China is going through a fundamental change.
It may not be immediately obvious from the outside, but China’s export sector is evolving rapidly and is set to cross two important milestones in the coming year, according to an Economist Intelligence Unit (EIU) study on the topic.
The first is developing countries (that is, non-OECD markets) are set to overtake developed countries as China’s primary export markets. The second is domestic Chinese firms will overtake foreign-owned or invested companies as the main exporters from China. These are profound changes and will have far-reaching implications both for China and for Western or OECD manufacturers seeking to protect their established export markets.
One key driver seems to be coming from the inevitable inflation in wage costs that has been going on in China’s coastal regions for some years. Left to itself, this would merely hobble Chinese firms from being able to compete on the world stage, but the flood of Western technology and know-how that has come on the back of successive waves of investment into China has enabled Chinese firms to innovate, reduce costs and compete internationally with their foreign peers.
The report suggests that heavy equipment manufacturers, particularly in the construction machinery sector, will be in the vanguard of this trend. The EIU expects China to overtake Germany and Japan in exports of construction machinery by the end of this year to become the world’s second largest exporter of construction equipment after the US. As most construction and mining activity is happening in developing countries, this will mean increased competition for the likes of Caterpillar in the years ahead.
Across the board, China’s ability to penetrate developed markets will be limited, but that doesn’t lessen their impact on Western manufacturers exporting to developing markets. In addition to construction machinery, China will soon be exporting high-speed trains, trucks and in time, even commercial aircraft, just as they have saturated the wind turbine and solar panel markets.
In a series of follow-up posts, we will explore some of the trends unfolding in China and their likely impact both domestically and on different export markets around the world.