Innovate or face decline, analysts warn

PUBLISHED : Saturday, 26 January, 2008, 12:00am
UPDATED : Saturday, 26 January, 2008, 12:00am

Guangdong can't rely on its low-cost manufacturers any more, academics say

The Guangdong People's Congress closed its week-long session yesterday but as provincial leaders celebrated its conclusion, analysts said the province faced an uphill battle to maintain its competitive edge.

They said Guangdong, which has led China's reforms for three decades, must transform itself from a low-cost production base if it hoped to remain a competitive economic powerhouse.

'The restructuring, or the second reform, is going to be much more complex and difficult than the first one,' said Ding Li of the Guangdong Academy of Social Sciences.

He said unlike the top-down economic reforms launched 30 years ago, Guangdong now needed more than just Beijing's blessings and the provincial government might find it was no longer in the driver's seat this time.

Professor Ding said what Guangdong needed to do had been outlined in the Government Work Report delivered by Governor Huang Huahua last week.

For example, the report gave top priority to the development of the service industry and the promotion of technological innovation over the next five years.

To achieve that, Guangdong would have to strengthen co-operation with Hong Kong and Macau in areas such as accounting, legal work, logistics, finance, exhibitions and tourism.

Professor Ding said the days when Guangdong could lead the way by relying on its low-cost manufacturers churning out toys and shoes were over.

In a study conducted in 2005, Professor Ding found more than 66 per cent of the output of the province's larger factories was in the form of components from original equipment manufacturers (OEM) who did not own the technology of their products.

He said they still played a central role in Guangdong's economy.

'Innovation means a number of things,' Professor Ding said, pointing out that enterprises serious about adapting should have their own brand names. He said the province also needed a fully developed service industry to support innovation.

He estimated that the combined output of services such as accounting, legal work and logistics amounted to 300 billion yuan last year - about 10 per cent of Guangdong's gross domestic product.

'But it is regrettable that almost all of that is generated by overseas-based companies because Guangdong itself is not capable of providing similar services,' he said.

Guangdong has attracted Japanese giants such as Toyota, Honda and Nissan who have set up factories in the province.

However, technology transfer has been rare. Lin Jiang , finance professor at Lingnan College of Sun Yat-sen University, said most foreign companies still controlled all core technology and even sales channels despite years of efforts by officials to achieve localisation,

'They found that if the factories moved away one day, nothing but the empty workshops and the displaced workers would be left in the province,' Professor Lin said.

'And that was why Guangdong, and maybe the whole country, is so keen to promote innovation and the service sector.'

He said Guangdong officials first hoped the service industry could be upgraded through market changes but it appeared that progress was too slow.

Professor Lin said many labour-intensive manufacturers in Dongguan were still relying on overseas orders and most lacked the will and ability to build their own brands and upgrade technology.

The slow upgrade in manufacturing then resulted in a lack of demand for a domestic service industry because all service items for OEM factories such as research and development, marketing, accounting and advertising happened overseas.

Both academics said without a service industry, innovation would probably remain a slogan but the government's ability to push the development of the service sector was limited.

They said unlike 30 years ago, when governments had been able to kick start the manufacturing revolution by providing cheap land and labour, development of the service sector required talent that could not be created with 'favourable' government policies.

Despite the obstacles, analysts said Guangdong had no choice but to forge ahead.

'Restructuring sometimes means having no clear direction and we must try,' Professor Ding said.

Another Guangzhou professor, who asked to remain anonymous, said Guangdong Party Secretary Wang Yang's recent emphasis on 'thought liberalisation' was also aimed at encouraging free thinking and finding a new way ahead for the economy.

'It is not about politics at all,' he said.

Professor Ding added that Guangdong's leaders would still focus on economic issues as they strived for transformation.

But he said the new round of changes would be much more difficult because they would affect different interest groups and any compromises would involve some tough bargaining.


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