaping the economic landscape but also influencing the movement of political figures, as senior officials from more developed regions are being transferred to the mainland to facilitate the domestic relocation of manufacturing sectors. For enterprises, the question becomes: what changes must they make in order to qualify for state support? In recent years, China’s manufacturing sector has faced significant challenges, including low profit margins in the global industrial chain, increased trade tensions, and competition from other developing nations. These issues have been persistent problems for Chinese manufacturers, highlighting the need for transformation. The development trajectory of China's manufacturing industry clearly shows that it is approaching a critical transition phase. A series of policy initiatives indicate that the government recognizes the urgency of this moment. Manufacturing remains a cornerstone of China's economy. Out of 40 industrial categories, 29 are manufacturing-related, and the sector accounts for nearly 95% of total industry output. In the first 30 years after the founding of the People's Republic, economic growth was largely driven by manufacturing. Over the past two or three decades, the industry has maintained an annual growth rate of 12-14%, outpacing overall economic growth. Moreover, it plays a vital role in employment, absorbing over 10% of the workforce. However, beneath the surface, serious structural issues persist. China's manufacturing industry is largely concentrated in the middle and lower tiers of the industrial pyramid, with limited presence in high-tech and advanced equipment sectors. This imbalance results in overcrowding in low-value industries while high-end sectors face shortages, often filled by foreign firms. For example, the electronics industry in the Pearl River Delta and Yangtze River Delta is dominated by Taiwanese and American companies. China’s equipment manufacturing sector is heavily dependent on imports, resulting in large trade deficits. Gao Liang, director of the State-owned Assets Research Center, pointed out that while China has introduced many technologies through joint ventures, there has been a lack of effective absorption and digestion. Unlike South Korea, which invested significantly in technology integration, China has spent far less on this process. The structure of China’s manufacturing industry presents a worrying trend: the upper tier of the industrial pyramid has not grown as expected, instead shrinking. As a result, China remains at the low end of the international value chain, relying heavily on low-cost labor and facing minimal profit margins. The core competitiveness of Chinese manufacturing still hinges on cost advantages, whereas developed countries focus on technological innovation. A telling example is the production of a wireless mouse in the Pearl River Delta. Sold in the U.S. for $40, only $5 goes to the Chinese manufacturer, while design and distribution take the majority. According to the National Bureau of Statistics, China’s manufacturing value-added ratio is just 26.2%, significantly lower than that of the U.S., Japan, and Germany. In high-tech sectors like communications equipment, the gap is even more pronounced. Profitability in China’s manufacturing industry continues to decline. While sales have risen by 77.91% since 2003, profits have only increased by 47.94%, with profit margins dropping from 5.96% to 4.94%. Gao Liang emphasizes that meaningful progress requires higher profit shares, otherwise China will remain a large but not a strong economy. Many domestic companies lack long-term vision, content with low-profit operations. In contrast, foreign firms often invest 5-10% of their costs in R&D. Even some large Chinese companies allocate only tens of millions annually for research, which is relatively high in comparison. In response, the Chinese government has begun implementing policies to revitalize key industries. On June 28, the State Council issued guidelines for the revitalization of the equipment manufacturing industry, emphasizing stricter control over foreign investment and focusing on 16 priority sectors. Meanwhile, tax reforms are underway to support domestic growth and reduce reliance on low-level exports. Labor costs, once a major advantage, are now rising, prompting companies to consider shifting operations to lower-cost areas. The shortage of migrant workers in 2004 signaled the beginning of this change, and recent wage hikes in Shenzhen reflect growing pressures. Foreign investors are increasingly aware that “China price” is no longer the lowest option. As manufacturing shifts from coastal regions to the mainland, political and economic structures are also evolving. Senior officials are being reassigned to support industrial transfer, signaling a broader effort to rebalance regional development. While the Pearl River Delta and Yangtze River Delta continue to thrive, the future of China’s manufacturing lies in upgrading its position in the global value chain. Efforts in the Pearl River Delta show that despite rising costs, the region remains competitive, with exports growing at 30% annually. The composition of China’s exports is also changing, with a growing share of high-value products such as telecommunications equipment and auto parts. This shift indicates that China is moving up the industrial ladder, competing with developed nations in previously insignificant sectors. The transformation of China’s manufacturing industry may reshape the relationship between the state and enterprises. Historically, countries like the U.S. and Japan relied on government support to develop high-tech industries. Similarly, China must balance market forces with strategic interventions to ensure sustainable growth. As China moves toward industrial upgrading, the challenge lies in managing the pace of transfer and maintaining economic stability. With a vast domestic market and increasing employment pressures, the path forward requires careful coordination between government and industry. The success of this transition will determine whether China can truly become a powerful, rather than just a large, economy.

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