In 1814, the year before the Battle of Waterloo, Johann Georg May, a German civil servant and factory inspector described a city he visited as having "hundreds of factories … which tower up to five and six storeys in height. Huge chimneys at the side of these buildings belch forth black coal vapors, and this tells us that powerful steam engines are used. The clouds of vapor can be viewed afar. The houses are blackened by it". This city was Manchester, the world's first industrial city.
Between 1773 and 1801, the population of the city tripled, growing from 23,000 to 70,000. By 1799, it boasted 33 textile factories, and by 1816, this number had increased to 86. Half a century later, Manchester's population had reached 300,000, and the vast majority of its 172 factories had already been built. The city's cotton industry held a dominant position in the country, and when textiles were sold to the other side of the world, they were simply regarded by locals as "Manchester goods".
The converging rivers provided Manchester with water power and transportation links. A network of canals, docks, and warehouses served as infrastructure, offering significant advantages during the first phase of the Industrial Revolution in Manchester. Subsequently, the development of steam power and railways ensured the needs of the second phase. As early as 1789, the city's first steam-powered factory was built and went into production. By 1830, a railway connecting the city to Liverpool was operational. With the completion of the infrastructure boom, industrial manufacturing began to change, with higher output, greater efficiency, and, of course, higher prices and costs. Ultimately, the rise in prices and costs attracted, concentrated, and formed larger amounts of capital. Thus, the focus shifted from production development to capital development. The economy began to virtualize, the appeal of industrial goods declined, and industrial manufacturing began to wither.
This was how early manufacturing looked like.
Modern financial capitalism in our days is quite distinct from the industrial capitalism described by 19th-century classical political economists. One of the historical tasks of industrial capitalism was to liberate the economy from the hereditary landowning class and predatory usurious finance. Today, however, a new rentier class, hidden behind banks, insurance, and real estate, has raised the banner of "neoliberalism" to re-establish its dominance. This trend has led to the de-industrialization of the United States and is at the root of the rise of Trumpism. The key issue lies in a renewed understanding of the difference between industrial capitalism and modern financial capitalism. While financial capitalism enjoys the privileges of economic rents, it also drags the real economy into a debt-deflation trap. This process of financialization and virtualization not only threatens the U.S. and the West, but also presents a global risk.
Therefore, redefining industrial capital and applying it on financial capitalism will be a crucial step for the success of Chinese companies in their global expansion.
Mr. Xu Shanda of China's SEEC Research Institute believes that the production relationship formed by industrial capital and labor has undergone new changes by the 20th century. In the 20th century, financial capital began to dominate, with the U.S. dollar as its representative. At this stage, financial capital had replaced industrial capital and became the dominant force in world economic development, with industrial capital now operating under the dominance of financial capital. Mr. Xu also believes that the emergence of semiconductor technology has brought about new developments. Large companies in the U.S. have shifted from industrial companies to financial companies, and now they are transiting from financial companies to information companies, hence it has been said that "information technology has entered a globally dominant position".
I believe Mr. Xu has addressed part of the issue, but the situation in China is somewhat different. Industrial manufacturing in China has always been about those who work hard yet are dissatisfied with the current situation, but all too helpless to change. Both the business owners and the workers belonged to this category; it is only the type of work they do is different. Therefore, China has never, or perhaps has not yet, entered the stage of industrial capital.
Currently, Chinese companies are facing the major challenge of expanding overseas. These companies are standing on the edge of a cliff, with even one foot already hanging off the edge. If they do not go global, they will fall into the abyss. In such a situation, transitioning from industrial manufacturing to industrial capital, out of sheer necessity, is no longer a theoretical issue but a major real-world problem and a critical reform issue related to integrating individual strengths into a collective force.
Looking at the experience of Japanese companies, the geopolitical pressures they face are no less than those faced by China, and in fact, Japan faced them earlier. However, Japanese companies relied on the "global production—global sales" model to increase their market share worldwide. The ratio of overseas production in Japanese manufacturing rose from about 6% in 1992 to 25.8% in 2021, with the overseas production ratio in various industries steadily increasing year by year. For example, in typical industries like transportation, the overseas production ratio has approached 50%. In 2023, Japanese automobile brands led the world with sales of 23.59 million units, while only 4.77 million units were sold domestically. The rest were produced in overseas factories and then exported globally. Geopolitical pressures may continue to exist, but "Made in Japan" continues to grow stronger and more dominant.
While many Asian workers have been involved in industrial labor, 138 years after the abolition of slavery in the U.S., the nature of industrial work has become much more complex, as the industrial workforce's competition is now extremely intense. There is also intense competition to qualify for such roles. If one is unable to meet these challenges, they may find themselves marginalized.
