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After FTAs with Australia and South Korea take effect, Chinese firms seek to switch gears to compete globally

China's free trade agreements with South Korea and Australia, which took

effect in December, will likely encourage struggling domestic manufacturers to further upgrade their technology, and to return to previous levels of export growth.

It may be early days, but the FTAs will likely have profound economic implications for Chinese companies.

Pacts that will transform China Inc

 Pacts that will transform China Inc

Participants take part in a kimchi making festival in Seoul, South Korea. Provided to China Daily

The FTAs come at a critical time when many economies are taking decisive measures to compete with China. Countries are keen to enlarge their export volume through new technologies, modernization of their services sector, investment in Southeast Asia, and effective marketing strategies.

Shin Un-cheol, chairman of the South Korea-China Marketing Association, says despite the price advantage being a core element in bilateral trade, it does not automatically mean cheaper Chinese products such as pickled vegetables and garlic products, say, will benefit from the FTA.

"On the contrary, China's packaged food industry will face challenges," he says. "Korean pickled vegetables and chicken soup may gain because of the FTA."

According to the China-South Korea FTA, China will remove import tariffs on 91 percent of South Korean products over the next 20 years, while Seoul will eliminate tariffs on 92 percent of Chinese goods.

The South Korean Ministry of Strategy and Finance says the countries' annual trade volume is expected to reach $300 billion this year, thanks largely to the FTA.

The China-Australia FTA will see Chinese import tariffs on 95 percent of Australian exports lifted, while obstacles will be removed to allow more Chinese businesses to invest Down Under. Visas will be also relaxed for Chinese visitors.

Shin says that, compared with South Korean businesses related to travel, medical services, retirement life, films, television and entertainment, China is relatively weak and will face serious challenges.

"If these industries in China don't raise their level of service and quality, consumers will feel they are losing out," he says. "Already, the China-South Korea FTA has attracted the attention of Chinese film and television people. Investment of Chinese enterprises in South Korea will see explosive growth."

Dereck Ji, senior partner of Roland Berger Strategy Consultants, says Chinese manufacturers no longer can rely on low-cost materials and cheap labor to compete with foreign rivals. "An open market doesn't mean lower prices and low value-added products, but brands, technologies and strategic market approaches for Chinese companies. They need to put their business growth on a firmer footing."

He says the FTAs can persuade large Chinese companies to upgrade their operations. Small and medium-sized companies could also benefit.

Experts say China's fast-growing 4G telecom networks and the Made in China 2025 strategy will lead to improvements in productivity and resource efficiency. Their potential benefits are even greater if they are extended to all stages of the value chain - suppliers, manufacturers and customers, as well as global markets.

Between 2010 and 2050, China's workforce as a share of the population is forecast to shrink from 72 percent to 61 percent. So inter-connected industrial operations will require a different kind of workforce and skill-sets in manufacturing. Demand for engineering and IT skills will likely increase, according to an October research paper from the Chinese Academy of Social Sciences' Institute of Industrial Economics in Beijing.

Zhi Luxun, deputy director-general of the department of foreign trade at the Ministry of Commerce, says market competition will put pressure on less-qualified employees in Chinese enterprises, and Chinese units of South Korean and Australian companies may have to find new opportunities in other sectors such as services and agriculture.

"These shifts will lead to new business models, which will partly substitute old ones. In this context, the two FTAs will bring about a profound transformation in the country, and present a major challenge," Zhi says. "Higher productivity will allow higher wages and may help alleviate labor shortages."

Rather than wait for the market call to get ready for battle, large-scale Chinese manufacturers such as CIMC Raffles Offshore Ltd in Yantai, Shandong province, have already taken the plunge by exporting more offshore oil rigs and engineering vessels to compete with South Korean shipbuilders.

CIMC Raffles completed development of a $550 million deepwater semisubmersible drilling rig named North Dragon at its production base last month.

The rig was built by CIMC Raffles for Norway's North Sea Rigs Holding, one of the largest offshore oil producers in Europe. It is the first China-made semisubmersible drilling rig capable of operating in the Arctic area with temperatures of -20 C.

The platform will be able to operate in seawater depths of up to 1,200 meters and drill to a depth of 8,000 meters. Capable of withstanding sea storms, it can work in the North Sea and Barents Sea.

Yu Ya, president of CIMC Raffles, says South Korea is capable of producing icebreakers, oil rigs and other specialized vessels, and China's prowess will not immediately impact South Korean shipbuilders. Yet Chinese companies must diversify to broaden their manufacturing expertise and ensure their global market share is not taken by South Korean companies, he says.

"Major Chinese shipyards and heavy industry manufacturers today are keen to acquire European and American maritime design and research firms in different sizes, because this is a big part of their tactics for gaining high-end technologies to produce core components and compete with rivals in both home and overseas markets," Yu says.

Shipyards in China received orders for new vessels with a collective capacity of 23.58 million dead weight metric tons between January and November, accounting for 28.7 percent of the global market share. South Korea's shipbuilding industry, a powerful rival of China's, held 38.8 percent of the global market share during the same period.

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(China Daily European Weekly 01/22/2016 page27)

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