Rethinking the Catch-up Industrialization in East Asia
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China: the ‘Workshop of the World’
In August 2012, I visited Huadu Shiling, located 34 kilometer north from the center of Guangzhou in China. This town (23 square kilometers) is widely known as the world production center of leather products, and leather travel bags in particular. According to the local government’s report, there are 7,200 manufacturers and 17,300 merchants specialized in the manufacturing and trading of these particular goods. Huadu Shiling is now accounting for 55% of the total production of leather products in China and, furthermore, is reported to occupy over 70% of the imports of leather travel bags in the American and European markets. Such a large-sized industrial cluster (on a specialized market) is beyond my image.
China is proud of the largest producers in major labor-intensive industries like travel bags. Ito’s intensive survey on the basis of UNCTAD (United Nations Conference on Trade and Development) data (2010) reveals surprising figures concerning China’s market shares of labor-intensive products in the world’s total imports, including respectively 66% for toys and sport goods; 60% for travel bags; 58% for household ceramics; 47% for audio videos; 43% for apparels; and 41% for telecommunication equipments. These figures suggest that China has served as the ‘Workshop of the World’ or ‘World’s Factory’.
What is important here is both the unprecedented high proportion of Chinese market shares and the high speed in the manufactured export growth. To exemplify this point, let me introduce changes of market shares of three major countries (Japan, Korea and China) in US imports of miscellaneous manufactured goods (goods included in Standard International Trade Classification 89 or SITC 89) between 1970 and 2010. During this period, Japan has constantly decreased in proportions, from 34% in 1970 to 18% in 1990; and down to 9% in 2000. Korea has slightly increased in percentage, from 5% in 1970 to 6% in 1990 (recording its’ peak with 9% in 1988) but afterwards, Korea dropped down to merely 2% in 2000 due to quickly increasing imports from China. Indeed, China accounted for 0%, 14% then up to 34% in the corresponding years. In 2010, China alone occupied as much as 48% of the total, surpassing Japan (4%) and Korea (1%) in great numbers.
However, the continuous growth of China’s manufactured exports is now questionned as some arguments point at the possible end of China’s role as the World’s Factory. Namely, this prevision relies on the rapid rise of wages China experienced in recent years (for the 2006-2010 Period, annual growth rates were on average 12.5%, and the Beijing government predicts a 13% annual growth for 2011-2015). In 2012, the World Bank and the Asian Development Bank (ADB) published reports cautioning against the so-called ‘middle-income trap’ as the most serious economic problem contemporary China1 is facing.
For example, the ADB report insists that unless China promotes a set of reforms, it will soon be caught in the middle-income trap. It could no longer compete with low-income countries because of rising wages on the one hand, and would be unable to compete with high-income countries because it has not shifted into higher-value production on the other hand. One of the report’s conclusions is that in order to avoid the middle-income trap, China inevitably needs a continuous industrial upgrade through innovation and a movement from a low-cost to a high-value economy.
In the real world, China seems to eventually avoid such a trap not through innovation but through relocations of factories from coastal areas (Shanghai, Guangzhou, Shenzhen, Dongguan etc.) to inland areas (Chongqing, Chengdu, Nanning etc.). As long as local and foreign firms continue to find frontiers of labor markets inside the country, it is highly possible for China to maintain its status of the Workshop of the World in the next decade.
However, my academic concern in this paper is not to answer the question of how China will avoid the middle-income trap in the future, but how China rapidly obtained the overwhelming status it has been holding in the global market to this day. Possible answers are the availability of abundant production workers and inflow of huge amount of foreign direct investments in export-oriented industries. But these elements are not sufficient to fully explain the high proportion of market shares and the high pace of their growth. We therefore seek for another answer, namely, the notable development of industrial clusters in China. Huadu Shiling is exactly one of these clusters that supports the rapid growth of manufactured exportations from China. I will discuss this topic later.
Sharp Decline of Japanese Firms in I.T. Goods Markets
The rise of China has induced the decline of Japan in the global market. More importantly, the decline of Japan does not only imply the decline of the competitiveness of its labor-intensive industries, but also the decline of Japanese firms in more advanced technology-based industries in general, and IT industries in particular. According to conventional arguments in international management, a front-runner firm which develops new technologies and new products can enjoy extra profits in the initial stage of production and can keep its dominant position for a certain period. But recent movements in IT industries come to contradict this conventional hypothesis.
