German industry, education an excellent model for China

Oxford professor says manufacturing will continue to play a dominant role

Eric Thun believes manufacturing will remain the "heart and soul" of the Chinese economy.

The associate professor in Chinese business studies at Oxford University's Said Business School and a renowned expert on Chinese manufacturing, was speaking after the launch of the government's Made in China 2025 plan.

The 47-year-old American insists the new plan reaffirms the importance of manufacturing despite the recent focus on moves to make the economy more driven by services and consumption.

"Even if you are promoting the development of services, manufacturing is the heart of and soul of the Chinese economy," he says.

The 2025 plan aims to make China a world manufacturing power but one further up the value chain than the one that set the country on the road to being the world's second-largest economy.

Instead of being known as a maker of cheap toys and other inexpensive goods, the aim is to be a manufacturer of more high-end technological products.

The focus will be on 10 sectors, including aerospace, new energy vehicles, railways and robotics.

Thun, who was speaking at the new Dickson Poon China Centre building at Oxford University, believes the plan is not some wholesale change of strategy.

"I don't think it is a dramatic departure from the Chinese development path up until this point. It is a response to the challenges that everybody recognizes are there, such as rising costs and how it is becoming very difficult to compete on low-value-added types of activities," he says.

Thun, who visits China several times a year, revisited an auto components maker in Zhejiang province, famous for its entrepreneurs who got rich on inexpensive manufacturing, in April.

"Ten years ago, you would have been talking about 800 yuan ($125; 112 euros) to 1,000 yuan for a monthly wage but now that would be 4,000 yuan, which is a dramatic change in the cost base.

"I think that particular factory would be OK because labor costs are a relatively small percentage of overall manufacturing costs. It is part of some of the ecosystems you have in China and has the advantage of logistics and supply chains but it is not the same for every manufacturer."

Underlying China's new manufacturing strategy is a desire among policymakers to emulate Germany's Industry 4.0 model, which it launched two years ago.

"I think the danger for China is that it is not always easy to imitate such plans. It is not as simple as creating a government policy where you can support certain industries.

"The German manufacturing model is actually based on a whole ecosystem of complementary institutions. You need a financial system that will provide patient long-term capital to small and medium-sized enterprises, the famous German mittelstadt companies. You also need an education system that is geared to vocational training and providing engineers to these firms."

Thun, however, believes the Chinese government is right to prioritize more advanced manufacturing because the old economic model is running out of steam.

He believes the ideas behind the plan originate from the China 2030 report produced by the World Bank and China's National Development and Reform Commission two years ago.

"The China 2030 report came out just before the new leadership came to power, and I think its concerns about the viability of the Chinese model were uppermost in their minds when they took over," he says.

"The buzz in Beijing was that the economic model was running out of steam and that if nothing was done, China could find itself in the middle-income trap and never make the advance to be a high-income developed country."

Thun, who is from Syracuse in upstate New York, studied political science at Princeton University and became interested in China while doing his doctorate at Harvard in the late 1990s, during which he spent a year in Taiwan learning Chinese.

"I spent a year doing nothing but language work. A lot of businessmen I meet who go to China take Chinese lessons just on the side. While I think that is great, I think with that approach you are going to find it very hard to get past taxicab level.

"Learning Chinese is an ongoing process. My writing is by far the weakest, although I can type Chinese on a computer."

In the early part of the last decade, he was assistant professor in the Woodrow Wilson School of Public and International Affairs and Department of Politics at Princeton, before moving to Oxford in 2005, where he is the Peter Moores Associate Professor in Chinese Business Studies at Said.

He says China's emergence as a major economy offers the opportunity to look at business in a different way and is a challenge to traditional Western MBA approaches.

"When you look at China, you need to look at how the state institutions in China shape Chinese firms. How the relationship between state and business work and how Chinese businesses compete in different ways. These are all the unique characteristics of the Chinese business model."

Established MBA tools are derived from developed Western countries and capitalist markets. The question is how to apply them to an emerging market like China."

Thun believes China's technological breakthough in manufacturing may come in the automotive industry, making up for the country's failure so far in this vital sector over the past 30 years.

"It has been difficult for the Chinese to compete with the German firms that have been mastering these technologies for decades and decades. But in electric vehicles everybody is searching for a solution and so there is more of a level playing field and there is a real possibility that a Chinese firm will do something that is innovative," he says.

"It may be that the Chinese make breakthroughs in electric vehicles and also in driverless cars, which is another of the new technologies emerging in the automotive sector."

Thun is skeptical whether these kinds of breakthroughs would result from the Made-in-China plan, even though the automotive sector is specifically highlighted.

"The question always remains as to whether the government has any superior wisdom than firms or the marketplace. I don't think the track record of governments anywhere has been particularly good on this.

"The best way to achieve it might be fostering the development of young entrepreneurs and removing support for the state sector. These measures might be more effective than anything it does in a top-down way."

Thun believes one of the key drivers behind moving up the manufacturing value chain is China's demographics.

The country's family planning policy has resulted in a shortage of young workers.

"The basic problem is that there are not enough workers for the age group that is generally in factories. This has an effect on labor rates. Even if you move factories into the interior you still have this problem."

Thun thinks that Chinese manufacturers have strengths that are often underestimated.

"There is too much focus on labor costs since Chinese manufacturers have other sources of competitive advantage. They have a better understanding of the Chinese domestic market than anyone else, particularly foreign companies. They have an ability to create local brands, an understanding of what customers want and are able to adapt their products to meet that."

andrewmoody@chinadaily.com.cn

(China Daily Africa Weekly 09/11/2015 page8)