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China manufacturers should look at the example of South Korea

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Supplier ManagementAs I wrote several times before, I think many Chinese manufacturers — probably 50% — will go out of business in the coming 10 years.

I usually point to historical parallels (other Asian countries like Japan or Taiwan that went through China’s current economic path). The best parallel is probably the trajectory of South Korea.

Many striking similarities

  • It was one of the world’s poorest countries after the war.
  • In 1960 its per capita GDP was 79 USD. Compare that to 5,438 USD in 1989.
  • It experienced very strong growth for 35 years, from 1961 to 1996 (the “Miracle of the Han River“) after they opened their economy.
  • This “miracle” (a term used for nationalistic purposes against Japan) was based mostly on industry and exports.
  • The world’s attention focused on this country during the Summer Olympics of 1988.
  • A few large companies (Hyundai, Samsung) are selling their products everywhere. (Think Huawei, Haier, Lenovo, ZTE for China).
  • These days, the main industries are cars, armaments, nuclear, and shipbuilding (more details here). All industries where China wants to play a larger role.

What happened to Korea’s manufacturing sector?

In the 1960s, Korea was known for its production of simple goods (garments, cheap toys…). But slowly these productions went to other countries.

That’s the problem when an economy is very focused on exports. And everybody in China understands this point.

But what people often forget is that many manufacturers had to be drastically restructured, or they simply disappeared, when the going got tough.

It is part of capitalism’s “creative destruction” process. Let’s say there are two competitors, A and B. A is 10% more productive than B. Both can survive when the market is easy. A makes more margin, but B can survive and even grow.

But let’s say prices drop. A makes a 3% profit. B is in the red. After a few years, B has either improved its operations or disappeared.

What will happen to many Chinese factories?

Overall, Chinese exports are still increasing. But, as Etienne Charlier pointed out recently, the mix of these exports is changing substantially.

It means, that, in many low-tech industries, the value of Chinese exports is decreasing. And the domestic market doesn’t always make up for it (and let’s not mention the cut-throat pricing negotiations for selling simple/commodity products inside China).

In a contracting market, the “B” players are bound to disappear.

Be prepared for many more factory bankruptcies in the coming years… Financial background checks will be more and more important.

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