Firms raise the stakes in battle for innovation

Push continues to ascend value-added chain as industry swaps toys for tech

BEIJING - Su Tongqiang and his ceramics company in Shandong province have bid farewell to wafer-thin profit margins, making an extraordinary transformation thanks to the business dynamics of adding value.

"Some years ago my company made a meager profits of less than 2,000 yuan ($290) from shipping more than 70,000 cups overseas in one container," Su said.

"Climbing the value chain was the only way to survive," added the entrepreneur, who owes his company's robust health to years of research and development. The company now holds more than 100 patents.

"The profit from one expensive cup is equivalent to dozens of cheap ones," Su said.

The transformation of Su's company is testimony to China's broader economic restructuring.

China is moving toward an economy based on innovation and services, reducing reliance on investment and exports of low value-added goods.

"China's transition to slower but structurally rebalanced growth continues," the World Bank said in a report earlier this month, noting that economic growth will continue to moderate as capacity is cut and credit is kept on a tight leash.

The revenue of Su's ceramic company grew 30 percent in the first quarter. The string of upbeat macroeconomic data in the first quarter, meanwhile, also pointed to a firming in the broader economy and progress in economic restructuring, giving policymakers some room for maneuver.

GDP growth in Q1 stood at 6.9 percent, up slightly from 6.8 percent in the previous quarter, with 77.2 percent of it driven by consumption, 12.6 percentage points higher than the 2016 level. The service sector rose 7.7 percent year-on-year, out-pacing a 3 percent increase in agriculture and 6.4 percent in secondary industries.

"Consumption is playing a more prominent role in driving growth, evidence of progress in economic restructuring," said Zhang Liqun, a researcher with the Development Research Center of the State Council, China's cabinet.

Innovation is critical to Su's and other Chinese businesses' progress up the value chain, an uphill battle they have to fight as improved salaries and living conditions for China's workers have allowed other countries to occupy the market for low-end products such as shoes and toys once cornered by China.

Industrial output growth in the high-tech manufacturing sector reached 13.4 percent in Q1, outstripping the 6.8-percent registered across all industrial companies.

The domestic wave of innovation and start-ups means new business and new consumption, according to Mao Shengyong, an official at the National Bureau of Statistics.

China still has a long list of reform tasks, many intertwined with one another, which when added to global risks like US interest rate increases and protectionism makes policymaking tricky, analysts said.

China should continue to reduce excess capacity, curb credit, lower debt leverage in the corporate sector and reform State-owned enterprises, said Sudhir Shetty, chief economist of the World Bank's East Asia and Pacific Region.

That view is echoed by the DRC's Zhang, who said that policy should focus on cutting overcapacity, reducing inventories, deleveraging, lowering costs and strengthening weak links to generate long-term growth and meet new consumer demand.

"Supply-side structural reform can force Chinese businesses to increase their competitiveness and improve overall growth quality, although the process will be painful," said Cai Zhizhou of Peking University.

Xinhua