Manufacturing hubs in China race up the value-chain

In a recent study, Kairos Future mapped the innovation geography of China’s IT sector based on IT patenting. Innovation intensity in this field, the study showed, is accelerating not only in traditional technology hubs such as the Bohai Rim and the Yangtze Delta, but also in inland locations such as Wuhan, Changsha, and Xi’an. But the strongest breeding ground for IT innovation is the Pearl River Delta in the south of China, gravitating around Shenzhen and Guangzhou (Exhibit below).

Exhibit. The IT innovation geography of the Pearl River Delta. Analysis: Kairos Future

The fact that manufacturing centers such as Foshan and Dongguan in the Pearl River Delta are also becoming important centers for IT patenting (see Exhibit), indicate an effort by companies in these locations to move to higher value-added production. Interviews we conducted with factory-owners in these cities, as well as with managers of technology companies in Shenzhen, show that companies in the region are racing up the value-chain. Some of them open factories in the poorer inland provinces to escape the surging labor costs in the richer coastal provinces. Others increase automation in their factories. But the most interesting change is that an increasing number of companies in the region attempt to climb the value-chain by developing their own products rather than merely produce for others.
In part, this is a natural step in China’s development. For decades, the coastal provinces have been the sweatshop of the world, enjoying a seemingly endless supply of cheap labor from China’s poorer interior. But, as it has turned out, this supply is now drying out. As inland cities are booming and migrants are offered the benefits of urban status in the provinces they are born in, the new generation of migrants choose to work closer to home. The trend has been aggravated by China’s peculiar age structure. China’s rural 20-somethings are dipping, a mark two generations down from China’s Great Leap Forward.
But the financial crisis, and the subsequent stagnation in global demand, has accelerated the pursuit of higher value-added in China’s manufacturing hubs. Left with overcapacity, many companies decided to move into product development and shift the focus toward the domestic market. This means they are becoming competitors, and not merely suppliers, to Western companies.

Tomas Larsson