Industrial Automation 16th January 2019

China’s Manufacturing Slowdown – Are There Synergies With 2009?

Maya Xiao
Maya Xiao
Senior Analyst - China

Maya has an interdisciplinary technical background in vehicle electrification, system automation and robotics. Based in China, she is the lead analyst for Interact Analysis’ Li-ion battery and forklift research, also covering markets for industrial and collaborative robots.

Interact Analysis predicts China’s manufacturing industry output growth in 2019 will be just 1.9%, the lowest since 2008.
China’s GDP grew just 6.5% in Q3 2018, the lowest increase since Q1 2009.
Unlike China’s economic downturn in 2009, which was mainly affected by external factors brought on by the global financial crisis, this round of economic slowdown is caused by a mixture of external headwinds (notably US tariffs) and internal factors – specifically a broad restructuring of industry and a drop in domestic demand and consumption in China.
In 2019, besides alleviating the impact and burden of small and medium-sized private enterprises through various policies, the Chinese government will strongly support the development of core technology enterprises and high-end manufacturing industries, and new opportunities will be created via continued industrial restructuring.

2019 – Lowest Growth Rate Forecast for China Manufacturing Industry Output Since 2008

In Q3 2018, the year-on-year growth rate of GDP (6.5%) and manufacturing industry output (6.0%) both hit a new low in recent times. We predict that manufacturing industry output growth will deteriorate significantly in 2019 with a 1.9% growth rate forecast for this year – the lowest rate since 2008.

The downturn of China’s economy in 2009 was mainly affected by the US financial crisis and the subsequent global recession. However, during that time period, the Chinese government launched a “CNY Four Trillion Stimulus Plan” with a large portion of the investment fueled into infrastructure and real estate, which led to a rebound in Chinese manufacturing for the following two years.

The Chinese government has issued a series of industrial policies to try to stimulus the market again, but the potential impact of them seems to be limited in comparison to those implemented in 2009.

What exactly are the challenges facing China’s manufacturing industry now?

US-Sino Trade War

In 2018, the impact of the US-Sino trade war on China’s economy was not significant. In fact, cumulative exports to the US increased by 12.8% from January to November (possibly due to a rush of exports to beat the tariff introductions). The year-round trade surplus with the US reached an all-time high. The trade war and tariffs implemented by the US are likely to have a much bigger impact on Chinese manufacturing and exports – even if the tariffs are subsequently revised or revoked altogether. The increase in exports (and associated manufacturing of goods) in 2018 to beat the tariffs, will likely come at the expense of growth in 2019. The challenges of increased import prices as a result of the tariffs will be further exacerbated by the higher inventory levels at customers caused by the extra shipments in 2018.

Overall the uncertainties caused by the tariffs and underlying political tensions have caused nervousness within the Chinese manufacturing base and the uncertainty could cause more damage than the actual impact of the tariffs themselves.

Declining Domestic Demand

Both consumer spending and also investments from the Government and enterprises have slowed sharply in 2018. Due to the pressure from a weakening global economy, the Chinese Government’s fiscal policies have been focusing more on tax reduction and infrastructure investment. This has resulted in a squeeze in the Government’s general commodity consumption.

For many enterprises they have faced falling profits and financing difficulties which has led to cost reduction and less commodity consumption as well as a reduction in investment.

Consumer spending growth also slowed in China in late 2018. This is possibly due to consumers becoming more cautious about their discretionary spending due to worries about the trade war’s impact on the overall economic outlook; but also due to the ever increasing costs in housing, food, energy that has reduced disposable income.

As manufacturing investment and exports continued to grow in 2018, the slowdown of China’s economy is mainly due to an internal adjustment of its industrial sector. A fall in private investment, coupled with the market turmoil caused by financial deleveraging resulted in a lack of confidence in the manufacturing industry. Since 2018, China’s manufacturing PMI has continued to decline, even falling below the magical 50.0 reference line in December (49.4%).

The above table is from Interact Analysis’s China Manufacturing Output Tracker (Q4 2018). In this service, we also collect and analyse detailed data on China’s top 10 largest industries, including analysis identifying industries that experienced setbacks and bright spots respectively.

Difficulties Within its Core Industry

In the first 11 months of 2018, the three industries with the highest profit growth in China’s manufacturing industry were resource or raw material related. Oil, coal and other fuel processing industries’ profits grew by 15.7%; chemical raw materials and chemical products increased by 19.1%; and non-metallic mineral products by 44.2%.

By contrast, the core industries that better reflect where upgrades and technological innovation are most apparent performed poorly. Profits in the automotive industry fell by 6%, while those in the electronics industry fell by 0.4%.

Especially in Q3 2018, the fixed assets investment in automobile production continued to show negative growth. According to recent data from the China Association of Automobile Manufacturers (CAAM), a negative annual growth rate in automobile sales for the first time in Chinese history has become a foregone conclusion, which has dragged down growth in total retail sales of consumer goods and manufacturing sales output by industry.

Industry Highlights and a Possible Economic Turning Point?

Despite the overall downturn in China’s manufacturing industry in 2018, some emerging industries are still developing at a high speed:

  1. Despite the overall decline in the automotive industry, the new energy vehicle sector has maintained good momentum. In the first three quarters, the production and sales volume of new energy vehicles reached 735,000 and 721,000 units respectively, with a year-on-year increase of 73% and 81%. As a result, the profits of local automobile brands and leading power battery companies are positive.
  2. The computer, telecommunications and other electronic equipment manufacturing sector grew by 13.4% in January-November 2018. Growth remained high (12.3%) even as late as November. It can be said that it has become a pillar supporting the growth of China’s manufacturing industry.
  3. The scale of China’s industrial IoT market exceeded CNY 30 billion in 2018, and annual growth is expected to reach 20% over the next 5 years. Semiconductor and electronic components, especially sensors and radio frequency identification (RFID) chips, all have huge market potential.

Overall, China’s internal economic restructuring and industrial upgrading are systematic reforms, including environmental standards, industrial policies, production capacity, taxation, social security and other aspects.

The small and medium-sized private enterprises, whose social security payment is not standardized, and technical reserves are inadequate have been most affected. Less so for leading enterprises focusing on core technology, since both central and local governments have given preferential policy support to them. This is also one of the reasons why the market concentration of China’s high-end manufacturing industry is getting higher and higher, notwithstanding the effects of scale.

China’s manufacturing industry will enter a new period of steady development after digesting the low-end capacity left over from the extensive development of China’s manufacturing industry in the previous ten years and entering a benign competition stage after the market has finished the survival of the fittest. This is also, possibly, a turning point for China’s economy to recover.


Related Insights:

“Manufacturing Industry Output Tracker”, a report to offer the most complete and unified analysis of the manufacturing industry globally. Click here 

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