Made in China 2.0

FOREWORDReplacement of old industries has entered a crucial phase

China's export manufacturing industry: challenges and opportunities

INTRODUCTIONLearning from the leaders admist economic transformation

NOTE ON REPORTING EXECUTIVE SUMMARY

UPDATE ON CHINA'S EXPORT MANUFACTURERSA strong sector, starting to slow

Headwinds ahead

Challenges to capturing opportunities abroad

A buyer's market

MADE IN CHINA 2.0 READINESS INDEXMade in China 2.0 Priorities

Recognition of the Made in China 2.0 Priorities

Performance of the Made in China 2.0 Priorities

Made in China 2.0 Readiness Index

LESSONS FROM THE LEADERSMade in China 2.0 Leaders

Made in China 2.0 Leaders' business performance

Made in China 2.0 Leaders' growth strategies

• Global footprint

• Diversifying your B2B and B2C customer base

• Understanding the role of logistics

• Priorities for the future

• Selling finished goods vs. unfinished goods

• Identifying the impact of emerging trends

CONCLUSION

01

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04

05

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09

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14

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CONTENTS

Produced by：UPS / Caixin Media

发行单位 / 出品单位：UPS / 财新传媒

Research Support：Lightspeed GMI

调研支持机构：Lightspeed GMI

Produced by：UPS / Caixin Media

发行单位 / 出品单位：UPS / 财新传媒

Research Support：Lightspeed GMI

调研支持机构：Lightspeed GMI

Editor-in-Chief：Simon Webb

主编：Simon Webb

Editor：Ming Xu / Junyang Tang / Qinghui Wu

编辑：徐明 / 唐隽阳 / 吴庆辉

Workflow Editor：Jiajun Zhao / Muxiao Zou

流程编辑：赵佳君 / 邹牧晓

Creative Director：Lekai Shi

视觉总监：石乐凯

Senior Designer：Bin Zhou

资深设计师：周斌

For more information, kindly contact:

Faith Wang

UPS China, Brand Communication Manager

[email protected]

01 Foreword

The future of exporting in China Lessons from the leaders

Replacement of old industries has entered a crucial phase

China's GDP growth rate fell from 10.6% in 2010 to 6.9% in 2015, and continued to fall in the first half of 2016. What is the reason for the sustained softening of the Chinese economy in recent years? In general, opinions fall into one of two categories. The first opinion is that the downturn is cyclical. In other words, domestic and foreign economic fluctuations have caused a slowdown in economic growth. From 2000 to 2007, the average annual growth of Chinese exports was 22%. In 2015, exports fell to 1.8%. There is a very clear logical relationship between a drop in export growth and the economic downturn it causes. Thus, it is clear that the economic softening in China can be attributed to a certain degree to a slow global economic recovery following the 2008 financial crisis.

The second theory is that the economic softening is a trend; in other words, the speed of growth has fallen as the level of development has risen. The less developed a nation is, the more possible it is for that country to experience rapid growth; this is the so-called "advantage of backwardness". In 1978, per capita GDP in China was only US$200, at which point China had staggering advantages in low costs. By 2015, however, GDP per capita in China already exceeded US$8,000, bringing China close to technologically developed nations. At the same time, we passed the peak of our laboring-age population; the number of laboring-age citizens has been falling by 3 to 5 million annually. So the softening economic growth in China is — to a great degree — a trend that will be difficult to reverse.

Between the cyclical downturn and development trend, however, there is also an important structural challenge to be faced by China's economy: the replacement of old industries with new ones. In simple terms, the pillar industries that once supported China's economy have been losing vitality for a long time, and there is an urgent need for new industries to drive the next round of economic growth. Economic growth was formerly primarily dependent on exports and investments, with the rise of the "world's manufacturing center" in the background.

