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Accelerating Supply-side Structural Reform of the Industrial Sector
( drc ) 2018-04-16
By Zhou Jianqi
Research Report Vol.20 No.2, 2018
The industrial structure in China is displaying obvious differentiation at the moment. Problems are focused on traditional areas, while new driving forces, though they may come from new products, new technologies and new models, can be released in both traditional and emerging areas. To improve the quality of industrial development, supportive policies can be introduced to address structural problems, including eliminating low-efficiency stock in the mining industry and traditional manufacturing industry, and strengthening high-end increment in high-end material industry. This will accelerate the supply-side structural reform of the industrial sector.
I. New Trends in Structural Adjustment of Industrial Enterprises
1. The proportion of enterprises in traditional industries, such as steel and coal, in the industrial sector does not change much, but their contribution to industrial growth is weakening.
Metallurgical industry such as iron and steel and mining industry such as coal are typical traditional areas, which consistently take up a large proportion in the industrial sector. We have chosen seven industries as examples: coal mining and washing, oil and natural gas extraction, black metal mining and beneficiation, non-ferrous metal mining and beneficiation, non-metal mining and beneficiation, black metal smelting, rolling and processing, and non-ferrous metal smelting, rolling and processing. Their total assets accounted for 17.4%①[] of the industrial sector in December 2000 and 17.8% in December 2017. By December 2017, their main business income accounted for 14.7% of the industrial sector, basically the same as the 14.6% at the end of 2000.
These traditional industries, which feature the economy of scale, have an obviously weakened effect in promoting economic growth under the new normal. In 2010, the accumulative growth of industrial value added was 15.7% year-on-year. The highest growth rate of those seven industries was 24.8%, the lowest was -2.0%, and three industries grew faster than the industrial average. In 2017, the accumulative growth of industrial value added increased slightly to 6.7% year-on-year, but the highest growth rate of those seven industries was only 1.5%, the lowest was -3.6%, five of them had negative growth, and all of them grew slower than industrial average.
2. Tech-intensive traditional manufacturers continue to grow.
In 2017, six manufacturing sub-industries remained among the top ten in the sector regarding the accumulative year-on-year growth of industrial value added. They were pharmaceutical, general equipment, special equipment, automobile, computer, communication and other electronic equipment, and instruments and apparatus. Those six sub-industries had a downswing during the 12th Five-Year Plan Period, when some even grew slower than the average growth of industrial enterprises, but structural adjustment within them was fast, and they have basically adapted to the medium- and high-speed development.
All of the six sub-industries are tech-intensive. General equipment, special equipment, instruments and apparatus, and computer, communication and other electronic equipment all fall in the category of equipment manufacturing, which is very demanding on capital, technology and talent. Emerging sub-industries such as aircraft equipment and IC also fall in this category. As information, communication and intelligent technologies develop rapidly nowadays, technology in the four sub-industries mentioned above is progressing by leaps and bounds. Pharmaceutical and automobile, however, are tech-intensive sub-industries in traditional areas. After the structural adjustment and upgrade in recent years, the profits of enterprises engaged in the six sub-industries are growing faster, and the accumulative growth of total profits in five sub-industries, except automobile, is all above 14% year-on-year.
3. Emerging manufacturers develop ever faster.
Emerging manufacturing industry mainly includes high-tech enterprises, which displayed good developing momentum to varying degrees in 2017 and have become a pillar for the manufacturing industry. Typical sub-industries include industrial robot, IC and NEV. Their fast growth not only reflected the improvement of that sub-industry itself, but also meant that related manufacturing upstream and downstream the industrial chain were also progressing, and the industrial ecosphere was getting better.
Industrial robot companies started quite late in China, but this sub-industry has grown at a fast pace. In December 2017, the accumulative output growth of industrial robot was 56.5% year-on-year and accumulative growth was 68.1% year-on-year, up by 8.5 and 33.8 percentage points from the same period of 2016 respectively.
In recent years, Chinese IC enterprises have grown quickly thanks to market and factor advantages, and this sub-industry has become one of the emerging ones that are hopeful of realizing high-end technological breakthroughs first. The output of IC products experienced negative growth in 2011, 2012 and 2013, but has maintained fast growth since 2014, especially two-digit growth since 2016. In December 2017, its accumulative output growth was 18.2% year-on-year.
China has the largest output and sales volume of NEV in the world. NEV realized the high growth of 58.5% in 2016, but the output growth slowed down at first and picked up later in 2017. In December 2017, its current-month growth was 71.2% year-on-year and accumulative growth was 51.1% year-on-year, 70.8 and 47.9 percentages points higher than the auto industry’s overall growth. China’s NEV output accounts for about 60% of the world total.
II. Main Structural Problems in Industrial Enterprises
1. Mining enterprises are inefficient.
In 2017, the accumulative year-on-year growth of the total profits in the mining industry was 261.6%, but enterprises in that industry had sluggish production. From January to December, the accumulative growth of industrial value added was 6.7% year-on-year, but that in the mining industry was only -1.5%. Of its seven sub-industries, coal mining and beneficiation, oil and natural gas extraction, black metal mining and beneficiation, non-ferrous metal mining and beneficiation, and non-metal mining and beneficiation all registered negative growth, and only auxiliary mining activities and other mining sub-industries maintained high growth.
Mining enterprises are inefficient in operation. In 2017, main business income per RMB 100 of industrial enterprises’ assets was RMB 108.4, but that in mining enterprises was only RMB 53.1, and that in manufacturers and in enterprises engaged in the production and supply of electricity, heating, gas and water was RMB 127.3 and RMB 42.3 respectively. The situation with the last sector was quite special because it was for public utilities. In 2017, the per capita main business income in industrial enterprises was RMB 1,315,000/person, and that in mining enterprises, manufacturers and enterprises engaged in the production and supply of electricity, heating, gas and water was RMB 881,000/person, RMB 1,317,000/person and RMB 1,988,000/person respectively.
2. Some traditional manufacturers grow at a low speed consistently. Inadequate supply of high-end materials is bad for the upgrade of manufacturing industry in general.
Manufacturers had obvious polarization. The 16 manufacturing sub-industries all grew slower than the industrial average, and certain sub-industries grew at a low speed consistently, such as black metal smelting, rolling and processing and non-ferrous metal smelting, rolling and processing (Table 1).
The 16 manufacturing sub-industries that grew slower than the industrial average were mostly engaged in traditional areas. A further analysis of them showed that high-end material manufacturers are lacking in China, which is bad for the upgrade of the overall manufacturing industry to the high end. Most enterprises in the 16 manufacturing sub-industries provide materials for the downstream. They are material producers in basic areas, whereas the six manufacturing sub-industries that develop quite well all produce downstream consumer goods. In other words, tech-intensive downstream consumer goods manufacturers have maintained good developing momentum and guaranteed industrial stabilization and progress. In comparison, midstream and upstream material makers develop quite slowly, and the main problem is the inadequate supply of high-end materials. There are two critical factors for the sound development of tech-intensive downstream consumer goods manufacturers. First, China has the world's largest market demand, which drives the development and concentration of product manufacturers. Second, global procurement of materials can make up for the short supply of high-end materials in China, but it has its shortcomings too. For one thing, the domestic shortage in high-end materials results in the high cost of foreign supply; for another, foreign countries block the export of materials in sensitive areas. Innovation by downstream manufacturers is restricted by the inadequate supply of high-end materials in China, which directly impedes the movement of Chinese manufacturers to the high end of the global value chain.
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