To progress, China's enterprises need to develop internally and externally

China's domestic labor costs, affected by the global macroeconomic downturn, have been rising quickly. It is not easy to dig more from the domestic market, while traditional markets such as Europe and the US struggle with bleak prospects.

The manufacturing sector, long the locomotive of China's economic growth, has not yet harnessed any core technology. In turn, this has led to a prominent loss of some of the high-added value industries.

Compared with industrialized economies, China's manufacturing is still miles from maturity, and its development has been long reliant on a labor-intensive, high-input, high-consumption production model. Its disproportionate development is aggravated by a lack of core technology and a deep-seated regional development imbalance.

In the next 10 years, China's manufacturing industry needs to achieve its restructuring and upgrading goals, promote independent innovation, as well as build an innovation-driven, intensive and efficient endogenous growth model so as to improve its overall capacity for sustainable development.

Since 2011, the outflow of foreign investment from the Chinese manufacturing industry has been much discussed. Developed countries such as the US, the UK, France and Germany are concerned about their unemployment problem. They want to create more jobs and alleviate social problems, but this is difficult to solve.

The manufacturing center of the world has been changing over the past two decades, and the labor skills needed are now in conflict with the educational content taught in the US over the past few years.

Therefore, to revive American industrialization, the country must first upgrade its current skill training and vocational education system so that trained workers will be equipped to carry out independent tasks in different manufacturing divisions.

Only in this way can reindustrialization be achieved, allowing the US to create more employment opportunities. The US economy has two advantages, technological innovation and a mature financial system, which will benefit the US in some of the high-end manufacturing sectors.

However, even if US companies move their entire production base back home to take advantage of relatively low energy prices, labor costs are still far higher than that of developing countries such as China and India. Therefore, in short term, developed countries' investment in China's manufacturing sector will not be transferred out of China.

Currently, foreign investors are concerned about China's market prospects. Low labor costs are not easy to obtain anymore. With an increasing proportion of new technical elements, labor cost advantages will become less obvious.

As the Chinese market itself has huge purchasing power, improved infrastructure and well-trained groups of workers, the prospects will still be good for foreign investment. Of course, when China's demographic dividend disappears, foreign enterprises will pay more attention to technology upgrades.

This is bound to squeeze the earnings of local enterprises, and foreign companies will also attract more quality talent. In this case, it is equally urgent to accelerate the transformation and upgrades of China's domestic manufacturing enterprises.

The structural transformation of China's manufacturing industry is now at a critical stage. With an emphasis on technical innovation, the role of talent will be more obvious. Chinese enterprises should increase technological investment and R&D input, because independent innovation is the only way for Chinese enterprises to enhance their competitiveness.

The introduction and cultivation of talent require a long-term transformation with a good, positive environment for innovation and entrepreneurship.

China needs to train more professionals with an international perspective. The transformation from product manufacturing to service manufacturing also requires Chinese enterprises to start from rudimentary industrial designs and then extend their scope to other sectors.

In addition, the modern manufacturing industry should be matched with modern management, an area in which Chinese enterprises still have a long way to go. Chinese enterprise in the next decade should prioritize industrial restructuring, which requires an innovative management system.

With regards to international competition, China needs to upgrade to high-end sectors. However, the biggest challenge is in fact the innovative force within the company.

The Chinese government has focused on the implementation of innovative development strategies to give greater support to the real economy, especially private enterprises. By addressing the funding needs of private enterprises in technological innovation, this innovative market mechanism will reallocate resources so that manufacturing enterprises can become the main engine of innovation.

Based on technological innovation, business model innovation might become the most important stimulus in the next economic cycle. A growing number of industrial products are now sold via an interconnected system, which means there is a closer link between different products. Lenovo, Sany and Huachen Auto are able to establish a strong system that quickly seizes the market by taking advantage of the global logistics system.

Many Chinese enterprises have long recognized this urgency, for real development is impossible if one is purely reliant on exports or cheap labor. "Made in China" must attend to its endogenous development and overseas markets at the same time.

The author is a professor at Nankai University in Tianjin who specializes in investment and market policies. The views do not necessarily reflect those of China Daily.

(China Daily 03/01/2013 page7)