There were two major components of the economy then. The first was labor-intensive manufacturing concentrated in Southeastern coastal cities. The other was resource-intensive

Huang Yiping Professor & Vice-President of National School of Development, China Center for Economic Research, Peking University

heavy industry concentrated in the Northwest and Northeast, the primary product of which was investment goods1. It is becoming difficult, however, to maintain these two industries.

The only way to maintain growth is through innovation and industry upgrading. The reality is that the replacement of old industries is already happening. For one thing, the economic activities of some traditional industries are rapidly dropping off; it would not be an overstatement to call this a "hard landing". At the same time, some emerging industries are developing rapidly, including large machinery equipment, telecommunications, intelligent machines, electric cars, tourism, and the internet economy. The fundamental reason that the economy is facing sustained pressure in the form of falling growth is that new industries are not yet well established. The only way to achieve an economic turnaround is for companies to bring about industry upgrading and product replacement more rapidly.

In compiling this year's report, owners of companies we have surveyed were optimistic about economic prospects on the one hand, but on the other hand felt that the economy is still in a downward slump. Although some companies hope for improvements in demand for exports, most have realized that China's competitiveness in exports can no longer be sustained by low prices, but instead must be realized through increases in product quality and improvements to customer experience. Research indicates that leading companies are adopting strategies and logistics for developing foreign market growth. But the majority of export manufacturers have yet to take the first step towards industry upgrading. What can be done to convert the successful experiences of leading companies into practical guidelines for tens of thousands of other companies in China? This is precisely the question this year's 2016 Made in China 2.0 Report aims to tackle.

The only way to maintain growth is through innovation and industry upgrading.

1 Investment goods, differing from consumption goods, refer to goods directly sold to manufacturing enterprises for production

02 The future of exporting in China Lessons from the leaders

Foreword

China's export manufacturing industry: challenges and opportunities

In 2016, Caixin Media and UPS collaborated once again to produce the 2016 Made in China 2.0 Report. This year's report comes at a time as China's export manufacturing industry faces much uncertainty in the global market, and as the ripple effect of Brexit and other economic events of the summer are being felt across the world. This report takes a deep dive into the challenges currently faced by Chinese export manufacturers.

Faced with uncertainty, export manufacturers have two choices: adapt and seek breakthroughs or fall behind. This continuation of our 2014 report aims to guide the transformation and upgrading of the Chinese export manufacturing industry and respond to the realities currently faced by export manufacturers. It is also drawn from UPS's strong experience in working closely with China's export manufacturing sector over several decades.

An important discovery we made in this report is that lower prices may not be the best strategy for export manufacturers to become more competitive. Our research indicates that a lower price is the least compelling factor for buyers when considering new suppliers. This indicates that the market has transitioned from low-cost suppliers towards one where buyers expect higher quality products and added value through closer partnerships with suppliers.

In other words, the strategy upon which Chinese export manufacturers formerly depended for survival – low prices – is no longer effective in more mature markets, where consumers are becoming more discerning. This development is closely aligned to the entry of China's economy into the "New Normal". Leading export manufacturers who are able to respond to market changes and remain competitive are seeing better performance than those unable to adapt.

Considering present conditions, the four key pillars that were identified in the 2014 report to guide reform for China's export manufacturing sector remain relevant today. We discovered that Made in China 2.0 Leaders – companies that have taken UPS's Made in China 2.0 Priorities to heart – take a much broader perspective on the role of logistics in driving competitive advantage. These companies have a clearer understanding than other export manufacturers on the value that logistics can add

Huang Shan Associate Editor, Caixin Weekly / Member of Editorial Board, Caixin Media

to a range of business objectives, including cost reduction, sales growth and improving customer experience.

Made in China 2.0 Leaders are three times as likely to recognize that logistics can play a highly important role in reducing costs and growing sales as compared to other export manufacturers. They are also more than twice as likely to identify the highly important role it can play in enhancing customer experience. In other words, modern logistics plays an extremely prominent role in reducing cost, increasing sales, and improving customer experience.

