October 11, 2021

News in Charts: Is Made in China really made in China?

by Fathom Consulting.

Supply chains for technology, and those passing through China in particular, were a constant source of political tension during Donald Trump’s presidency. The election of Joe Biden is unlikely to produce an abrupt change in US policy towards China, although we may see some tinkering around the edges. The topic reared its head again this year following bottlenecks in semiconductor supply chains. This research note examines the importance of these technological supply chains in Asia, and their interaction with President Xi’s Made In China 2025 (MIC 2025) policy initiative.

Despite the hype surrounding MIC 2025, efforts to move up the value chain — by upgrading China’s economy from traditional industries reliant on low-skilled workers towards more advanced and technology-driven growth — are nothing new. In fact, the idea goes all the way back to the 1980s, and yet data on China’s progress are patchy at best. Fathom’s tailor-made RiCArdo trade database aims to address this deficit.[1] Despite grand proclamations, progress in upgrading China’s economy has stalled in recent years with the share of China’s exports that can be described as high-tech remaining broadly flat.

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Fathom’s RiCArdo dataset shows that, while China is now the world’s largest exporter in five of the nine MIC 2025 sectors, it is currently running a large trade deficit in intermediate IT products, and particularly in semiconductors. Supply of these chips is scarce and output is highly concentrated in a small number of predominantly Asian countries, including China. However, while the PRC is a major producer of semiconductors, it is currently unable to manufacture enough to meet the needs of its large manufacturing sector, and must make up the shortfall through imports.

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Outside mainland China, firms in South Korea and Taiwan dominate semiconductor production, but countries including Malaysia, Vietnam, Singapore, Thailand and the Philippines are also key players. While production of semiconductors has risen globally, production in Japan — once a dominant player in the market — has stayed broadly flat in recent decades, and the country’s market share has fallen. These countries play a crucial role in China’s supply chains and, unsurprisingly, exports to China matter greatly to them.

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However, while trade with China has undoubtedly boosted standards of living in many of these economies — Vietnam’s per capita income has increased by more than 600% since 2000 — evidence from Fathom’s Centrality Tracker suggests that these countries are not as sensitive to shocks in Chinese domestic demand as might be expected. Rather, since China is often an intermediary, assembling products that are ultimately destined for elsewhere, it is shocks to global demand that tend to matter for these countries.

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Take, for instance, the global demand for mobile phones. While there are more mobile phone subscriptions in China than anywhere else in the world (close to 1.7 billion), around 80% of mobile phones in use globally are owned by people living outside the PRC. That is to say, the demand for these final products is far larger outside China than it is within China. Consequently, it is changes in global demand in the rest of the world that affect output in China and, in turn, demand for Asian semiconductors.

There are several reasons why technological supply chains tend to pass through China. Aside from the country’s vast pool of low-cost labour, there are economies of scale to be earned by concentrating production in a single location. Incentives put in place by policymakers in Beijing have also played a part.

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This does not mean, of course, that Asian technology exporters are immune to economic outcomes in the PRC: Fathom’s own analysis shows that changes in the composition of Chinese economic growth matter greatly for these countries. Indeed, the MIC 2025 policy initiative aims to cement China’s position as the pre-eminent global supplier of high-tech products. This can only be achieved to the detriment of other Asian technology exports, which puts China in direct competition with many of its nearest neighbours.

[1] Fathom’s RiCArdo database contains detailed export data for over 200 different countries and regions, covering the period 2005 to 2020. Referring to various resources for guidance, the sub-industries were whittled down from over 1800 product-level classifications in order to capture the ‘new’ (i.e. high-tech) sectors targeted by the MIC 2025. The remaining sub-industries were then categorised according to the nine key sectors prioritised in China’s latest plan.

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