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Manufacturing, service industries deepen integration

QIAN XUEFENG and HU ZONGBIAO | 2020-12-24
(Chinese Social Sciences Today)

After-sales staff members of Yida Express Elevator Co., Ltd. conduct regular maintenance in Huzhou, east China's Zhejiang Province. The company has accelerated its transformation toward service-oriented manufacturing, providing optimal solutions for clients from sales, manufacturing and maintenance. Photo: PEOPLE’S DAILY ONLINE


As China enters a new era, in which it has vowed to expand the all-around opening-up of its economy and form a "dual circulation" development paradigm for the future, it also embraces the trend of service globalization and the integrated development of the manufacturing and service industries. The Chinese government has issued several documents on this topic, such as the "Implementation Opinions on Promoting the Deep Integration of Advanced Manufacturing Industry and Modern Service Industry" in 2015, to promote the in-depth development of advanced manufacturing and modern service industries.
 
In fact, the integrated development of the two industries is, to some extent, already happening. For example, in the field of e-commerce, some enterprises have successfully realized the seamless connection between design, production, and consumption. Similarly, in the consumer goods sector, many companies manage to meet diverse customer needs through customized services and production process reengineering. Therefore, the deep integration of the manufacturing and service industries is in line with China's efforts to promote high-quality economic development.
 
Riding the trend
At present, the global economy has entered the era of service economy, with the industrial structure’s servitization trend becoming increasingly evident.
 
According to data released by the World Bank, the value added of the service sector accounted for about 65% of the global GDP on average in 2019, with 70% in high-income countries and 55% in middle-income countries. To be specific, the percentage was 77%, 71% and 69% respectively in the United States, the United Kingdom, and Japan, and it also approached or surpassed 50% in BRICS countries.
 
In China's mainland, the value added of the service sector exceeded 50% of the GDP for the first time in 2015 and reached 53.9% in 2019, with Hong Kong and Macao hitting 88% and 94% respectively. In the future, the service industry’s value-added is expected to rise further in all countries. 
 
In addition to the increased share of service sector value added year by year, the proportion of employment in the service sector out of all employment is also steadily increasing. As early as 2014, the World Trade Report noted that services already accounted for two-thirds of the world's total economic value.
 
The socioeconomic environment facing global manufacturing is undergoing profound changes, and development's uncertainty is looming. Technology and knowledge have fundamentally reshaped the mode of economic growth, and the value creation of tangible products or intangible services will depend on the input of service factors. 
 
Against the backdrop of anti-globalization and global value chain restructuring, countries around the world have successively put forward strategies and measures to accelerate the deep integration of manufacturing and service industries, such as the US Industrial Internet, Germany Industry 4.0, and Made in China 2025. These initiatives demonstrate that the integrated development of manufacturing and service industries is the current and future trend.
 
International competition
The value chain is comprised of manufacturing and service activities. At present, the value chain's pivot is shifting from manufacturing to service activities, which brings forth new advantages in international industrial competition through various mechanisms, such as productivity effects and cost-saving effects.
 
Theoretically, the servitization of the manufacturing industry can improve industrial productivity by optimizing enterprises' internal resource allocation, increasing the possibility of service outsourcing and giving play to service trade's technology spillover. However, if a country's service industry is burdened by costs, the servitization of the manufacturing industry may lead to the decline or even stagnation of industrial productivity. Due to such differences in the impact mechanism, academia has yet to reach conclusions regarding the potential impact of manufacturing servitization on industrial productivity.
 
In the end, whether or not manufacturing servitization can improve industrial productivity depends on the maturity of manufacturing servitization. If the current level of servitization is relatively low, enterprises may be unable to make scientific plans due to insufficient knowledge and talent reserves. Once a blind servitization decision is made, enterprises may over-emphasize the input of service factors and cut the R&D input of core products, taking a toll on enterprises' innovation capacity and productivity.
 