From the experience of Japanese companies expanding internationally, Japan's investment in Europe and the U.S. has been steadily increasing, while its investment in Asia has leveled off. There are reasons for this. The primary purpose of Japan's investment expansion in Europe and the U.S. is to avoid trade barriers and expand overseas markets. Japan's investment in Asia, on the other hand, has focused on utilizing cost advantages. However, with the rise in labor costs in China, Japanese companies have gradually shifted their direct investments in Asia from China to the four ASEAN countries. From 2016 to 2022, Japan's investment in Europe accounted for 31.8%, while it was 29.1% in the United States. As for Asia, it was 23.7%, showing a decline compared to the past.
In terms of the structure of overseas expansion companies, Japan's experience also provides valuable insights into the broader macroeconomic landscape. The country's manufacturing foreign investments are primarily concentrated in capital- and technology-intensive industries, such as transportation, food, chemicals and pharmaceuticals, ferrous and non-ferrous metals, general machinery, electrical machinery and equipment, among others. As of 2022, the top five sectors in terms of overseas income for Japan were semiconductors, automobiles, technology hardware and storage, aerospace, and electronic equipment. In the first half of 2023, chemicals/pharmaceuticals, electrical equipment, and transportation equipment accounted for 20%, 18%, and 9% of manufacturing foreign investments, respectively.
From the overseas expansion trends of Japanese companies, between 2008 and 2022, the five industries with the fastest growth in overseas revenue share were home goods, food and beverages, air freight and logistics, pharmaceuticals, and semiconductors, primarily concentrated in the consumer and technology sectors. This is because the manufacturing and production of consumer goods are closely linked to the global market, making their performance particularly significant and prominent. In fact, the wholesale and retail industry's overseas expansion has also been accelerating. From 2012 to 2019, the proportion of foreign investment by the wholesale and retail industry in total overseas service sector investment increased from 25% to 45%.
Another important question that must be addressed is: as Chinese companies go overseas, what can China itself retain?
From the experience of Japanese companies going global, the main strategy is to retain industries that carry core competitive capabilities domestically and typically keep industries with core competencies in their home country, focusing on cultivating and developing these head factories. This is central to their overseas expansion. These domestic head factories produce integrated products while overseas factories handle the assembly-type products. When adjusting their industrial layout, Japanese manufacturing companies keep integrated products, which require a technological edge, in domestic production, while moving assembly-type products, which lack technological advantages, to developing countries for modular production.
The comparative disadvantage of Japan's manufacturing industry is its high labor costs, while its advantage lies in its strong organizational and integration capabilities. This type of manufacturing is not suitable for producing modular assembly-type products but is more suited for producing highly integrated products. Through controlling such products, Japanese companies maintain their competitive edge in high-end manufacturing technology. Even under the impact of global manufacturing's modular production, Japanese companies that remain in the domestic market can still leverage their advantages in integration and precision processing through selective decisions. In other words, assembly-type products that lack technological advantages are outsourced to overseas factories or contractors, with the provision of 'interface' technology patents to assist in production. However, integrated products are kept in the domestic market for modular packaging production with a technology blockade.
The head factory experience in Japan is essentially about creating a group of other head factories that are capable of meeting the engineering and industrialization demands of significant technological achievements. These factories serve as the main entities for innovation in advanced manufacturing processes, forming an industrial chain centered around them. This includes a group of companies located domestically, responsible for the production of specialized, refined, unique, and new products. Meanwhile, the groups of companies located in developed countries, primarily focus on innovation and technology absorption or research and development centers, absorb high technologies, and take on the crucial responsibility of maintaining core competitiveness and ensuring the continued development of the business. Therefore, Japanese companies' global strategy is well-planned, systematic, strategic, and theoretical, much like a corporate war strategy, rather than a chaotic, haphazard rush to expand abroad.
Chinese companies expanding overseas effectively become part of industrial capital, regardless of their preferences. From the moment they establish operations in the host country, they will be subject to its regulatory measures. However, many such companies, as well as the local governments encouraging these investments, have yet to grasp the implications of this transition fully. They often perceive the expansion simply as production relocation, rather than recognizing it as a form of industrial capital. This could pose significant challenges for both the companies and the broader strategy of international expansion.
The key recommendation for Chinese companies expanding overseas is consolidating individual strengths to form a collective capability. Over a decade ago, ANBOUND suggested that China develop a "conglomerate economy". At that time, this was not widely understood, yet today the situation has become clear. The concept emphasizes that small and medium-sized enterprises (SMEs) must unite to strengthen their capabilities. In China's industrial landscape, where SMEs are prevalent, survival and growth depend on both individual effort and collective strength. Therefore, the key to Chinese companies' overseas expansion lies in consolidating their strengths and effectively managing this consolidation. By addressing this challenge, "Made in China" can transition from industrial manufacturing to industrial capital, thereby becoming a formidable global force.
The ability of the Chinese to truly assert themselves on the global stage is fundamentally shaped by the strategic visions that drive the realization of this objective.
