New materials key to manufacturing revival

Since the normal net profit margin of Chinese manufacturers hovers around five percent or less, a steep cut in material costs could double a factory's profits.

The lackluster performance of many manufacturing businesses in China is a result not so much of a decline in external demand as of the increases in labor costs, land prices and tax rates.

Nonetheless, many observers believe that the consistently high price of raw materials has also added to the misery of many Chinese manufacturers.

One of them, a scholar-turned-entrepreneur named Yang Guisheng, spoke about the topic at a forum held by Shanghai National Accounting Institute over the weekend. As the first graduate with a doctorate in engineering materials from a Chinese university, Yang explained that materials account for roughly 80 percent of the overall production costs of manufacturing businesses.

Efforts to develop indigenous materials to replace those imported from abroad have only been partially successful.

Continued efforts in this regard are significant because a reduction of material costs by 10 percent will lead to a, say, eight percent increase in gross profits, according to Yang. Since the normal net profit margin of Chinese manufacturers hovers around five percent or less, a steep cut in material costs could double a factory’s profits.

According to Yang, one of the premises of China’s strategy to enhance its manufacturing competitiveness is a breakthrough in homegrown material science. China was an early starter in the study of material science. But, despite the huge importance the country’s top leadership has attached to the subject, major challenges remain to hinder growth in the sector.

Lack of differentiated growth

As Yang sees it, the most obvious obstacle is the lack of differentiated growth, meaning a concentration of research efforts and capital in a single field, causing it to become overheated.

A typical example is graphene, once a darling of the tech scene. The material is widely used in building electric cars.

An influx of investment led to a glut of similar graphene products. Coupled with the reduction of subsidies for car makers, the profit margins of the graphene business have considerably shrunk.

Yang cautioned against waging price wars on the basis of homogenous industrial development.

To encourage greater improvements to come along, he said a stronger mechanism to protect intellectual property has to be put in place.

Cracking down on counterfeits

In response to a request from a client that makes bamboo steamers, his company developed in 2013 a food-grade paper tissue that could be used as a “mattress” to separate steamed buns from the bamboo “beds” underneath.

Compared to traditional disposable paper, which sticks to the buns, Yang’s invention is clean, safe and economical — it can be used hundreds of times.

Plans to scale-up production were quickly scuppered when he found that the market had been flooded with knockoffs priced a tenth of his products.

The government has to be a lot tougher in cracking down on counterfeits, so as to enshrine the concept that intellectual property is sacred, said Yang.

He went on to argue that craftsmanship is sorely needed in a country on a fast lane to a tech era. A combination of craftsmanship and technological strength is a proven recipe for success.

One would only need to look east to our neighbor for evidence. During a tour of an undersea aquarium in Sanya, Hainan Province, Yang’s curiosity was piqued by the gigantic plexiglass archway through which tourists can peer at the marine life overhead.

Although the glass is over a dozen centimeters thick, it is seamlessly glued together using special adhesives and not a bubble can be seen.

Later Yang learned that the glass archways of many aquariums, including the one in Sanya, are supplied and installed by a Japanese company.

Its dedication to a specific segment of the industry has paid off. While ordinary plexiglass sells for as little as 2 yuan (30 US cents) a ton, the Japanese company charges over 100,000 yuan for a ton of its product.

The story indicated, in his opinion, that there are plenty of opportunities for Chinese companies specializing in new materials and mass speculation on graphene, or anything for that matter, is a bet on the wrong horse.

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