Let's also take a look at two current hot topics in China: "One Belt, One Road" and "Connectivity" both of which convey the significance of modern logistics in helping China to achieve international productivity collaboration and economic transformation. For example, the China-Singapore (Chongqing) Demonstration Initiative on Strategic Connectivity is the third inter-governmental project that China and Singapore have undertaken in China's western region. The project, which focuses on modern connectivity and modern services, has identified transportation and logistics as two of its key priorities, demonstrating the importance of these two areas in China's new economy.

UPS, an international leader in logistics, has drawn from over 100 years of experience in helping Chinese export manufacturers grow their business, to provide valuable insights to this report. Caixin Media, one of China's foremost multimedia groups, has long followed trends in China's economic construction as well as the development of its export manufacturing industry. Caixin spoke to four leading academics and experts in Beijing, Tianjin, Shanghai and Shenzhen to discuss the growth challenges for export manufacturers in these cities, and sought their advice and recommendations for companies currently facing intense global competition. Together, we hope that this report serves as a valuable resource in helping Chinese export manufacturers prepare for stronger growth and greater competitiveness in the Made in China 2.0 era.

As China undergoes economic transformation, the differences between strong and weak companies are becoming clearer.

Learning from the leaders amidst economic transformationIn the era of Made in China 2.0, customer-led focus on innovation, adaptability and logistics remains key to success.Richard Loi President, UPS China

03 Introduction


When we conducted the first round of this research in 2014, it was already clear that the future survival and success of Chinese manufacturers would depend on their willingness and ability to make fundamental changes to the way they do business. Many of the themes identified in the initial research have now found voice in the idea of China's "New Normal" – a crucial rebalancing of China's economy which places innovation at the forefront of growth and moving Chinese manufacturing up the value chain.

The latest research shows that our observations were well founded with demand both at home and abroad in decline, the headwinds faced by China's manufacturers remain considerable. UPS's Made in China 2.0 initiative is geared now, as it was then, towards helping businesses face these conditions head on.

The necessity for change remains great. Our research clearly shows that great opportunities lie ahead for companies that have succeeded in implementing what we identify as key principles for future competitiveness.

This report identifies how these successful manufacturers achieved better performance than their peers by organizing themselves differently and deploying different strategies. What is notable from UPS's point of view is the expansive and sophisticated way leading export manufacturers view logistics compared with less successful companies.

In my introduction to our 2014 report, I wrote of UPS's ongoing commitment to China's export manufacturing sector and our support for individual export manufacturers eager to hone their global competitiveness. We continue to be deeply committed to this spirit of partnership, and remain dedicated to accompanying Chinese exporters at every step as they pursue further success around the world.

Note on reportingThis report is based on 1,000 interviews conducted in December 2015 with senior decision-makers from Chinese export manufacturing companies. It follows research conducted in July and August 2014 with another 1,000 senior decision-makers.

In order to qualify, respondents in both research phases were required to have senior decision-making responsibilities from manufacturing companies with at least 40% export value of their goods.

Respondents were drawn from an online panel maintained by Lightspeed GMI, a multinational research company.

Beyond analysis of the overall results for the Chinese export manufacturing sector, this report focuses on analysis across two key variables:

• Variation by the sector from whichthe export manufacturer was drawn.In particular, we look at variations in theresponses from manufacturers in the retailgoods sector, the industrial manufacturingand automotive and the high-tech sectors.

• Variation based on the location of themanufacturer. Specifically, we look atthree key manufacturing hubs across China:Shenzhen, Shanghai and the Beijing-Tianjincorridor, as well as their three surroundingareas.

These variations are displayed as indexed values showing how the result for each sector or location differed from the overall average (scored as 100). An indexed score of 125, for example, shows that the result for that sector or location was 25% higher than the average result, and a result of 80 shows that it was 20% below the average.

