Chinese government changing rules for foreign manufacturers

Western manufacturers operating in China should aim to pre-empt changes following the recent announcement of plans to consolidate and strengthen the country’s state-owned enterprises in order to increase their global competitiveness.

Western manufacturers operating in China should aim to pre-empt changes following the recent announcement of plans to consolidate and strengthen the country’s state-owned enterprises (SOEs) in order to increase their global competitiveness.

DJ Vendigital-2014-12-06-0043
Dominic Jephcott, CEO, Vendigital.

The Made in China 2025 initiative, as outlined at the National People’s Congress recently, is a 10-year plan for transforming the country’s manufacturing sector in order to create a smaller number of large-scale businesses capable of competing internationally in a number of strategic sectors.

Based in Hong Kong, Dominic Jephcott, chief executive officer at Vendigital, procurement and supply chain specialist, said: “Western corporates with joint venture relationships in China need to keep a close watch on what happens next. Communist party leaders have promised to release broad guidelines for the restructuring plan in the next few months.”

Most of the world’s leading automotive manufacturers are already operating joint ventures (JV) in China. Jaguar Land Rover and the Chery Automobile Company, for example, are in the process of building a new factory to the north of Shanghai as part of a £1.1bn joint venture investment plan.

Explaining the potential impact of significant manufacturing sector consolidation in China, Jephcott added: “China has more than 100 automotive companies of its own – mostly state or provincially-owned, and few are currently able to export into the primary Western markets. In the run up to 2025, we could see the emergence of just a handful of larger players capable of turning out high-quality vehicles that consumers around the world will want to buy.”

Ahead of the changes, international companies with joint ventures with smaller Chinese companies will need to take pre-emptive action by spending more time with JV partners and their respective government connections to monitor what is happening. They should also consider putting contingency plans in place.

In the meantime, there is also likely to be a window of opportunity for Western manufacturers to support the evolution of China’s higher-value manufacturing sector.

Jephcott concluded: “Over the course of the next decade there will still be opportunities for Western companies to share their knowledge and technologies. This is already happening in some sectors through initiatives such as COMAC and AVIC in the aerospace sector. By 2025, China should have an aircraft manufacturing capability equipped to challenge the duopoly of Airbus and Boeing internationally.”

Other strategic sectors where consolidation on this scale is likely include energy, infrastructure and transportation. This could ultimately reduce commercial opportunities for Western companies or significantly increase competition, but as with the automotive sector, there could be opportunities in the meantime.