Needless to say, Japanese firms were previously proud pioneers and leading firms in IT-related industries as DRAM memory, personal computers or PCs, glass panels for LCD-TVs, optical fiber and car navigation equipment. All these products require high technology, heavy investments in R&D and world-wide marketing. For these reasons, Japanese firms used to enjoy 80% to 100% of market shares together with high returns in the initial stage of production. But the business leadership was quickly eroded by the challenge of emerging firms in Korea, Taiwan and China. The following figures2 speak for themselves.
For example, in the case of DRAM memory, Japanese firms’ market share declined from 75% in 1988 to 50% in 1997, and further down to 5% in 2003. In the case of liquid crystal panels, their shares dropped from 100% in 1995 to 50% in 2000, and further down to 20% in 2003. In the case of car navigation equipment, the pace of the decline was much faster than the former two products, going from 100% in 2003 to 40% in 2006 and down to 20% in 2007. Conversely, emerging firms in Korea and Taiwan fully catched-up with Japanese firms and replaced them as the market leaders. Similar movements are currently observed in equipments of digital mobile phones and notebook PCs too, in which Korean firms (Samsung Electronics and LG Electronics) and Taiwanese firms (Quanta Computer, Compal Electronics, Inventec Corporation etc.) now have strong stakes in the global market3.
Thereby, we need to raise the second question: why Japanese firms were forced to reduce their market shares so quickly, yielding their business leadership to emerging firms while they still demonstrated a high capacity in technology. To answer this question, we must take into account fundamental changes in production systems as well as the evolution of the manufacturing system in recent years. The essence of recent evolutions may be summarized into two key words that are modularization and standardization.
Before examining this important topic, I will describe the model of catch-up industrialization4. The “catching-up” with advanced countries exactly represents a target commonly shared by the state, the firms and the people in East Asian countries. Therefore, the catch-up industrialization model constitutes a useful angle to understand the process and characteristics of industrial developments in these countries, including China.
Rethinking the Model of Catch-up Industrialization
The model of catch-up industrialization consists of two key elements: a policy combination of trading promotion and industrial promotion, and the use of imported technologies to accelerate the process of industrial development.
A. Gerschenkron, an economic historian, claimed that a late-starting industrial country such as Germany might be able to enjoy a faster growth than advanced countries by importing existing technology from abroad (cf. England) since it could save time and money instead of developing its own technology. He called such merit the “advantage of economic backwardness5”. Japan was the first country in East Asia to take advantage of economic backwardness, and Korea and Taiwan followed the same pattern to catch up with Japan first, and then with the Western advanced countries.
Meanwhile, the hypothesis of a flying-geese pattern, which is a part of the model of catch-up industrialization as was proposed by K. Akamatsu6, implies two major movements in reference to late-starting industrialization. The First movement is the cycle of import / domestic production / export (and reimport through overseas production) in a particular industry, like textile industry. This cycle will then be reproduced in various industries, starting from labor-intensive ones and shifting to capital and technology-intensive ones in accordance with the accumulation of skills, capital and technology. In order to facilitate this cycle and to promote an industrial upgrade, governments in late-starting industrial countries are expected to play active roles in both import substitution and their expansion of exporting manufactured goods.
The second movement consists in the continuous shifting of the leading exporter in a particular industry (or goods) in the global market. For example, Japan started domestic production of some kind of manufactured goods (e.g. black and white TV sets) fully depending on technology imported from the United States, and then shifted to the stage of exporting these products, especially towards the US market. Likewise, Korea and Taiwan followed Japan in starting the production of identical products depending on American and Japanese technology in order to export them to the US market.
After Korea and Taiwan met the challenge, Japan shifted its exportable products from black and white TV sets to color TV sets, and further to more technologically sophisticated goods like IT products. Meanwhile, Korea and Taiwan also shifted their exportable products from low-end goods to high-end ones in their competition with China and other late-late comers. Such a shift of leading exporters in the global market represents a kind of flying-geese pattern, in which Japan came as the lead goose, followed by Korea and Taiwan in the second line, then followed by Southeast Asian countries and China in the third line. We could observe such a flying-geese pattern among East Asian countries, at least until the mid 1990s, in the exportation of miscellaneous manufactured articles like sport shoes, textiles, electrical appliances, steel products and ship building.
However, the new movements that appeared after the mid 1990s require to reexamine and rethink the flying-geese pattern as well as the model of catch-up industrialization. Firstly, as the case of US imports well suggests, China established an overwhelming status in the global market and did not yield its position to late-comers (Philippines and Thailand) nor to late-late comers (Indonesia and Vietnam). Exportations from these countries could hardly find a place in the US, EU or Japanese markets, contradicting thereby the hypothesis of the catch-up model.