Location of export manufacturers

Size of export manufacturers

Seniority of respondents

34%

55%

19%

29% 15%

9%

40%

23%

36%

42%

Shanghai and surrounding areas

Small and medium enterprises-200 or fewer full-time employees

C-suite executives

Beijing-Tianjin orridor

Large enterprises-over 1,000 full-time employees

Mid-tier executives

Shenzhen and surrounding areas

Mid-market enterprises-201-1,000 full-time employees

Senior executives

Rest of China

04 Note on reporting


05 Executive summary


EXECUTIVE SUMMARY

This 2016 Made in China 2.0 Report provides a clear way forward for a manufacturing sector facing growing headwinds domestically and internationally. As the Chinese economy slows, excess manufacturing capacity has opened up in the

local economy. Under the government's "One Belt, One Road" initiative and other related policies, Chinese export manufacturers are being encouraged to look to new markets overseas to absorb this excess capacity. It is against this backdrop that we look at the current state of export manufacturing in China.

The latest data from the report shows that both China's export manufacturing sector in particular and the economy in general have experienced further setbacks since we first surveyed manufacturers in 2014. The export manufacturing sector continued to slow in the intervening period, with new orders and output both down year-on-year. While a majority of export manufacturers remains optimistic about the economy, the number who say it is worsening is on the rise.

Export manufacturers are increasingly finding themselves being squeezed by a combination of falling domestic demand and growing domestic competition. Meanwhile, despite these pressures, they report being less concerned about RMB appreciation, holding out hope of better export opportunities later in 2016.

Competition among export manufacturers not only remains fierce, but is also expected to intensify this year. Furthermore, manufacturers know that customer loyalty is low and that many would, given the right incentive, readily seek alternative suppliers. It is important to note that a lower price is the least important inducement to switch, suggesting that export manufacturers need to look to improving the quality of their offering to customers and focus less on simply reducing the cost of that offering.

In the face of these intensifying pressures, the four Made in China 2.0 Priorities outlined in UPS's Made in China 2.0 reform agenda are increasingly important in helping to develop healthier client relationships, authentic partnerships and, ultimately, better profits for China's export manufacturers.

If manufacturers are to survive and thrive in a tougher, more competitive export market, they must:

Strengthen Knowledge and Understanding by building a deeper and more nuanced understanding of customer business needs, markets and environment

Develop Responsiveness and Collaboration by elevating customer relationships to the level of true partnership, understanding that their success is your success

Deliver Tailored Logistics Solutions to enable competitive advantage and provide value to their customers

Build Capacity for Innovation by developing internal capabilities for change and corporate strategy

To assess the extent to which China's export manufacturers are prepared for a more competitive export environment, we created the Made in China 2.0 Readiness Index. The results of the 2015 Readiness Index reflect the degree of which export manufacturers recognize the importance of the four priorities and how they are responding to them. At 45.2, the Readiness Index shows a slight fall from 46.6 in 2014, driven by a small decrease in the number of companies that recognize the importance of these priorities.

The Index is scored from 0 to 100, where 0 is not at all ready for the future of export manufacturing and 100 is completely ready for the future of export manufacturing.

45.2

47.0

46.5

46.0

45.5

45.02014 2015

46.6




Export manufacturers based in the Beijing-Tianjin corridor performed better on the Readiness Index in 2015 than those in Shenzhen where performance decreased notably compared to 2014. The performance of Shanghai-based manufacturers remained unchanged. Interestingly, there was no significant difference in the Index performance of export manufacturers based on their industry sector.

Think like a leader for successWhile the overall results of the Readiness Index show there is still considerable room for improvement, much can be learned from focusing on companies that have taken the Made in China 2.0 Priorities to heart. We have given these companies the name Made in China 2.0 Leaders. These Made in China 2.0 Leaders are from all over China. From all industry sectors and represent companies of all sizes. They significantly outperform their peers in terms of profitability, productivity, market share and revenue. Made in China 2.0 Leaders represent the top 8% of export manufacturing companies, and score 90+ in the Readiness Index2. Studying these Leaders in depth, significant differences are apparent in both their business performance and the strategies they deploy.

