Made in China

OECD Observer

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Almost every household in China has a mobile phone. In fact, China is now the world’s largest mobile phone market, both in demand and supply: 303 million mobile phones were produced in China in 2005, exceeding production levels in most OECD countries. However, as this year’s OECD Information Technology Outlook points out, mobile phones are not the only sector of information and communication technology (IT, also known as ICT) where China is making inroads.

That same year the country also churned out 81 million computers, taking second place as the world’s largest PC market, and it became the world’s third largest producer of semiconductors. This dizzying pace of output has brought down IT costs globally, and helped make IT products an integral part of daily life. In terms of spending, China now ranks sixth in the world IT market, making it important for exports from OECD-based firms.

The new economy is vibrant too. At the end of 2005, China had 111 million Internet users, up from 94 million in 2004. The number of broadband users stood at 64.3 million. By comparison, India, another IT giant with a similar population and considerable potential, only had roughly 35 million Internet users in 2004.

China’s staggering economic growth rate has stood at almost 10% for the last 20 years. One cause is strong exports underpinned by low production costs. Information and communication technology now claim the lion’s share of China’s export trade, accounting for approximately 30% of its exports in 2005. The year before, China ranked as the largest exporter of IT products, outstripping the EU, Japan and the US. Since 1996, China’s IT goods trade has been growing at almost 32% a year. China’s success in this market differs from that of its neighbours, Japan and Korea, in that China has long encouraged heavy inward investment. Though the government knows that labour-intensive and low value-added production is already inexpensive in China, it uses tax rebates and other financial incentives to lure foreign companies. Some 55% of China’s total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese.

So what defines a product as “made in China”? After all, much of IT assembly takes place in China, with components often imported from Japan, Chinese Taipei, the US and Europe. The fact that assembly and final testing of goods may occur in third countries and that much of China’s IT trade is shipped through Hong Kong-China adds to the riddle. The discrepancy as to what “made in China” means is evidenced in trade figures published by the US and China: Chinese figures for IT exports to the US are 48% lower than US figures for IT imports from China. Both China and Japan recorded trade deficits in IT trade between themselves.

The world’s largest potential IT market has not reaped the full benefit of its own IT output.

Although regarded as the world’s largest potential IT market, China has not reaped the full benefit of its large-scale IT output, particularly in terms of productivity. Apart from mobile phones, the vast majority of Chinese do not yet use IT. In general, IT spending is lower in China (about 4.5% of GDP in 2005) than in leading OECD countries (about 9% of GDP in 2005).

One paradox is that while low IT costs brought about by China’s competitive supply has helped OECD-based firms upgrade, reorganise and boost productivity, the actual uptake of IT within Chinese firms is lagging behind too. Notions like supply-chain management, resource planning or knowledge management software that are standard currency in dynamic OECD firms are still rather undeveloped in China. Fortunately, the Chinese government has understood that spreading IT can spur productivity and development in all sectors, from farming to services.

But there are geographical challenges too. Access to IT by the Chinese population is variable, with a wide “digital divide” between urban and rural regions. Whereas the absolute figure of Chinese Internet subscribers and users is large, the size is small in relation to the population. In 2005, for example, that 111 million amounts to just 8% of Chinese people using the Internet, compared with 50% in OECD countries. Closing this digital gap has become government policy.

Indeed, the Chinese government has set its sights on becoming a global player by moving from being a low-cost manufacturer to being a global provider of high value-added products, such as software, information security and IT services. With this in mind, the government is encouraging domestic firms to invest overseas, to seek mergers and acquisitions in the quest for new technology and expertise. This “go-out” strategy, as it is called, lay behind China’s TCL television business merger with France-based Thomson in 2004 and Lenovo’s acquisition of IBM’s China PC business in 2005.

Research and development is a priority. In its recent 11th Five-Year National Plan for 2006-2011, the Chinese government announced its intent to foster domestic innovation in all high-technology sectors through greater investment and domestically-owned patents, and to reduce dependence on foreign technology and intellectual property rights. Some see this as the most significant change in China’s IT policy.

If–or rather when–this occurs, OECD countries will be pressed to develop strategies to keep their competitive edge at the high end of the IT production chain. With a sharper focus on research and development, a rising number of graduates in engineering and science both at home and abroad, the surge in private firms now generating over half of the country’s GDP, and a growing use of the e-economy, China is set to take a leading role in future IT developments worldwide. LT

References

For more on information and communications technology in China, contact Sacha.Wunsch-Vincent@oecd.org and Graham.Vickery@oecd.org

OECD (2006), OECD Information Technology Outlook, Paris, ISBN92-64-02643-6. Available at www.oecdbookshop.org

©OECD Observer No 257, October 2006




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