Re-setting Sail: Where Will the Ship of China's Foreign Trade Navigate to?

Industrials Author: Ruoxin Zhang May 10, 2023 05:04 PM (GMT+8)

On April 25th, the General Office of the State Council issued the Opinions on Promoting Stable Scale and Optimized Structure of Foreign Trade (Opinions). The Opinions arrange tasks for strengthening trade promotion, expanding markets, stabilizing and expanding the scale of key product imports and exports, increasing financial support, accelerating innovation in foreign trade development, and optimizing the environment for foreign trade development. The constant improvement and adjustment of relevant policies in the Opinions have helped enterprises stabilize orders and expand markets, also indicating that China's foreign trade industry has entered a new stage of development.

According to Customs Statistics, in the first quarter of this year, the total value of China's goods trade import and export was CNY 9.89 trillion, a year-on-year increase of 4.8%. Among them, exports were CNY 5.65 trillion, a year-on-year increase of 8.4%. Imports were CNY 4.24 trillion, a year-on-year increase of 0.2%. Clothing, home appliances, and furniture, once known as the "old three" of foreign trade exports, are constantly upgrading, while the "new three", represented by electric passenger cars, solar cells, and lithium batteries, increased their exports by over 60% in the first quarter, driving the continuous optimization of China's foreign trade structure.

Looking at China's total trade import and export value, although there is only a slight increase compared to last year, a longer-term view reveals changes. In 2020, due to the impact of the pandemic, the trade surplus shrank to only CNY 90 billion. But in the past two to three years, the trade surplus has continuously expanded again. This also shows that even in the complex environment of high global inflation, weak economic growth in major economies leading to weakened external demand, and increased risks of protectionism and geopolitical instability further exacerbating the instability, uncertainty, and unpredictability of the global economy in recent years, China's foreign trade has still shown a strong recovery.


However, in recent years, there have been ongoing discussions about the challenging situation of China's foreign trade, including significant loss of Chinese orders and a shift in foreign trade orders to Southeast Asia. For example, from October to December 2022, China's foreign trade exports showed a decline, especially in exports to the United States and Europe. According to Customs Statistics, in the first two months of this year, China's total value of export trade with the European Union decreased by 5%, with the United States decreased by 15.2%, and with Japan by 5.7%. Overall, China's exports to the United States, Europe, and Japan have all declined. However, China's total export value in these two months has increased. Where does this difference come from?

According to Customs data, in the first two months of this year, China's exports to ASEAN reached CNY 570 billion, an increase of 17.9%. China's trade surplus with ASEAN reached CNY 188 billion, a year-on-year increase of 91.6%. Although China's exports to the US, Europe, and Japan have decreased, the difference has shifted to ASEAN countries, where some of these exports are converted into goods and then exported to the US, Europe, and Japan. ASEAN countries serve as transit hubs for Chinese goods.

The shift of foreign trade orders is related to lower labor and land costs in Southeast Asia, which are more suitable for labor-intensive industries. For example, in recent years, Apple has been accelerating the transfer of some production lines out of China. And its suppliers have also moved factories to countries such as Vietnam and India. Toshiba, Intel, and other foreign companies have also relocated factories to Vietnam. In addition, sportswear giant Adidas decided to close its only direct factory in China in 2012 and enter Southeast Asia. Samsung launched a layoff plan in China in 2019 and moved production facilities to Vietnam, India, and other countries.

In the book The Pivot, Professor Shi Zhan of Shanghai International Studies University mentioned a hypothesis: Without substantial changes in technical conditions, the shift of manufacturing to China is ultimately predictable. China's status as the "world's factory" may be final. Many people also believe that China's important position in the global supply chain is precarious, and Vietnam will become the next "world's factory" to replace China. According to statistics, European, American, Japanese, and South Korean countries have transferred approximately USD 72 billion worth of orders annually from China to five Southeast Asian countries in four categories: footwear, furniture, home appliances, and communication equipment. Among them, Vietnam, as the absolute main force, has received approximately USD 45 billion worth of overseas orders.

However, the large-scale transfer of factories to Southeast Asia will not threaten China's position in the supply chain. The transfer of orders to Southeast Asia is mainly concentrated in the advantage links of the relevant industrial chains, namely the terminal assembly and production links. A large number of factories in Southeast Asia still need China's raw materials and spare parts exports and supporting industries such as machinery and technical services to complete the production process. The transfer of the industrial chain to Southeast Asia is mainly for low-tech value-added industries, without the ability to undertake China's high-end supply chains and high-tech threshold industries. The transfer of factories is fundamentally an action of pursuing cost reduction and maximizing profits.

Under the constantly changing international trade situation, Chinese foreign trade enterprises are also facing challenges. Some enterprises have gradually transformed into more internationally competitive enterprises through technological upgrading and self-built brand advantages, such as PowerOak (Chinese: 德兰明海) and Bear Electric (Chinese: 小熊电器), which have transformed into independent brands. Kemflo (Chinese: 溢泰), who has transformed from a plastic product OEM enterprise to an independent brand in the water purification industry, and Karmiqi, who has transformed from an OEM manufacturer for European and American lighting brands to a new global Internet lighting brand on Amazon. Undeniably, intelligent upgrading and brand advantages going abroad have become one of the future core directions of high-quality development for enterprises.

Regarding how to transform independently and grow bigger brands, the growth of energy storage unicorn PowerOak may provide us with some inspiration. Before the transformation, PowerOak was a supplier for many cross-border e-commerce companies and acted as an OEM manufacturer for well-known brands such as Anker Innovations(Chinese: 安克创新), Belkin, and Romoss(Chinese: 罗马仕). However, in 2020, PowerOak launched its brand building under the brand BLUETTI and used crowdfunding, independent sites, Amazon, third-party channels and other methods to promote brand building and sales expansion and to precipitate product strengths into brand strengths through fine operations, achieving deep connections with users. Today, proprietary brands have become PowerOak's main source of revenue, and sales and profit margins have doubled. From competing for orders to creating orders through brand assistance, this is also the next step forward for many domestic and foreign trade factories.

For the foreign trade factories embedded in the manufacturing industry that want to transform into well-known brands, products, users, and brands are all indispensable. Merely having manufacturing capabilities is not enough to effectively capture user needs and trends. Breakthroughs are needed in products and brands. In the process of transformation, enterprises need to continuously explore and try, and core managers should go out actively and upgrade technological production factors, such as using advanced digital software for management or using robot technology. When the competition in the sector is too intense and there is no hope for rapid transformation and upgrading, "abandoning the sinking ship" and using the accumulated funds in more promising or better fields should be done in a timely manner.

Artificial intelligence, flexible production, and constantly developing digital technology are profoundly affecting and changing the future of China's manufacturing industry. The visibility of technological leapfrogging seems to be overturning the ecosystem of the global supply chain. At that time, what position will China occupy in the new global supply chain system, and where will China's foreign trade "big ship" sail? Regarding these grand themes, enterprises still need to continuously try and explore the road of transformation.