A recent visit to China gave one an impression that the manufacturing giant is changing lanes and is now set to give a run for money to all developing and developed economies in the services sector as well.

The focus on innovation and next generation information technology in their latest Plan is clearly aimed at building China’s competitive strengths in services.

The increased use of technology by its youth (corroborated by growing sales of smart-phones and tablet computers) and the priority being accorded for acquisition of English language skills (as witnessed by the mushrooming of English schools and institutions offering classes and crash courses in the language) clearly heralds a new era in China.

English is now being taught from Grade 3 in every elementary school in China, except in very remote and economically backward places.

The requirement of linking one’s promotion in even his or her area of specialisation to passing a minimum English proficiency test is becoming increasingly widespread.

Moreover, close to four lakh Chinese students went abroad for higher education in 2012, a growth of 17.65 per cent over the previous year.

A third or more of them, however, are returning back to China to avail of economic and career development opportunities largely in the services sector.

In fact, you can go to any top business school across the globe and find a large chunk of Chinese students there — most attentive, focused and raring to go.

The question that naturally comes to anyone’s mind is why China is moving to services where it has hitherto not enjoyed any edge, unlike in manufacturing — where it is the unquestioned ‘factory of the world’?

Strategic thinking

Here, it is useful to understand that in China, things don’t happen just by co-incidence.

Rather, they are invariably offshoots of some well-thought and conceptualised long-term strategies. In this case, it seems China is seeing the writing on the wall.

Rising wages, higher social security costs being by entrepreneurs, industry having to relocate to hinterlands from nearer to the ports, and a declining labour force alongside an ageing population are seen as blunting the advantages that China has in manufacturing. This may take time, but the direction is more or less there.

Also, the educated, English-speaking and technology-consuming youth may not be as keen to take up blue-collar jobs as their predecessor generation. Increasing urbanisation will further compound the problem.

The urban population has already risen two-and-half times, from 20 per cent in 1978 to almost half in 2012, and is expected to reach 70 per cent by 2030.

By then, the Chinese population would have shaken off its predominantly rural past, as it was throughout most of its long history.

The number of cities in China has, likewise. multiplied: Those with a population of half a million or more has risen from 51 in 1980 to 236 in 2010, and is expected to reach 343 in 2025.

Amid these profound transformations, it is quite natural to find workers across all segments of manufacturing industries in China unequivocally aspiring to see their children engage in white-collar jobs that they couldn’t themselves have.

These are the kind of jobs — unlike the monotonous robot-like environment of factory assembly lines — which only the services sector can provide.

Non-manufacturing future

It is quite possible that even within manufacturing, China will increasingly focus on innovation-based industries to hold on to its share. But how successfully a country, which has attained its present manufacturing supremacy position largely though cost competitiveness derived from economies of scale, can make such a transition is something many are questioning.

Moreover, the countries that are really driving innovation may be most reluctant to partner with China, given its past unimpressive track record in enforcing patents and copyrights protection. Simultaneously, the Chinese manufacturers themselves are increasingly looking at setting up more and more factories in Vietnam, Cambodia, Myanmar and other countries, especially in labour-intensive industries such as textiles where China’s traditional competitiveness has been eroded by rising wage costs at home.

All this will curtail traditional employment opportunities in China. The resultant gap will have to be filled by the services sector. China’s focus is likely to be mainly in telecommunication, IT, financial services, insurance, consultancy and tourism, apart from construction where one would its companies carving out an increasing share of the global market.

It is not just the developed world, but even India that needs to watch the above transition closely. We, for one, certainly have to ensure that growing clout of China in services does not eat our share in global services trade. The focus on services has, after all, served as a good strategy for meeting the aspirations of our own urban and semi-urban youth.

This is also a sector, where we have also shown our capabilities derived from our traditional English-knowing and software programming skills, among others.

(The author is President, Federation of Indian Export Organisations.)

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