April 26, 2014 U.S. Manufacturers Reaching Chinese Consumers

Volume 17 | Issue 2

Exposure to China’s growing economy is becoming increasingly important for American manufacturers, especially as domestic demand for many pr

Even better, the export opportunities that have existed in consumer goods and in machinery and equipment in recent years are not forecasted to dissipate anytime soon.

According to the U.S. International Trade Commission and IBISWorld estimates, U.S. exports to China grew at an average annual rate of 12.2 percent between 2008 and 2013, reaching $124.2 billion.

“The Chinese market is one of the largest in the world, and it’s going to be even bigger as they continue to grow,” says Omar Khedr, an industry research analyst at IBISWorld, a global business intelligence leader specializing in industry market research and procurement and purchasing research reports.

“That’s going to present a huge opportunity for U.S. manufacturers, especially in the high technology sector as well as sectors that have strong barriers to entry,” he adds.

Domestic demand in China has grown so much, in fact, that IBISWorld has developed a list of U.S. industries that are expected to perform particularly well exporting products to China in this new phase in U.S. manufacturing.

“I don’t want to say that all U.S. manufacturers will have a great opportunity in China because low-end manufacturers of, let’s say, clothing and textiles, are not likely to come back to the U.S. They have already been outsourced,” Khedr says. “But industries that have advanced technology on their side will benefit.”

More specifically, industries that have high barriers to entry, that benefit from economies of scale, and that contain high technological requirements have been particularly successful exporting products to China – and will continue to do so, Khedr says.

These industries often have a high market share concentration, and the biggest players traditionally have strong, well-recognized brands. In particular, think manufacturers of medical devices, automobiles, and aircrafts, he says.

“In terms of exporting volumes, those are the top three industries,” he adds.

While Chinese companies are trying to make inroads into many of these industries, they face several obstacles that will prevent them from serving these markets in the short term.

Khedr explains why.

On Cruise Control
Many Chinese consumers have experienced an improvement in living standards over the past five years, driven by higher incomes.

In the five years leading up to 2013, per capita income in China grew at an average annual rate of 10.2 percent, IBISWorld says, setting off an increase in China’s middle class. In Shanghai, one of China’s richest cities, the average annual income is now estimated to be slightly above $20,000, according to World Bank data, putting the city on par with some U.S. cities, such as Detroit.

In addition, while China’s savings rate remains high relative to OECD members, consumption has increased, especially in durable goods.

China’s growing middle class is benefiting the U.S. automotive sector. Over the past five years, demand for American-made automobiles has surged. Cars, sports-utility vehicles, and light trucks are all in great demand. The manufacturing of these vehicles, consequently, has skyrocketed.

Between 2008 and 2013, motor vehicles exported from the U.S. to China grew at an average annual rate of 42.6 percent, exceeding $7.0 billion, according to IBISWorld. Khedr estimates that 15.5 percent of China’s passenger car imports came from the U.S. in 2013.

Detroit and Michigan, as a whole, have had, for the last five years, a pretty tough time, but what’s not usually talked about is that demand from international markets, especially China,” Khedr says. “It has been really good for GM and for some of the major autos in general.”

For instance, the Chinese, in 2013, bought almost $848 million from GM, according to Khedr. The auto giant and its partners sold more than 2.8 million vehicles in China in 2012, with company management stating that it expected to increase vehicle exports to China by 70.0 percent in 2013.

“GM sells more cars now in China than it does in the U.S.,” Khedr says. “Now, granted, that’s not all manufactured in the U.S. and exported, but thousands of jobs today are connected between the U.S. manufacturing sectors in the automobile industry and the Chinese market.”

In the five years leading up to 2018, these auto industries are anticipated to continue benefiting from China’s ever-expanding middle class.

In truth, IBISWorld expects that the automobile manufacturing industry will grow at an average annual rate of 2.4 percent and 3.1 percent, respectively, with exports to China rising as a share of total industry revenue.

Still, U.S. auto-manufacturing industries currently face strong external competition from Germany and Japan, Khedr says, but their hefty prices are not expected to dent American’s auto dominance in China.

“There’s competition from Mercedes, from BMW, but those cars are so out of price range to the local Chinese, even the local Chinese middle class person, that it provides a huge opportunity for American autos to get in there and capitalize,” he says.

Medical Clearance
China is also a major market for the Medical Device Manufacturing industry, which produces electromedical equipment such as pacemakers and imaging equipment.

Since these products assist medical practitioners in spotting health concerns earlier, China’s growing middle class and its aging population provide strong demand for this industry.

“The Chinese government has basically doubled their spending in medical expenditures in the last four years, reaching close to half a trillion dollars,” Khedr says.

“That’s a huge market,” he adds, one that is providing an excellent opportunity for high-end medical-device manufacturers to service the Chinese market.

“The Chinese haven’t had a chance to really service those industries, and they’re very dependent on U.S. manufacturers because of their quality,” Khedr says. “Local Chinese companies have not really got into these industries. They’ve only focused on the low-end part of it, such as providing hospitals sheets and blankets, and basic equipment, but nothing like medical imaging devices or high-end instruments needed for surgeries.”

