Rapid-Growth Markets Forecast: Winter 2013

China gradually moving up the value chain

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China-based companies will seek wider profit margins built on their ability to sell desirable, high-specification products rather than simply offering the best value for money. These factors will contribute to an economic transformation.

China's rebalancing toward higher-value sectors will lead the RGMs to another decade of buoyant growth.

China's 12th five-year plan (2011 to 2015) aims to shift economic growth toward consumption and away from low value-added manufacturing exports.

If the plan is successful in achieving greater focus on R&D and high-end manufacturing and services, what will this mean for other economies in the region?

Some commentators have suggested that they would be hit by falling demand for manufactured components for products currently assembled in China. However, it is more likely that assembly would shift to lower-cost parts of the region or of China, and that they will benefit from China's gradual movement into the higher-value industries.

Shifting economic structure

China has come a long way in 20 years. In 1991, GDP per capita (in PPP terms) was less than US$1,000 a year; last year it was US$9,024, roughly where Korea was in 1991 or Japan in 1980.

With higher incomes and development levels, China is now able to encourage higher-value industries. The chart below illustrates the changing structure of its economy.

China: economic structure: share of GDP

China: economic structure: share of GDP

Source: Oxford Economics.

As the importance of agriculture has declined, consumer and intermediate goods have taken its place. Over the next 25 years we expect investment goods and services to become increasingly important, including financial services.

Social security, education, health care, tourism and wholesale and retail trade will also expand.

Our forecasts suggest that China's share of the world pharmaceuticals market will grow from less than 10% now to more than 15% over the next 10 years. Its share of global mechanical engineering will rise to almost a third.

By 2022, a third of all electrical goods in the world will be produced in China.

Creating opportunities for lower cost producers

As China makes these transitions, it will create opportunities for other RGMs, notably in Africa and Southeast Asia. The labor-intensive textile industry, for example, is dominated by countries with low labor costs.

Wages have risen notably in China over the past 10 years, so wages in the Philippines, Vietnam and Indonesia are now substantially lower than in China. Countries in Africa also have a good opportunity to build market share in the lower cost labor-intensive industries.

Average annual earnings, 2011

Average annual earnings, 2011

Source: Oxford Economics.