Made in China 2.0 Leaders' business performance

When it comes to their performance over the last year and how they expect to perform in the year ahead, Made in China 2.0 Leaders enjoy significantly better business results and forecasted a more positive outcome than other export manufacturers in the following areas:

Their businesses are also significantly more likely to be on a growth trajectory. Being prepared for the future of export manufacturing has an immediate payoff today in terms of business results.

Made in China 2.0 Leaders' growth strategies

Global footprint The global footprint left by Made in China 2.0 Leaders provides further instructive contrast to manufacturers who are less prepared for the future. Leaders, for example, have a broader footprint overall with a significantly higher presence in Hong Kong, Thailand, Indonesia, France and the UK. They are also much more focused on key emerging markets for Chinese products in Eastern Europe and Oceania.

ChanneldiversificationMade in China 2.0 Leaders have developed a more diverse customer base than other export manufacturers and are more likely to use both B2B and B2C channels to reach customers — not just one or the other. They also understand the importance of capturing opportunity by constantly scanning their surroundings to understand the key driving factors underpinning emerging trends in their market.

ChallengeidentificationOne of the key factors that appears to support the success of Made in China 2.0 Leaders is their ability to clearly identify and overcome the issues affecting their businesses, both now and in the future.

Supply chain optimization Made in China 2.0 Leaders have a much more expansive view of the role of logistics in driving competitive advantage. They also understand their role in other crucial areas of business, including growing sales, reducing cost and enhancing customer experience.

Market share Revenue ProfitProductivity



2 The UPS Readiness Index reflects a combination of Recognition and Performance Score. An indexed score of 90 reflects an average score of at least 9 or higher (on a scale of 1 – 10) for each dimension. There are 10 dimensions each for Recognition and Performance Score.

Update on China's Export Manufacturers

Conditions facing China's export manufacturers 2014-15

Economy is better overall than

12 months ago

Economy is worse-off overall than

12 months ago

2015

2014

Company's output increased in the past

12 months

Company's new orders increased in the past

12 months

78%

70%

75%

69%

63%

74%

29%

16%

A strong sector, starting to slowData from the 2016 Made in China 2.0 Report shows that pressure is intensifying for China's export manufacturers. The overall outlook for the sector remains strong, with large majorities reporting increases in new orders and output. However, when it comes to new orders, the number of companies saying they have experienced an increase has fallen from 75% to 69%. The number of those reporting increased output meanwhile has fallen from 78% to 70%. Both of these changes suggest that the New Normal may have hit export manufacturing.

Headwinds aheadConsistent with experiences in their respective sectors, the assessments from export manufacturers in this latest report regarding the overall health of the economy were more pessimistic than the year before. The number of companies reporting an improvement in the economy from the previous year fell 11 percentage points to 63% and the number reporting a deterioration increased 13 percentage points to 29%.

REGIONAL BREAKOUT:

A clear regional divide is apparent with companies in the Beijing-Tianjin corridor significantly more likely to have seen new orders and output increase in the last year compared with manufacturers in other parts of China. They are also considerably more bullish on the performance of the overall economy.

New orders

Output

Better overall economy

100 Shanghai

region

Shanghairegion

Shanghairegion

Shanghairegion

102

91

120

124Beijing-Tianjin

region

Beijing-Tianjinregion



120

133

43

81 Shenzhenregion

Shenzhenregion

Shenzhenregion

Shenzhenregion

81

81

127

09 Update on China's export manufacturers


Worse-off overall economy

These variations are displayed as indexed values showing how the result for each sector or location differed from the overall average (scored as 100). An indexed score of 125, for example, shows that the result for that sector or location was 25% higher than the average result, and a result of 80 shows that it was 20% below the average.