As a result, medical devices exported from the U.S. to China increased at an average annual rate of 4.6 percent, reaching $2.5 billion, in the five years leading up to 2013.

This caters to another American manufacturing strength. According to the U.S. International Trade Commission, the U.S. has the largest medical device industry in the world, with 20 of the 30 largest manufacturers.

Additionally, U.S. exports of orthopedic, cardiovascular, and imaging devices grew at an annualized rate of 2.3 percent between 2008 and 2013, reaching $2.0 billion. The U.S. specializes in these products, as they require significant investment in research and development as well as highly skilled labor.

While local Chinese companies have started manufacturing medical devices, these companies primarily focus on supplying low-tech devices and hospital supplies.

Procedures in many of the major orthopedic segments are expected to achieve double-digit growth due to China’s increasing aging population, driving demand for high-end imaging devices.

Between 2008 and 2013, IBISWorld estimates that U.S. exports to China for MRI devices, stents, and ultrasound devices grew at an average annual rate of 14.9 percent, reaching $585.0 million. American manufacturers, with established supply chains and reputations, still maintain a competitive advantage in this high-tech, highly skilled industry.

Therefore, exports to China from this industry are expected to remain strong going forward as China’s aging population increases, with industry exports growing at an average annual rate of 2.9 percent in the five years to 2018, reaching $2.8 billion.

Moreover, Chinese competition is expected to remain light, Khedr says.

“Within these industries, it’s hard for a Chinese manufacturer to just break into it right away. They don’t have the engineers, the factories, and the equipment necessary,” he says. “Until the necessary manufacturing facilities and operations are set up, they’re going to have a hard time securing a contract with a major government ministry in Beijing.”

Still Flying High
As per capita income continues to rise, demand for air travel within China is expected to increase rapidly, Khedr says.

Consequently, demand from China for the aircraft, engine, and parts manufacturing industry has been high – and it is expected to stay that way.

IBISWorld estimates that in the five years prior to 2013, exports to China for industry products grew at an annualized 17.2 percent, reaching $11.8 billion. Khedr says most of this growth was for fully completed commercial aircrafts.

While China’s leaders are investing in building a local aircraft manufacturing industry, this globalized industry is characterized by a high level of capital intensity and high technological requirements, making it difficult for a new Chinese competitor to capture significant market share in the short term.

In the five years to 2018, IBISWorld anticipates that industry exports to China will continue to grow though at a slower average annual rate of 5.3 percent, reaching $15.3 billion. This is primarily because China is planning to start manufacturing its own commercial aircraft through COMAC, a state-owned enterprise established in 2008.

“The eventual goal, from Beijing’s perspective, is that COMAC will one day be able to produce high quality locally manufactured commercial airplanes, but that is years down the line, and the closest thing that they’ve got is a joint venture with Boeing,” Khedr says.

The engine and turbine manufacturing industry has also seen strong demand originating from China over the past five years.

To modernize its infrastructure and transportation sectors, China officials have been forced to import power generation equipment and diesel engines. Between 2008 and 2013, industry products exported to China grew at annualized rate of 12.7 percent, reaching $1.8 billion.

Companies in this industry are characterized by a high capital intensity as well as significant research and development outlays. For instance, major industry players such as General Electric and Caterpillar Inc., for instance, offer highly advanced and energy-efficient commercial engines to their Chinese clients.

In the five years to 2018, this industry is still expected to be among the top 10 products exported to China ranked by total value. However, industry operators will need to adjust for slower expected growth in China during this period. IBISWorld anticipates that in the next five years industry exports to China will grow only at an average annual rate of 2.2 percent, reaching $2.1 billion by 2018.

“The Chinese are well aware that they want to have their own locally-manufactured businesses and counterparts, but that’s going to take a long time,” Khedr says. “Boeing’s Investor Relations Group is forecasting that in the next 20 years, the Chinese are going to need 5,000 new airplanes. That will not all be manufactured in the U.S., but a good portion of it will be serviced by U.S. sub-contractors and U.S. companies.”

More To Come
The strong growth of exports from these U.S. manufacturers to China is expected to continue over the next five years as China’s middle class expands, its population ages, and consumption as a share of the country’s economy rises.

IBISWorld estimates that in the five years to 2018, U.S. exports to China will grow at an average annual rate of 5.2 percent, reaching $158.6 billion. While local Chinese manufacturers are seeking to meet China’s growing market, IBISWorld expects that U.S. manufacturers in industries characterized by a high level of technological change, high capital intensity, and produce innovative product designs will continue to do well during the short to medium term.

“The Chinese economy is the second largest economy in the world, and that means while the middle class is about 270 million today, it has the potential of growing to much more,” Khedr says. “As more Chinese enter the middle class, more will be able to afford better health care, better transportation vehicles, and a better means of travel – and U.S. brand name manufacturers will be the means by which they do it.”

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