China's secret weapon in light manufacturing: Small and Medium Enterprise-oriented "Plug and Play" industrial zones

 

Light manufacturing operations in a Chinese standardized factory building

The success of Chinese manufacturing growth in recent decades is indisputable and has irrevocably shifted the global landscape for manufacturing competitiveness. In contrast, manufacturing in Sub -Saharan Africa has failed to deliver broad-based growth and poverty reduction on anything close to the scale as has been observed in East Asia. As countries, such as China and Vietnam, look to upgrade technology and move up the value-chain, there may be an opportunity for Africa to become competitive in the low-technology, labor-intensive light manufacturing sectors and enter the global manufacturing supply chain.

After Ethiopia (see our last blog on rose growers in Addis Ababas), the World Bank W team on Africa's competitiveness in light manufacturing went to China and Vietnam in September and October 2010 to better understand the key factors behind the region's extraordinary success in the light manufacturing sectors. The team focused on the two provinces of Jiangxi and Zhejiang in Eastern China, and visited enterprises in Hanoi, Hue and Ho Chi Min City in Vietnam. . We visited more than twelve industrial zones and conducted in-depth interviews with more than 75 private enterprises in these two countries. 

Although the importance of China's coastal special economic zones has been well-recognized and documented (e.g. as platforms for attracting export driven FDI and testing grounds for key reforms), China's experience with smaller industrial zones mostly catering to domestic SMEs is less well known - and yet these have also played a critical role in China's astonishing industrial development over the last twenty years. 

One spectacular example of China's success and the role played by zones is the Weihai Zipper Company in Zhejiang. Starting from virtually nothing, over a span of two decades, it now exports $15 million worth of zippers to about 60 countries. It currently employs 3000 workers with an estimated daily output of 4 million zippers. This company is part of a zipper industrial cluster which counts more than 500 companies (China has more than 75% of the world’s market share in zipper, with the industry employing more than a million workers). Weihai Zipper Company decided to move to an industrial zone because the government offered a great package of cheap and abundant land and a predictable supply of utilities, especially water and energy. The manufacturer said that moving to the industrial zone enabled the scale up of the company by providing more space for plant expansion and for workers’ dorms in the park.

China has more than 1000 industrial zones following a central government policy encouraging the development of such zones. Most cities and counties have followed the models set by the large zones developed by the central and provincial governments. The local governments are motivated to develop industrial zones to get tax revenues and revenues from selling land, as well as nice records of administrative performance. Of course, not all Chinese industrial zones have been successful; the better ones were built on existing or potential industrial strengths, in other words, local comparative advantages.  These industrial zones played a critical role in facilitating the growth of Chinese SMEs from family operations catering to the local market to global powerhouses. These zones not only provided Chinese SMEs with good basic infrastructure (e.g. roads, energy, water and sewage), security, streamlined government regulations (e.g. government service centers) and affordable industrial land, they also provided technical training, low cost standardized factory shells allowing Chinese entrepreneurs to "Plug and Play" as well as Chinese workers with free and decent housing accommodations right next to the plants. Hence they played a very critical role in helping Chinese small enterprises to grow into mid-size and large enterprises, avoiding the "Missing Middle" problems that other countries face.

These industrial "Plug and Play" zones considerably reduced the start up investment costs and risks for SMEs at a phase in their development where they are still too risky for bank loans. They also facilitated the development of industrial clusters allowing tremendous economies of scale and scope for Chinese industries (the emergence of clusters was further facilitated by the Chinese government's support for the development of input and output markets). In a nutshell, the Chinese government facilitated SME development through the efficient provision of public goods and market information about sellers and providers but not subsidies. For example, firms pay market prices for the use of utilities. Most importantly, competition between firms is intense. The government does not bail out failing firms. It should also be noted that most of these zones did not preselect particular light industries, letting market forces drive the organic development of specialized clusters.

 

Housing for workers in a Chinese industrial zone

A large proportion of China's 350 million migrant workers from the Western Provinces live inside these zones in free housing located right next to the plants. These free accommodations provide decent housing at very low economic costs to the country (they are built using large scale productive techniques). The companies also provide very cheap food through cost effective means to the zones.  Not having to spend much on food plus free housing and no need for transportation means that a worker in China can save up to 80% of her salary. In Africa, most of the wage is gone by the time the worker pays for his housing (often in slums), food and transportation. This, combined with the fact that a worker can increase her salary by 50% through extra hours and productivity bonuses, goes a long way in explaining why Chinese workers are so motivated and productive while costing relatively little (it also explains a big part of the more than 40% of GDP saving rate in China...) - these workers can earn and save in a few years enough money to change their and families' lives.

China's success with such industrial zones also relied a great deal on intense competition (domestic producers as well as export markets), its decentralized implementation and ensuing competition between local governments as well as with the key role devoted to the banks and private sector developers. The zones (including the standard factory shells and housing units) are being financed by local governments as well as the private sector - e.g. private zone developers who will charge a capped rent to companies. The local governments' share is often financed through bank loans (with the zone's real estate as collateral) which are paid back with the additional taxes resulting from the increased economic activities.
 
By contrast, Vietnam did not develop such SME-oriented zones, relying exclusively on FDI linked industrial zones to develop manufacturing exports and has successfully done so. However, there are limited linkages between such zones and the vast majority of small, informal SMEs which focus on the domestic market and remain small.  Export growth in Vietnam does not bring about as much value addition as we find in China (20 percent vs 33 percent in China from manufacturing value added) as the large firms also suffer from not being plugged into local clusters and value chains - they import most of their inputs.

The Chinese system of SME-oriented "Plug and Play" industrial zones is thus one of the most important and least well publicized factors behind China's extraordinary competitiveness in light manufacturing industry. These insights provide food for thought as we consider the role industrial parks could play in the future development of manufacturing industry in Sub- SaharanAfrica.