Increasing competition from companies in China

Decreasing demand for products in China

Strengthening of the RMB against other currencies

37%

39%

29%

37%

32%

24%

Challenges to capturing opportunities abroadChinese export manufacturers are feeling pressure from both the demand and supply sides — the two challenges most commonly cited are increasing competition from Chinese companies and decreasing demand from Chinese customers. The number of export manufacturers citing a decrease in domestic demand as highly challenging has increased eight percentage points since 2014 to a high 37% — only two percentage points behind the 39% citing increased competition from domestic players.

There are reasons for optimism for export manufacturers: the proportion that see the appreciation of the RMB as a challenge to their business has fallen from 32% to 24% in this year's report.

Key challenges facing China's export manufacturers 2014-15

2015

2014



A buyer's market

Respondents' sentiments of competition in export manufacturing

Possible reasons for switching suppliers

The competition faced by manufacturers is set to grow with 80% expecting competition to increase in 2016, continuing a trend of increasing competition over the last five years.

Export manufacturers face not only a proliferation of new competitors, but also the prospect of their customers switching to these competitors who offer a more attractive deal.

Competition grew in the last five years

Competition grew in the last year

Competition will grow in the next year

77%

80%

68%

Offers higher quality products

Shows understanding of their business and helps them to compete more successfully

Offers a faster and more efficient supply chain

Offers a better customer experience

Helps reduce costs in their supply chain

Offers a lower price

Importantly, for export manufacturers looking to compete in the market, reducing price may not be the optimal solution. Of all of the tested inducements to switch suppliers, price reduction was selected by the fewest export manufacturers. This suggests the market has matured beyond lowest cost suppliers, to one where manufacturers are expected to offer higher quality products and add value through closer partnership with customers.

83%

82%

80%

82%

80%

71%




Made in China 2.0 PrioritiesIt is against this backdrop of tightening economic conditions and increasing competition in the export manufacturing sector that UPS's Made in China 2.0 Priorities are increasingly important. Developed in 2014 to help Chinese manufacturers retool for the future of exporting in China, four priorities were identified to guide reform:

The Made in China 2.0 Readiness Index assesses Chinese export manufacturers' preparedness for the future of their industry – in other words, how ready they are to succeed in an ever-changing and evermore competitive environment. The Index combines a Recognition Score based on how well companies understand the Made in China 2.0 Priorities and a Performance Score that assesses how well companies are delivering on those priorities within their organizations.

Priority 1: Strengthen Knowledge and Understanding

Helping their customers innovate to secure

competitive advantage

Building partnerships with their customers to

jointly expand to new markets

13 Made in China 2.0 Readiness Index


Gathering market intelligence on their industry's

competitive initiatives

Using market intelligence to stay current with trends

and ensure their products meet customers' evolving

expectations of service and technology

Developing cross-cultural business and language

skills to interact more closely with their international

customers

Understanding their international customers'

legal and regulatory environment

Priority 2: Develop Responsiveness and Collaboration

Priority 4: Build Capacity for Innovation

Improving customer experience by aligning their

global logistics capabilities with their customers'

demands

Enhancing their global logistics which, in turn,

allows their customers to be more flexible and

responsive

Developing in-house capabilities for innovative

product development

Developing in-house strategic planning capabilities

to constantly evaluate and refine their business

model

Priority 3: Deliver Tailored Logistics Solutions

1

5

2

6

3

7 9

4

8

10

45%

55%

Index Methodology

The Made in China 2.0 Readiness Index Score is calculated by combining two related metrics – a Recognition Score and a Performance Score.

The Recognition Score is calculated based on the number of export manufacturers who understand each measure to be very important to their success (by rating its importance as 9 or 10 out of 10 on a scale from 0 to 10, where 0 is not at all important and 10 is extremely important). The Performance Score is calculated the same way and refers to the number of export manufacturers who say they perform each task very well (by rating their performance as 9 or 10 out of 10 on a scale from 0 to 10, where 0 is not at all well and 10 is extremely well).

The Made in China 2.0 Readiness Index is marked out of 100 by combining a company's Recognition Score (marked out of 50) and a Performance Score (marked out of 50).

