Participants take part in a kimchi making event during the Seoul Kimchi Festival outside the city hall in Seoul.[Photo/China Daily]
With FTAs with South Korea and Australia taking effect, Chinese firms seek to switch gears to compete globally
China's free trade agreements with South Korea and Australia, which took effect last month, are expected to encourage struggling domestic manufacturers to further upgrade their technology, to return to previous levels of export growth.
It is early days still, but the FTAs will likely have profound economic implications for Chinese companies. The FTAs come at a critical time when many economies are taking decisive measures to compete with China. Countries are keen to enlarge their export volume through new technologies, modernization of their services sector, investments in Southeast Asia and effective marketing strategies.
Shin Un-cheol, chairman of the South Korea-China Marketing Association, said despite the price advantage being a core element in bilateral trade, it does not automatically mean cheaper Chinese products, like, say, pickled vegetable and garlic products, will benefit from the FTA.
"On the contrary, China's packaged food industry will face challenges," Shin said. "South Korean pickled vegetables and senate chicken soup may gain because of the FTA."
As per the China-South Korea FTA, China will remove import tariffs on 91 percent of South Korean products over the next 20 years, while Seoul will eliminate tariffs on 92 percent of Chinese goods.
South Korea's Ministry of Strategy and Finance said that China-South Korea annual trade volume is expected to reach $300 billion by the end of this year, thanks to the FTA pact.
As per the China-Australia FTA, Chinese import tariffs on 95 percent of Australian exports have been lifted, while obstacles will be removed to allow more Chinese businesses to invest Down Under. Visas will be also relaxed for Chinese visitors.
Shin said compared with South Korea's businesses related to travel, medical services, post-retirement life, films, television and entertainment, China is relatively weak and will face serious challenges.
"If these industries in China don't raise their level of service and quality, consumers will feel they are losing out," said Shin. "Already, the China-South Korea FTA has attracted the attention of Chinese film and television people. Investment of Chinese enterprises in South Korea will see explosive growth."
Dereck Ji, senior partner of Roland Berger Strategy Consultants, said Chinese manufacturers no longer can rely on low-cost material and cheap labor advantage to compete with foreign rivals.
"An open market doesn't mean lower price and low value-added products, but brands, technologies and strategic market approaches for Chinese companies. They need to put their business growth on a firmer footing," said Ji.
He said the FTAs can persuade large Chinese companies to upgrade their operations. Small and medium-sized companies could also benefit.
Models and an LG group executive display the South Korean company's latest products. [Photo/China Daily]
Experts said China's fast-growing 4G telecom networks and the "Made in China 2025" development plan will lead to improvement in productivity and resource efficiency. Their potential benefits are even greater if they are extended to all stages of the value chain-suppliers, manufacturers, and customers, as well as global markets.
Between 2010 and 2050, China's workforce as a share of the population will probably shrink from 72 percent to 61 percent. So, inter-connected industrial operations will require a different kind of workforce and skill-sets in manufacturing. Demand for engineering and IT skills will likely increase, according to an October 2015 research paper of the Beijing-based Institute of Industrial Economics, which operates under the aegis of the Chinese Academy of Social Sciences.
Zhi Luxun, deputy director-general of the department of foreign trade at the Ministry of Commerce, said market competition will put pressure on less qualified employees in Chinese enterprises, and Chinese units of South Korean and Australian companies may have to find new opportunities in other sectors such as services and agriculture.
"These shifts will lead to new business models, which will partly substitute old ones. In this context, the two FTAs will bring about a profound transformation in the country, and present a major challenge," said Zhi. "Higher productivity will allow higher wages and may help alleviate labor shortages."
Rather than wait for the market call to get ready for battle, large-scale Chinese manufacturers such as Yantai-based CIMC Raffles Offshore Ltd have already taken the plunge by exporting more offshore oil rigs and engineering vessels to compete with South Korean shipbuilders.
CIMC Raffles completed development of a $550-million deepwater semi-submersible drilling rig named North Dragon at its Yantai production base in East China's Shandong province last month.
The rig was built by CIMC Raffles for North Sea Rigs Holding AS of Norway, one of the largest offshore oil producers in Europe. It is the first China-made semi-submersible drilling rig capable of operating in the Arctic area with temperatures of minus 20 degrees Celsius.
The platform will be able to operate in seawater depths of up to 1,200 meters and drill to a depth of 8,000 meters. Capable of withstanding sea storms, it can work in the North Sea and Barents Sea
Yu Ya, president of CIMC Raffles, said South Korea is capable of producing icebreakers, oil rigs and other specialized vessels, and China's prowess will not immediately impact South Korean shipbuilders. Yet, Chinese companies must diversify to broaden their manufacturing expertise and ensure their global market share is not taken by South Korean companies, he said.
"Major Chinese shipyards and heavy industry manufacturers today are keen to acquire European and US maritime design and research firms in different sizes, because this is a big part of their tactics for gaining high-end technologies to produce core components and compete with rivals in both home and overseas markets," said Yu.
Shipyards in China received orders for new vessels with a collective capacity of 23.58 dead weight tons between January and November in 2015, accounting for 28.7 percent of the global market share. South Korea's shipbuilding industry, a powerful rival of China's, held 38.8 percent of the global market share during the same period.