Technology and High Value Added Exports From China

Hong Kong-listed China Railway Group announced over the weekend that its parent company, China Railway Engineering Corporation Group, has entered into a $7.5 billion contract with Venezuela’s National Railway Agency to build a 471-kilometer line in the Latin American country. The order represents the largest contract signed by a Chinese company in Venezuela outside the oil industry, and involves a railway link between the Venezuelan cities of Tinaco and Anaco. China Railway Group will act as the contractor under the agreement.

Venezuela will hold a 60 percent stake in the joint project, while China Railway will hold the remaining 40 percent. China Development Bank will provide much of the financing from China. The project is expected to create 7,500 jobs and to be completed in 2011, said Diosdado Cabello, Venezuela’s infrastructure minister. With help from China Railway, Venezuela will build a plant to produce train cars and track.

When I was in Kenya and Tanzania earlier this year, I commented that the most visible link to China in both countries was in infrastructure development, where it seems that Chinese construction companies are building all of their new roads and major buildings. During our trip, we saw countless local work crews, supervised by Chinese foremen and using Chinese-made equipment, constructing roads and airports. Leveraging the country’s experience in building out its own railway system, it appears that China is now following suit in railway infrastructure development.

China Railway’s announcement illustrates two key points. First, it shows how China is transitioning from being an exporter of low value-added, labor-intensive products to one which exports higher value-added products, technology, know-how, services—and even capital. Secondly, it underscores the vast market that the other emerging countries of the world represent for China.

Much has been written about China losing its global competitiveness because wages are on the rise and China’s currency has already appreciated by approximately 20 percent against the dollar over the last two years. While it’s true that these two factors may make exports of certain labor intensive products less competitive globally than they once were, their net effect is to drive China’s manufacturers and companies up the value chain to export higher value-added products where labor costs are far less of a factor. Along with the technology and know-how that China will export through the engineering and design services it is providing to Venezuela under the new contract, China’s construction equipment and railway component manufacturers will find new customers in Latin America.

Of the approximately 6.7 billion people who live in the world today, only 1.0 billion live in the most developed countries where consumption is highest and which to date have represented the largest market for China’s exports. China Railway’s contract with Venezuela, however, is a good example of how growth and development in emerging markets are creating significant opportunities for China in a potentially much larger market — the less developed countries of the world where the rest of the 5.7 billion people (including the 1.3 billion in China) live.

In Venezuela and other countries in Latin America, in the former Soviet Bloc countries, in Southeast Asia, the Middle East and Africa, cost perspectives and operating conditions are closer to what they are in China than they are in countries like the United States. China may ship fewer toys, clothes and sneakers to the Americans and the Europeans in the years ahead, but it will be exporting technology, cars, trucks and trains to everyone else.

3 Responses to “Technology and High Value Added Exports From China”

  1. Hi again Jack,

    Something which came to mind immediately after reading this post was whether or not this would result in a two-tiered international branding campaign for Chinese companies marketing to the 5.7 billion?

    Given how much has been written lately about cash-rich Chinese companies going abroad to market their merchandise, and how the entire practice of branding is generally not well-known to them, how does this affect the approach to branding for companies like Huawei (http://www.newsweek.com/id/207381)? Not to mention the fact that Huawei is still learning how to market B2C!

    Any thoughts on that?

    –ADM

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