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China Sets its Formal Economic GDP Growth Goal for 2016- Setting the Stage for Industry Value Chain Collisions

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The depressed state of manufacturing activity across China has garnered far broader business media and industry supply chain attention. Gross overcapacity among certain industry manufacturing and supply chain sectors has created bigger headaches for China’s governmental leaders, and consequently for industry supply chains.

Last week’s announcement indicating that this year’s annual growth target has been lowered to a range of 6.5 to 7 percent range will add, in the view of Supply Chain Matters, further consequences with the stage set for industry vale-chain collisions.

Last year, China’s growth rate was reported as 6.9 percent but a variety of global economists continues to question the reality and accuracy of that number. Further, that growth rate represents the slowest growth pace in 25 years. The International Monetary Fund (IMF) had established that agency’s growth plan for China as 6.3 percent this year as compared to an original forecast of 2015 growth of 7.1 percent nearly a year earlier. The 2015 forecast was subsequently revised downward to 6.8 percent by mid-2015. The new established growth rate marks for the first time in nearly twenty years that rather than a specific number, a target range has been established. Previously, a specific GDP growth target has always been achieved, regardless of market challenges.  It was a number that would consistently be reported and achieved.

The new annual growth goal was announced by Premier Li Keqiang at the National People’s Congress last week. The goal is part of a broader strategy aimed to stimulate growth, maintain employment, encourage needed restructuring of industries and continue to focus cities as the nucleus of employment growth.  A recent edition of The Economist featured a published article titled, The march of the zombies, (Paid subscription required) which in-essence, declares that China’s existing “grotesque overinvestment in industrial goods is a far bigger problem.”  In his recent declaration to the People’s Congress, the Premier declared: “We will address the issue of “zombie enterprises” proactively and prudently by using measures such as mergers, reorganizations, debt restructuring and bankruptcy liquidations.

However, publications such as The Wall Street Journal and the Financial Times continue to point out that local governments are highly dependent on these zombie enterprises for local revenues to offset prior large investments in regional manufacturing and local economic manufacturing zones to spur employment and economic growth. Thus, the impetus for zombies is self-fulfilling and a means for continued survival.

Included in this annual growth declaration was a commitment to generate 10 million new jobs among the country’s urban areas and to maintain unemployment below 4.5 percent in cities. A revised five year economic blueprint additionally calls for easing controls on overseas investments among China’s largest enterprises. China’s targeted budget deficit will reportedly be risen to 3 percent of GDP in 2016, up from 2.3 percent in 2015, while there are additional pledges to reduce corporate taxes and fees for Chinese enterprises. The ongoing strategy toward fostering a consumption based economy will continue, one that has businesses more focused and responsive to domestic consumption needs while decreasing China’s dependence on export-driven manufacturing needs.

As face value, this latest news on revised, more pragmatic growth would have been viewed as good news for foreign based firms focused on tapping China’s vast market potential. Instead, it should be, by our Supply Chain Matters lens, cause for additional caution and added concern.

China’s continuing slide in economic growth has in reality placed more de-facto protections on China’s home grown firms to tap existing anemic domestic product demand in various industry segments. Whether by increased regulation of foreign firms or the uptick in de-facto investigations of the business practices of foreign-owned enterprises, foreign firms doing business in China will continue to experience added challenges.  Battered domestic manufacturers, who are now more desperate for growth, are attempting to move-up the technology ladder, turning to additive manufacturing, increased automation such as robotics and Internet of Things as well as other investments aimed at diversification of product offerings. However, as is the usual trend in these initiatives, as goes one, so go the many, causing more duplicative initiatives and investment fueled by the same economic regions that already have high debt loads.

Gross domestic overcapacity in areas such as the manufacturing of steel have prompted other countries to declare unfair price practices with the World Trade Organization, kicking in new tariff protections among other countries.  That places new artificial ceilings on producer prices in key economic regions such as the Eurozone and the United States which in-turn are striving to boost domestic manufacturing levels.

The easing of controls on overseas investments implies that some select Chinese manufacturers have the green light for external investments within external industry supply chains.  Evidence of this has already occurred in automotive industry value-chains and in high-tech and consumer electronics supply chain by virtue of investments in foreign semiconductor based firms.  Readers should not be surprised by future investments in alternative energy value-chains such as battery and storage technologies.

The J.P. Morgan Global Manufacturing PMI posted a value of 50 at the end of February, representing a 39 month low and a level that signals overall global manufacturing contraction. China, the epicenter of global manufacturing, beset with enormous challenges of balance sheet profitability and significant overcapacity challenges among industry manufacturing sectors will now have to respond to even greater challenges to maintain growth momentum, diversify into more promising strategic growth sectors or risk being an economic casualty. Other countries have come to the realization that the promise of added growth for emerging market regions has also significantly muted. In 2016, the stakes are far higher along with the consequent implications to broader industry and global value-chains face their own challenges to spur manufacturing and supply chain growth.

Years ago while an industry analyst at AMR Research, this author recalls our well attended annual client conferences when tech industry icon Bruce Richardson would present his often anticipated talk: When Industry and Technology Forces Collide. Something has to give when industry forces collide, and that will likely be the global manufacturing and industry value chain scenario of 2016.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 

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