Instead, these countries have shifted their trade partners from Japan and US to China through increasing exports of natural resources (oil, coals, natural rubber, etc.) and agricultural products (sugar, broiler chickens, etc). At the same time, a mutual trade of computer components between China and ASEAN has tremendously increased in conjunction with the rapid development of IT industries in the region. The combination of these factors sums up the spectacular growth of China-ASEAN trade, increasing from US$19.9 billion in 1995 to US$362.9 billion in 2011 (while Japan-ASEAN trade amounted to US$132.5 billion and US$255.4 billion in the same year). The giant goose flying ahead in the region is no longer Japan, but China.
The Evolution of a Manufacturing System: Modularization and Standardization
The rapid growth of new IT firms in Korea and Taiwan is closely related to a double evolution of the manufacturing system: (i) the shift of the production architecture from integral-type to modular-type, and (ii) the introduction of international standards by platform leaders in major IT products7.
Generally speaking, Japanese IT firms have constructed their competitiveness in the global market through a closed integral production architecture, in which they developed a company-specific technology and struggled to maintain information in the design and technical know-how within the company. At the same time, they were inclined to obtain necessary components through long-term transactions with particular suppliers rather than through open markets. This business strategy has ultimately enabled Japanese firms to maintain their competitiveness during the 1970s and the 1980s.
However, after the 1990s, the modular-type production architecture was introduced into DRAM memory, PCs, DVD, LCD-TVs and digital mobile phones, where late-comers in emerging Asia could produce standardized components or combined components with a standard interface to produce finished products8. Thanks to the development of modular-type architecture, late comers could catch up faster with front runners like Japanese firms in the IT industries and could more easily expand their market shares with little accumulation of their own technology and skills.
In addition to such shifts in the production architecture, the progress of international standardization of IT products has also helped the rapid growth of emerging Asian firms. For example, in the middle of the 1990s, Intel developed the standardization of PCs not only by upgrading the CPU capacity but also by integrating peripheral circuits into a chipset. The design information, implicit knowledge and technical know-how were embedded in a chipset as a package or a platform (which of course was protected by intellectual property rights). Since Intel strategically supplied Asian emerging firms like in Taiwan with these chipsets (Japanese firms adhered to company-specific technology), they could more easily launch their production of PCs than before9. Similar movements are widely observed in the fields of LCD-TVs and glass panels, DVD, and digital mobile phones.
Therefore, we can attribute the reason for the quick growth of emerging Asian firms together with the sharp decline of Japanese firms to the combination of modularization and standardization taking place in the IT industries after the 1990s. At the same time, these movements became major elements in the reshaping of industrial maps in East Asia of the present time.
Two Ways of Industrialization: Production-oriented and Market-oriented
Now let me go back to the first question of why China could quickly grow into the largest exporter of manufactured goods in the global market. This question seems to be related to the difference between Japan and China in the formation of industrial districts or industrial clusters. Generally speaking, Japanese traditional industrial districts, or sanchi, have historically been developed with no substantial assistance from the government. And relationships between assemblers and part suppliers, and manufacturers and wholesalers, are characterized with a hierarchical and closed system. Small-sized manufacturers are usually integrated by large-sized wholesalers residing in the town (sanmoto shosha), and the sanchi membership principally is not inclusive but exclusive against new comers.
In contrast to the Japanese sanchi, industrial clusters in China are characterized with horizontal networking among a large number of manufacturers and merchants. There are neither regulations nor traditional rules to define the memberships or to exclude outsiders. Industrial clusters are principally open areas for all the players and serves as place where they compete with each other in the search for profits.
Japanese sanchi emphasized on the quality of the products and on the development of technology to sustain quality. Essential elements for Japanese manufacturers (and merchants) are quality, cost, and delivery or Q.C.D. On the other hand, Chinese industrial clusters put their priority on the needs of the clients of the markets, including foreign markets. For this reason, Chinese manufacturers (and merchants) tend to focus on another combination of three elements, which is the variety of products, flexibility in delivery and innovation in the development of new products or V.F.I in addition to Q.C.D.10.
