US Secretary of State John Kerry speaks at the Boeing 737 airplane factory on May 19, 2015 in
With China moving away from a manufacturing-based economy to a more innovation-driven one, some foreign companies doing business there are finding new ways to navigate in the populous nation, with some relocating their labor-intensive facilities from China to Southeast Asian countries characterized by cheaper labor forces.
A pact signed on Tuesday by US aircraft maker Boeing and the Commercial Aircraft Corporation of China (COMAC) to deepen their joint research cooperation in support of the sustainable growth of commercial aviation can be seen as a latest effort that foreign companies have made to crack the code in China by sharing innovative technologies with their Chinese partners. According to the agreement, Boeing and the COMAC, which have been researching ways to improve aircraft's fuel efficiency and reduce greenhouse gas emissions, will explore six areas of mutually beneficial research through the Boeing-COMAC Sustainable Aviation Technology Center.
Just four days before the pact, Boeing got the nod from the Chinese government to open a Boeing 737 completion center in Zhoushan, a coastal city in eastern China's Zhejiang province, in partnership with the COMAC. The joint venture, which is Boeing's first 737 completion facility outside the US, will be used to install interiors such as in-flight entertainment systems and seats and paint liveries. A separate Boeing-owned delivery center in Zhoushan will oversee the handover of the completed aircraft to Chinese buyers.
The moves emanate from the strong confidence Boeing has on the huge Chinese market, which predicted in its annual China Current Market Outlook report released in September that China will need 6,810 new airplanes valued at $1.025 trillion over the next two decades, becoming the first trillion dollar aviation market in Boeing's forecast. Boeing Commercial Airplanes' vice president of marketing, Randy Tinseth, attributed the estimate to China's transition to a more consumer-based economy and the rising demands for travel and transportation which will promote the country's passenger traffic to grow 6.4 percent per year over the next 20 years.
In fact, establishing the Boeing 737 completion facility in Zhoushan has already been written into a development blueprint set by the Zhejiang provincial government, which had decided to set up an aviation industrial park in Zhoushan, amid the Chinese leadership's new focus on upgrading the high-technology manufacturing and developing self-owned innovative technologies.
However, Boeing still trails its archrival Airbus in localizing manufacturing in China. The European aircraft maker already has two plants in China: the A320 Family Final Assembly Line established in 2009 in Tianjin and the A330 Completion and Delivery Center set up in 2015 in the same city. In addition to assembling aircraft locally, the Toulouse, France-based company has stolen a march on Boeing to push its collaboration with China to the high end of the industry chain including composites production and aircraft design. Airbus has hailed the high-level, win-win cooperation as giving the Chinese aviation enterprises more access to its aircraft design process and global supply chain.
With the rise of its economic clout globally, China has renewed its ambition to be an international innovation center rather than a world manufacturing hub making low-quality, low-priced products. According to a document jointly issued by the Communist Party of China (CPC) Central Committee and the State Council, the country's cabinet, in May, China aims to become an innovative nation by 2020, an international leader in innovation by 2030 and a world powerhouse of scientific and technological innovation by 2050.
The policy change is putting an end to the era of foreign companies seizing the Chinese market by virtue of the overwhelming technological advantages, and has increasingly made them understand a rule of doing business in China: if you want to get something, you have to share something.
In 2015, US computer maker Dell opened the Strategic Innovation Venture Fund to Chinese startups as a part of its new "In China, For China" strategy. The corporate venture capital fund is committed to serving China's early-to-growth-stage companies, especially those operating in emerging technology fields, bolstering their innovation through offering financial and technical support and brand-building and market know-how.
Dell's Chinese startup-focused policy came as China is carrying out the Mass Entrepreneurship and Innovation and Internet Plus policies, a new national strategy adopted at a time when the country has entered a "new normal" phase of slower economic growth.
Another US technology company IBM last year announced its decision to share its technologies regarding semiconductor chips, IBM architecture-based servers and software running on those machines with the Chinese companies, in a makeshift strategy the Big Blue adopted partly because of China's xenophobic technology policy calling for more use of Chinese-owned technologies at the cost of the foreign ones.
Although IBM CEO Virginia Rometty beautified her policy as a goodwill to help China build its own information technology industry, industry experts believed that IBM's "friendly" China policy was aimed at stealing more market share from Intel, a monopoly in China's chip market, and was a response to the country's increasingly nationalist industrial policy for the technology sector.
Since Xi Jinping took office as Chinese president in 2013, the Chinese government has played hardball with foreign technology companies with the anti-monopoly law and tightened regulatory rules. US chip producer Qualcomm was among those punished foreign technology giants, which was fined $975 million by the Chinese government in February 2015 for abuse of market dominance. At the time, AmCham China published a survey, claiming that American and other foreign companies doing business in China were facing challenges including unclear regulations, economic protectionism and complicated approval processes.
During a trip to Shenzhen in October, Apple CEO Tim Cook unveiled a plan to open a second research and development center in the southern Chinese city by the end of 2016, as a long-term commitment to China's efforts to rebuild the city into an incubator for technology and innovation. Apple's first research and development hub in China will be located in Beijing. Media reports said that the 300 million yuan ($44 million) facility will focus on computer hardware and software, audio and video equipment, consumer electronics, telecommunications products and other advanced technologies.
Apple, which treats the Chinese market as one of its most important markets, is one of the foreign technology giants obedient to the Chinese government. Last year, the Cupertino-based company bended to China's State Internet Information Office's demand for launching full security scrutiny on its hardware and software products sold in China to alleviate the government's concerns over backdoor surveillance. The move is widely seen as a compromise Apple made in exchange for more opportunities to grow its business in China.
However, while foreign high-end manufacturing and technology companies are betting more on China, their low-end peers are reducing presence amid the country's economic transition, industrial restructuring and the rising salaries of Chinese workers.
Currently, Chinese stores are flooded with Nike and Adidas sneakers made in Vietnam or Indonesia, a totally different situation compared with 10 years ago when foreign-branded shoes were almost all made in China.
In 2012, German sportswear company Adidas shut down its only company-owned apparel plant in Suzhou, eastern China's Jiangsu province and moved it to Myanmar in a bid to reduce production and labor costs, after its major American competitor Nike closed its self-owned shoe plant in the province's Taicang city in 2009.
This year, Adidas announced that it will bring its shoe manufacturing back to Germany in 2017, when it will use robots to make shoes instead of humans in Asia where the costs are rising.
The 2016 Global Manufacturing Competitiveness Index report issued by professional services firm Deloitte shows that manufacturing labor costs in Indonesia were less than one-fifth of that in China last year, which could serve as a major factor behind foreign manufacturers' weakening interest in locating their production bases in the world's second-largest economy. The report also predicts that China's policies either encouraging or directly funding investments in science and technology, technology transfer and infrastructure development appear to be helping Chinese-based companies to create competitive advantage.
In an interview, Bai Ming, a researcher with a think tank under the Ministry of Commerce, said that technological cooperation with Chinese-focused foreign companies will be a shortcut that China can use to rapidly enhance its international competitiveness. But the researcher stressed that the labor-intensive manufacturing sector still has an important role to play in China's economy because it offers job opportunities.