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Should we be afraid of China’s ‘value chain’?

Employees work in a textile factory in Suzhou, China.
China Daily | Reuters
Employees work in a textile factory in Suzhou, China.

The devaluation of the yuan may have a tougher impact on global companies than previously imagined, as China's drive to produce and consume higher-quality goods intensifies.

The shockwaves of the People's Bank of China's devaluation of its currency are still resonating around the world's markets, but in the medium to long-term, it's manufacturers who may hurt the most.


Western companies from Apple to Burberry will face a tough time finding out whether they can rely on their cachet in China even when their goods becoming more expensive.

China's wealth has grown by leaps and bounds since the gradual opening up of its economy began in the 1980s. Its gross domestic product per capita in 2014 was $12,608.87, when adjusted for purchasing power, more than double what it had been just a decade before.

The Chinese leadership's current five-year economic plan (2011 to 2015) is specifically aimed at moving the economy's fast-paced growth away from the low-cost manufacturing it had become famous for, towards consumption. Tactics included greater investment in research and development, higher-end manufacturing, and services targeted at the country's burgeoning middle class.

In May, the Made in China 2025 plan has been billed by Premier Li Keqiang as an attempt to "redouble our efforts to upgrade China from a manufacturer of quantity to one of quality."

He pledged in May to "seek innovation-driven development, apply smart technology, strengthen foundations, pursue green development" – all of which is aimed at avoiding the "middle income trap", where a country gets stuck at a certain level of economic development.

Worryingly for those countries which have done well out of exporting to China in recent years, the plan includes sourcing 70 percent of key components within China's borders by 2025.

China has so far achieved what analysts at Credit Suisse called in a research note published this week a "dramatic ascent of the value add curve" citing as an example that China has "more than doubled its share of the domestic robotics market." So while you might once have been shocked to see designer clothing with a "Made in China" label, you can now spot them everywhere from Diane von Furstenberg to Prada.

However, as they have climbed this curve, Chinese companies seem to have maintained similar margins – whereas in the West, margins typically expand as you move up the value chain. To put it bluntly, Chinese manufacturers seem to be able to produce goods relatively cheaply even when their goods are more expensive.

"As we see increasing value add from China, it becomes more difficult for Western companies to play the "quality" card," the Credit Suisse analysts wrote.