The case of Huadu Shiling mentioned in the opening of this paper demonstrates the major characteristics of a Chinese industrial cluster: the size of the population involved in the trade of travel bags, wide-ranged horizontal networking among manufacturers and merchants, and the variety of products available inside the cluster. Huadu Shiling does not confine its products to low-end ones. Manufacturers and merchants can supply any type of products, including high-end ones in response to the diversified demands in the global market. Any type of material and accessories can easily be found inside the cluster, and therefore they can ship finished goods to clients in the world within 24 hours after reception of commands.
The essence and strength of Chinese industrial clusters are based on the openness of the market and high competitiveness in the open area. These elements are also observed in the evolution of the manufacturing system in the IT industries. Global markets of consumer goods and IT goods request a variety of goods and flexibility in the delivery rather than a ultra-high quality of products sustained by original production technology. Accordingly, market-oriented approaches in Chinese industrial clusters can more easily find their clients in the global market than the technology-oriented approach of production adopted by Japanese sanchi. This approach is a key factor in the rapid growth Chinese manufactured exports experienced in recent decades.
The rise of China and the evolution of a manufacturing system do not necessarily imply the invalidity of the model of catch-up industrialization. Late-late comers such as Vietnam and Cambodia are now going to follow the catch-up model under the initiative of governments who strategically promote export-oriented industries and adopt a policy of inviting foreign firms to these industries. Even in China, the development of steel industry is considerably identical to the hypothesis of the flying-geese pattern.
Regarding the validity of the catch-up industrialization model, more important are the impacts of new international environments such as globalization, liberalization and the progress of the information technology. The catch-up model presupposes that the fundamental player is the country, and the government is empowered to rule the market through various policy tools. But under the pressure of globalization and liberalization, the scope of governmental activities becomes smaller than before.
As the development of IT industries well suggests, the major player in the global market is no longer the government but private firms. The essential element determining the new industrial division of labor in the region is no longer governmental policies but corporate strategies. In association with these new conditions, the government is required to change its major role from being a conductor who promotes target industries into a facilitator which provides a better business environment.
How to reconstruct a new model to answer more consistently to the new industrial divisions of labor in the region? The task falls to specialists of East Asian economics. Rather than governmental industrial policies, the elaboration of a new model requires a scrupulous examination of corporate strategies.
1. Asian Development Bank, Growing beyond the Low-Cost Advantage: How the People’s Republic of China can Avoid the Middle-Income Trap, ADB, Manilla, 2012.
2. K. Ogawa, International Standardization and Business Strategy, Hakuto Shobou, Tokyo, 2009.
M. Kawakami, Compressed Industrial Development: Mechanism of Growth of Taiwanese Notebook PCs Firms, Nagoya University Press, 2012.
3. Akira Suehiro, Catch-up Industrialization: The Trajectory and Prospects of East Asian Economies, National University of Singapore Press, Singapore, 2008.
4. A. Gerschenkron, Economic Backwardness in Historical Perspective, Harvard University Press, Boston, 1962.
5. K. Akamatsu, “A Historical Pattern of Economic Growth in Developing Countries” in The Developing Economies, Preliminary Issue n° 1, Tokyo, 1962.
6. S. Fujimoto, “Architecture-based Comparative Advantage in Japan and Asia” in MMRC-F-94, University of Tokyo, 2008; K. Ulrich, “The Role of Product Architecture in the Manufacturing Firm”, Research Policy, n° 24, 1995.
7. H. Tastumoto, K. Ogawa and J. Shintaku, “Strategic Standardization: Platform Business and the Effect on International Division of Labor” in Annals of Business Administrative Science, 10, 2011.
8. H. Tatsumoto, K. Ogawa, and T. Fujimoto, “The Effect of Technological Platforms on the International Division of Labor: A Case Study on Itel’s Platform Business in the PC Industry” in A. Gawer (ed.), Platforms, Markets and Innovation, Edward Elgar, Cheltenham, 2009.
9. A. Ito, “Dynamism of Development of Yi Wu and Its Dilemma”, in Mita Gakkai Zasshi, 103 (1), 2010.
Akira Suehiro est professeur à l’université de Tokyo, chercheur et directeur de l’Institut des sciences sociales de Tokyo depuis 2009. Ses recherches portent sur le développement industriel, la sécurité sociale et la coopération régionale en Asie de l’Est. Il est spécialisé dans les économies asiatiques. Il a obtenu son doctorat d’économie à l’université de Tokyo en 1991. Il est l’auteur de l’ouvrage Catch up industrialization: the trajectory and prospects of East Asian economies publié en 2008 aux presses de l’université d’Hawaï.