Each measure is weighted equally, as are both the Recognition Score and the Performance Score. This is done to reflect their equal contribution to the task of readying themselves for China's manufacturing future.

Recognition of the Made in China 2.0 PrioritiesRecognition of the Made in China 2.0 Priorities has decreased slightly with the Recognition Score down from 25.4 in 2014 to 23.6 in 2015. This fall was driven primarily by a decrease in the number of export manufacturers who recognize the following three key areas as highly important to their success:

• Building partnerships with customers to expand to new markets (down 10 percentage points) • Developing in-house corporate strategy capabilities (down 6 percentage points)• Helping customers innovate (down 6 percentage points)

Overall, the decrease suggests a reduction in focus on collaboration and creating true partnerships with customers.

Made in China 2.0 Recognition Score 2014-15

23.6

25.5

25.0

24.5

24.0

23.52014 2015

25.4

Developing in-house corporate-strategy capabilities to constantly

review our business model

Building partnerships with our customers to expand to

new markets together

Helping our customers innovate to get ahead of

their competitors

2014

2015

Changes in the Recognition of key areas of the Made in China 2.0 Priorities 2014-15

49%

43%

48%

54%



REGIONAL BREAKOUT:

The Recognition Score varies significantly across China. Companies in the Beijing-Tianjin corridor score particularly well, when it comes to developing in-house innovation capabilities and gathering market intelligence about their competition. Shenzhen-based manufacturers are less likely to recognize the importance of seven of the ten Made in China 2.0 Priorities, resulting in a low Recognition Score.

SECTOR BREAKOUT:

The Recognition Score does not vary significantly based on the manufacturer's sector. Companies in the industrial manufacturing & automotive and retail sectors are more likely than those in the high-tech sector to recognize the importance of developing in-house corporate strategy capabilities and partnering with customers to expand to new markets. Conversely, those in the high-tech sector are more likely to recognize the importance of understanding their customers' regulatory environment and partnering with them to expand to new markets.

Made in China 2.0 Recognition Score 2015 by region

Made in China 2.0 Recognition Score 2015 by sector

24.2 23.7 24.7Industrial

Manufacturing & Automotive

High-tech Retail



24.5 26.6 20.9

Shanghairegion


Shenzhenregion

REGIONAL BREAKOUT:

When it comes to six of the ten priorities, export manufacturers in the Beijing-Tianjin corridor are much more likely than those in other parts of China to perform very well. Shenzhen-based companies, on the other hand, are less likely to perform well when it comes to building in-house corporate strategy and gathering market intelligence. These two factors lead to a much higher Performance Score from companies in Beijing-Tianjin and a lower score for companies based in and around Shenzhen.

SECTOR BREAKOUT:

Consistent with their Recognition Score, Performance Score does not vary based on the type of products manufactured.

Made in China 2.0 Performance Score 2015 by region

Made in China 2.0 Performance Score 2015 by sector

Performance of the Made in China 2.0 Priorities While recognition of the Made in China 2.0 Priorities may have decreased slightly, the performance of the priorities has not. The Made in China 2.0 Performance Score has increased marginally from 21.2 in 2014 to 21.6 in 2015. However, the Performance Score still lags behind the Recognition Score, confirming a finding first seen in 2014 that more export manufacturers recognize the importance of the Made in China 2.0 Priorities than are actually implementing those Priorities. In other words, while some Chinese exporters know what to do, they do not follow through on that knowledge.

Made in China 2.0 Performance Score 2014-15

Shanghai region

Beijing-Tianjin region

Shenzhen region

22.6 25.1 18.6

Retail

22.1 22.3 22.1

21.6

22.0

21.5

21.0

20.5

20.02014 2015

21.2

Industrial Manufacturing &

Automotive

High-tech



Made in China 2.0 Readiness Index Based on the fall in the number of export manufacturers that recognize the importance of the Made in China 2.0 Priorities, our latest study shows that the Made in China 2.0 Readiness Index has fallen slightly from 46.6 in 2014 to 45.2 in 2015.

