OPINION> Liang Hongfu
Reinvent or stay out of the race
By Hong Liang (China Daily)
Updated: 2008-07-29 07:29

Growing fat on a heavy diet of OEM for years, many mainland enterprises appear to have lost the ability to evolve on their own.

So, it is not surprising that on the brink of a global recession, translated into shrinking export orders, manufacturers on the mainland are clamoring for government aids in the form of higher export tax rebates and forceful intervention to mitigate the appreciation of the renminbi against the US dollar and other world major currencies.

But instead of groaning and whining, mainland enterprises should try to turn this apparent setback into an opportunity to restructure themselves in ways that would make them fit enough to climb up the value-add chain. They have to accept the fact that they can no longer do business on the cheap as some of them have done in fragrant disregard to the welfare of their workers and the delicate balance of the environment.

To be sure, China still enjoys a clear advantage over many other developing countries as a viable manufacturing base. But its overall cost competitiveness, especially in the low-value-added light industrial sector, has been seriously eroded by double-digit wage increases in the past several years and the 20 percent appreciation of the renminbi against the US dollar since July 2005.

The business environment has also changed. Extreme cost-cutting measures that create unacceptable levels of environmental pollution will no longer be tolerated. In some areas, manufacturers have been required to bear the cost of cleaning up the environment which they had polluted and install new equipment to treat the smoke and waste water discharged from their factors.

It would be grossly unjust to roll back the benefits of the workers who have made a disproportionately large contribution to China's economic growth relative to their individual incomes. Any relaxation of the rules to prevent further abuse of the environment would seem equally unacceptable.

Of course, there are monetary tools available to the government to slow down or even stop the appreciation of the renminbi. But it is necessary to bear in mind that the US dollar has depreciated not just against the renminbi, but also against the euro, the Japanese yen and other world major currencies. As the Chinese economy becomes increasingly internationalized, the government must take into account that global economic conditions in setting the renminbi exchange rate.

Following the examples set by their Hong Kong counterparts in the 70s and 80s, some mainland manufacturing enterprises have sped up the transfer of their labor- and land-intensive production activities to overseas low-cost manufacturing bases, including Vietnam and some other neighboring countries. Others are trying to offset losses in exports by boosting domestic sales through expanded distribution networks and massive publicity campaigns.

But in the domestic market, mainland enterprises are focusing on competing among themselves and with foreign manufacturers on price rather than on quality and consumer appeal. As such, their profit margins have remained low, which, in turn, has inhibited further investments in product development.

There is no shortage of management gurus preaching on TV talk shows, public seminars and Internet chat rooms the importance of branding. Judged by the quality and appeal of the TV commercials on various domestic channels, I doubt if many mainland manufacturers can tell the difference between brand building and product hard-sell.

That's not important. They can hire the people who know. But those bosses who really care about developing their own brands in the domestic and foreign markets must be prepared to make the initial large investment in research and development to create quality products of their own design. This is the necessary first step in establishing brand value. The rest is marketing and promotion.

Those manufacturers unwilling to make such investments will stay at the bottom rung of the value-add chain with little room to maneuver when the economic tide turns against them.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 07/29/2008 page8)