In contrast, when the servitization of the manufacturing industry reaches a certain level, horizontal and vertical innovation of enterprises will accelerate. The two types of innovation will work together to improve productivity and create new advantages in the manufacturing industry's international competition. Horizontal innovation is mainly reflected in the ways enterprises meet consumers diverse needs through customized design, whereas vertical innovation is connected to technological advancement, which will last until the marginal revenue equals the marginal cost. 
 
The manufacturing industry's servitization requires a mass investment of human capital, which will accelerate the incorporation of technology from service factors. Moreover, increased investment in advanced service factors, such as R&D, will strengthen the technology spillover effect, thus improving industrial productivity and creating new advantages in international competition.
 
At the same time, with the deepening of enterprises' understanding of their servitization process and the perfection of the producer service market, the servitization of the manufacturing industry upgrades the social division of labor and further optimizes the allocation of production factors, to achieve cost-saving effects through external and internal economies of scale.
 
Service-oriented manufacturing will inevitably bring about the evolution of the division of labor between manufacturing and service sectors. For example, manufacturing enterprises will shake off non-core business to other market service providers. Since market-oriented services are generally low cost, outsourcing can achieve cost savings.
 
Once the manufacturing enterprises divest from non-core businesses, they can apply the limited human, financial, and other resources to the operation of core businesses, which is a process of optimal reallocation of enterprise resources. In particular, if manufacturing servitization leads enterprises to concentrate their limited resources on high-tech research and development, the internal economies of scale and cost-saving effects will be more significant. Therefore, service-oriented manufacturing can gain new advantages in international competition through cost-saving effects.
 
Dual circulation
In the face of dampening global market demands and increasing uncertainties, China is striving to build a new pattern of dual circulation development that smooths domestic circulation and lets domestic and international circulations reinforce each other.
 
First, releasing consumption potential in the domestic market cannot be divorced from high-quality manufacturing servitization. As of now, a large service consumption market has begun to take shape. In 2019, China's per capita GDP exceeded $10,000 for the first time, laying a foundation for people's ability to pay for more services. Also, with the steady progress of consumption upgrades, there is still huge space for improvement in terms of service consumption, especially high-end service consumption. Both the input servitization and output servitization of the manufacturing industry will promote the formation of a dual circulation development pattern. 
 
Second, an all-around opening up of the Chinese economy cannot be separated from high-quality service trade development. In recent years, with the rapid development of digital technology, service trade's digitization process is speeding up, and the exchange of service products is on the rise. As digital technology gains power, the scale of the service trade in China—and even the world—will continue to mount, and the servitization of the manufacturing industry will undoubtedly become a new driving force for service trade's expansion, continuing to enhance China’s level of opening up.
 
The manufacturing industry's servitization increases the probability that service products will be imported from abroad, which can provide more service export opportunities for the global market. The 2019 international trade in services data from the Ministry of Commerce shows that China is the world's second largest service importer and the United States is China's largest source of service imports. 
 
In the meanwhile, the manufacturing industry's servitization also increases the probability that China will export service products to foreign countries. Since the early 1990s, China's trade in services has been running a deficit. With the steady development of the domestic service economy and the extensive application of digital technologies such as 5G, new international competitive advantages in some service sectors are gradually taking shape. In 2019, half of the service trade sector, including finance, computer and information services, and telecommunications had a surplus. Therefore, the servitization of the manufacturing industry can increase the trade probability for imports and exports, improve China's level of opening up to the outside world, and also accelerate the formation of a new dual circulation development pattern.
 
In the future, under the joint influence of the market's endogenous drive and the government's participation, China will innovate and explore the integration of the manufacturing and service industries, so as to promote the high-quality development of manufacturing, uplift China's position in the global value chain, optimize resource allocation, improve the supply quality and total factor productivity, shift the growth model while replacing old growth drivers with new ones at a faster pace, as well as reshape new competition advantages in international cooperation.
 
Qian Xuefeng is a professor from the School of Business Administration at Zhongnan University of Economics and Law; Hu Zongbiao is from the Institute for China (Hubei) Pilot Free Trade Zone.
 
Edited by YANG XUE