Changing times require changing strategies

Reporter's log | Zheng Yangpeng

The economy's transition is posing a challenge to all companies, including those with overseas investment.

Factories owned by overseas investors have long been a more competitive part of China, using its abundant labor to generate increasing export incomes. But now, as the economy is changing from export-led growth to growth driven primarily by domestic consumption, they will have to rethink their China strategies.

There is a question they all face: What are they here for? Using the country's cheap labor to produce things for their home market or third countries? Or to make and sell things primarily in China?

They did not have to think about this when they first came, amid the boom of the so-called processing trade.

The definition of such trade is when foreign firms provide material, designs or samples, while the Chinese side (local governments or businesses) provide land and labor.

The processing trade first came to the mainland in 1978 in Humen, now part of Dongguan, an industrial city in the Pearl River Delta that has one of the largest clusters of foreign-invested manufacturing operations in China.

While still contributing about 35 percent of China's foreign trade last year, the glory days of the processing trade are over.

Land and labor are no longer in abundant supply, and North America and Western Europe are no longer generating big orders.

So for companies wanting primarily cheap labor, probably they will find it is time to go someplace cheaper.

For companies turning to the Chinese market, they also have to make some changes. Amid a rise in all costs, labor in particular, they must lean to innovate and find more creative ways to do business.

Some, among the companies that have chosen to stay, said they had cut labor's share in their total costs to below 10 percent.

Rising wages, said an executive of Advanced Micro Devices Inc, a US semiconductor company, is a problem that the company has been trying to address for a long time.

"We stay here not for the low wages, but for the size of the market," he said.

Among foreign-invested companies that are leading the change, most began the process years ago, some even before the 2008 global crisis.

One example is Lite Array Co Ltd, a Dongguan-based company with Hong Kong investment.

Starting as a typical original equipment manufacturer, Lite Array realized its business model was no longer sustainable and began to seek a transition in 2005. It moved away from its traditional line of household electrical appliances and into opto-electrical products.

"We had to do so because we felt competition was already too fierce in the market for household electrical appliances. As a Hong Kong company, we don't enjoy any advantage in cost. So we had to make a move," said Shu Weiping, general manager.

It decided to go for technology-intensive production and, after quite some market research and much thought, chose to make camera modules that enable mobile phones to take pictures.

To implement the plan, Shu and his team went on a nationwide search for talent at many universities, making generous offers to PhDs in optics and micro-electronics.

Lite Array made a smart bet. In the years that followed, these moves slashed operating costs. Its electric bill fell 1 million yuan ($157,584) per month and the workforce shrank by more than 2,000.

These developments also helped the company move from a net loss before the change to about 20 million yuan in annual profits.

The company is still eyeing the future. The increasing use of mobile phones has no apparent limits, which means more potential markets.

"The mobile phone market used to be dominated by overseas brands. Now, domestic brands have taken up a bigger market share and are creating a better opportunity for us," Shu said.

The company formerly exported all of its products, but now it ships 85 percent of its output domestically.

As the case of Lite Array seems to suggest, in a broad sense, the processing trade is but one kind of trade, and all trade is based on comparative advantage.

Trade happens so long as companies can manage to match something unique in China with something unique of their own.

In the old days, China's unique resources were thought to be its cheap land and labor.

Today, they may be its under-utilized universities and university graduates, and even its increasingly more valuable currency.