While China has been the factory of the world for the last few decades, its competitive advantage in manufacturing has begun to decline over the last few years. Chinese labor costs, on average, were more than 60% higher in 2016 compared to 2011. The high wage growth is causing companies with manufacturing facilities in China to consider moving their production to other nations, particularly in Southeast Asia. Even though the quality of products produced in China have improved significantly compared to the past, they are still perceived to be of lower quality compared to products manufactured in Europe, North America, and Japan. This also includes products from upstream industries (e.g., hydraulics). Similarly, products manufactured in Europe and North America have a higher price-tag; they are also perceived to be of higher quality, which justifies investments in these products.
To address this challenge, the Chinese government initiated the ‘Made in China 2025’ initiative to ensure that the country’s manufacturing sector does not get sandwiched between high-end manufacturing countries (Japan, North America, and Europe) and low-end manufacturing countries, resulting in China losing out to both ends of the spectrum in the process. The Chinese Government’s ‘Made in China 2025’ initiative aims to overhaul China‘s volume-based low-cost manufacturing sector into one that is both high-tech and of high value. The government’s ambition is to turn China into a manufacturing powerhouse that influences global standards and drives innovation. The government has also set specific objectives that are to be achieved by 2020 and 2025. Similarities exist between the Chinese initiative and Germany’s Industry 4.0 movement, especially in the context of digitalization of the industry. However, the Chinese initiative intends to tackle more pressing issues related to the quality, safety, environmental protection, and the competitiveness of Chinese technology.
A key concern for the Chinese government is the fact that within the high-end manufacturing segment most of the core components including hydraulic equipment originate in other countries. Chinese companies have tried to improve their manufacturing competitiveness and product quality through the adoption of robots. However, even though China is now the largest market for industrial robots in the world, over 80% of the robots are foreign. China’s robot density rate is also below the global average, with countries such as the United States, Germany, South Korea, Japan, Sweden, and Denmark among the top 10. At the minimum, the initiative aims to increase domestic production of industrial robots to 30% and renewable energy equipment to 20%. The ‘Made in China 2025’ initiative lists out 9 strategic tasks for the overhaul of the manufacturing sector. Some of the key tasks include encouraging innovation and digitization of the manufacturing sector, promoting green manufacturing methods, improving the global presence of Chinese brands, and promoting service-oriented manufacturing.
Furthermore, a total of 10 priority sectors have been identified for the manufacturing industry’s digital transformation. These include advanced marine equipment and high-tech vessels, advanced rail and equipment, agricultural machinery and technology, aviation and aerospace equipment, high-end medical equipment, integrated circuits and information technology, high-end electronic equipment, high-end manufacturing control machinery and robotics, low and new energy vehicles, new and advanced materials. This initiative aims to increase the domestic content in Chinese-made products to 70% by 2025 (State Council of the People’s Republic of China).
In the context of the hydraulic equipment market, the key end-user segments are agricultural equipment, aerospace equipment, marine equipment and high-tech vessels, advanced rail equipment, robotics, and renewable energy equipment.
Hydraulic components are essential in the manufacturing supply chain and they are used extensively across the aforementioned industries. The hydraulic equipment industry in China is populated by 2 distinct groups of manufacturers. The first group mainly comprises foreign manufacturers that bring their expertise from Europe, North America, and Japan and these products are considered to be high-end products in the industry. The second group comprises domestic low-cost manufacturers that primarily compete on price; however, these products are perceived to be of lower quality than those offered by foreign manufacturers. China’s Made in 2025 initiative aims to move participants from the second group into the first group, and enable them to achieve a greater presence outside China.
Even though the number of Chinese companies looking to scale-up in terms of technology are bound to reap the benefits of this initiative using government support, this initiative cannot claim to be a success unless its impact is felt by the small and medium sized enterprises (SME)—especially ones that traditionally employ a considerable amount of manual labor. While these companies are unlikely to transform themselves into high-tech companies soon, the initiative definitely presents them with opportunities to move up the value chain. This is where the system-design capabilities of foreign hydraulic equipment manufacturers would be best suited. Considering the scale and size of the Chinese manufacturing sector, if these foreign companies can help these domestic companies automate, it would not be far-fetched to expect steady double-digit growth in the hydraulic equipment industry in the next 5 years. There has also been a trend of Chinese hydraulic suppliers trying to gain a foothold in North America and Europe, but they have been unable to do so due to the negative perception surrounding the quality of Chinese products.
While the general theme of the initiative comes across as being nationalistic and promoting China above all else, the initiative offers great opportunities for companies based in the industrialized countries of North America, Europe, and Asia to help China implement the changes it requires. These established companies are at the forefront of innovation and contain the expertise to help China move up the manufacturing value chain. Furthermore, the ‘One Belt One Road’ initiative may also open up new opportunities for foreign companies, as China seeks to expand its presence beyond its borders and develop global supply-chain networks. Foreign companies, however, are likely to remain skeptical, especially with regards to poor intellectual property (IP) protection. The Chinese government has acknowledged these concerns and claimed that foreign companies will be given the same opportunities to thrive as Chinese companies. While these concerns are unlikely to fade in the near future, the potential establishment of a level playing field represents a tremendous opportunity for foreign hydraulic equipment suppliers to generate new revenue streams as China seeks to transition from quantitative to qualitative growth.
The Chinese government’s approach to make the ‘Made in China’ tag desirable in the future is debatable, as the policy has its own strengths and weaknesses. However, foreign hydraulic suppliers should watch this space more closely, not only to identify revenue generating opportunities for themselves, but also because the initiative has the capability to empower Chinese hydraulic suppliers in the future. Improved product quality would also enable Chinese hydraulic suppliers to be more competitive in foreign markets, allowing them to exert greater pressure on established market participants in those regions. While the market positions of the established hydraulic equipment companies in the industrialized regions has been stable, this initiative could potentially open up possibilities to upset the established order in these markets.