Next wave of industry to fuel China's growth

Published: 10 September 2014

China today faces an inflection point: the ingredients that propelled its rapid expansion and unprecedented development over the past 30 years won’t fuel its expansion over the next three decades. Instead, China faces an opportunity to transition to a new wave of prosperity.

In order to move up the “value chain,” it must evolve from relatively commoditized manufacturing and lower-skilled assembly to a more innovation-based economy, which includes design, logistics, financial and business services, high-tech industries and life sciences. This is according to Deloitte Touche Tohmatsu Limited’s (“Deloitte Global”) latest competitiveness report, Competitiveness: Catching the next wave in China.

“There is no question that China’s economic transformation over the last three decades has been remarkable,” says Gary Coleman, Deloitte Global Managing Director for Industries. “To grow to even greater heights, China today must embrace new sectors and strategies for growth, as well as build a culture of innovation, in order to maintain its comparative advantage.”

The report maintains that in order to thrive amidst today’s global economic challenges, China must transition from labor- and capital-intensive activities to those that utilize knowledge, innovation, design, IT sciences, software, and marketing. The sectors driving China’s “next wave” of growth should focus on more specialized and innovative production:

• Aerospace: Currently a small percentage of the nation’s manufacturing industry, aerospace has been identified as a high-priority sector in China’s growth plans. Developing a viable aircraft industry will test Chinese firms’ ability to penetrate a space clearly dominated by the United States. With government support, China could very well become a significant player in the aviation sector.
• High-value machinery and components: China is likely to become a regional hub for machinery production. Similarly, a shift in electronics components has caused a rapid increase in trade of higher-tech products and components.  
• Life sciences: The domestic market for drugs and medical devices is rapidly expanding within the Chinese life sciences industry. With government support and rising investments from foreign pharmaceutical firms into research & development, China is positioned to become an important—and potentially disruptive—player by 2025.
• Mobile technology: Now the world’s largest consumer of mobile phones, Chinese subscribers grew from 7 percent in 2000 to nearly 90 percent in 2013. Chinese innovation in mobile gaming, communications, e-commerce, and shopping software and services holds enormous potential to boost the nation’s competitiveness and spur new mobile-specific industries.
• Internet e-tailing and social media: Online sales in China accounted for approximately 6 percent of all retail purchases in 2012 worldwide– higher than in the United States. The expansion of e-commerce sites into other business sectors, such as financial services, paves the way for additional growth opportunities within China’s economy.
• Logistics and other services: Shifting to innovative and specialized manufacturing creates opportunities for companies to capture new value in the aftermarket for goods after production. Adding cloud computing and data analytics to business practices has tremendous potential to propel the distribution sector to one of the fasting-growing industries over the next two decades.
• Health services: As China’s population begins to age and cultural standards evolve, the government continues to expand its investment in healthcare. Construction of urban hospitals and rural clinics, along with an increase in state-funded healthcare delivery, could contribute to expenditures of US$1 trillion by 2020, or equivalent to nearly 7 percent of GDP.
• Education services: With an annual government investment in education of about US$250 billion, boosting the quality of the education system has become a top government priority in the transition toward a more services-based economy. Despite companies opening private universities for their employees, expanding access to education is still a critical factor in China’s economic development.
• Energy: China’s rapid growth and development has created a demand for more innovative and environmentally-friendly energy policies. This demand is creating opportunities for China to address growing ambient air pollution and greenhouse gas emissions while fueling economic growth.

The report also discusses the role of government and its revamping of economic policies. Among these is the opening up of markets to increased foreign investment—critical to China’s continued growth trajectory and its ability to take its place on the world stage as an important trade partner and global leader.  

“Deloitte China has been in the marketplace for almost a hundred years. We have witnessed the evolution of different industry sectors and worked with many companies to help them overcome the difficulties of transformation and realize the gains,” says Clement Hung, Chairman, Deloitte China. “This report reaffirms that innovation is pivotal to China’s sustained transformation and economic growth in the 21st century. The key to instilling impactful and disruptive innovation in the marketplace is ongoing policy development in important sectors including education, intellectual property protection, and market reform.”