Made in China 2.0 Readiness Index Score 2014-15



45.2

47.0

46.5

46.0

45.5

45.02014 2015

46.6

Industrial Manufacturing &

Automotive

High-tech Retail

46.3 46.0 46.8

44.8 44.7

52.2

20152014

REGIONAL BREAKOUT:

One of the most important findings in the latest Made in China 2.0 Readiness Index is that export manufacturers in the Beijing-Tianjin corridor are heading in the right direction. They have seen an almost seven-point increase in the Index Score from 45.0 in 2014 to 51.7 in 2015. This increase is mirrored by an even larger decrease in the Index Score for companies based in and around Shenzhen, from 53.9 in 2014 to 39.5 in 2015.

SECTOR BREAKOUT:

While across industry sectors the Index Score does not vary much, there has been a decrease in the Index Score of manufacturers in the retail sector from 52.2 in 2014 to 46.8 in 2015.

Shanghai region

Beijing-Tianjin region

Shenzhen region

47.151.7

39.5

48.3

45.0

53.9

20152014

Lessons from the Leaders

Productivity

Market share

Revenue

Profit

Made in China 2.0 Leaders

Looking at the performance of export manufacturers on the Made in China 2.0 Readiness Index, a small segment of elite companies are leading the way in terms of their understanding and implementation of the Made in China 2.0 Priorities.

Made in China 2.0 Leaders provide a model of success for other Chinese export manufacturers to emulate. By identifying how these Leaders differ from other businesses, a roadmap can be developed for export manufacturing success.

Broadly speaking, Made in China 2.0 Leaders differ from other companies when it comes to their business performance and their strategies for growth.

Made in China 2.0 Leaders' business performanceThere is a clear connection between an organization's investment in the Made in China 2.0 Priorities and business performance. When it comes to productivity, market share, revenue and profit, Made in China 2.0 Leaders tend to do much better than companies less aligned with the priorities.

The Made in China 2.0 Priorities are connected to hard measures of business performance in the here and now. Investing time and resources into aligning with these principles pays performance dividends.

Across the four measures of business performance — productivity, market share, revenue and growth — Made in China 2.0 Leaders are significantly more likely to have seen improved performance in the 12 months preceding the research. Similarly, they are also more likely to expect to see their performance improve in the next 12 months.

It is hardly surprising then that the overwhelming majority (83%) of Made in China 2.0 Leaders say that their businesses are experiencing growth. Leaders are 13% more likely than other export manufacturers to be on a growth footing and 7% less likely to say that their business is currently declining.

Business is currently growing

Business is currently holding steady

Business is currently declining

Other export manufacturers

Next 12 months


Last 12 months

Business trajectory – Made in China 2.0 Leaders vs. other export manufacturers

Business performance - Made in China 2.0 Leaders outperform other export manufacturers

19%

18%

17%

25%

17%

28%

27%

30%

70%

83%

16%10%

14%7%

19 Lessons from the Leaders


Made in China 2.0 Leaders' growth strategiesGlobal footprintIn today's environment, it is vital to capture growth wherever it presents itself. The Chinese government's "One Belt, One Road" and Third-Country Market Cooperation initiatives reinforce how important it is for manufacturers to look overseas to reach new customers in new markets. As manufacturers move up the value chain and as the New Normal sees diminished domestic demand, excess manufacturing capacity must turn to meet export demand.

The global footprint of the Made in China 2.0 Leaders provides a further clue for Chinese manufacturers looking to enhance their competitiveness. Leaders sell to considerably more markets than other companies and are particularly strong in Asia, with 97% of Leaders selling to at least one Asian market.

Thailand Hong Kong SAR France Indonesia The UK

Compared to other export manufacturers, Made in China 2.0 Leaders are particularly focused on key markets in Asia and in Europe. They are more likely to sell to:

161% 151% 116%126% 115%



Made in China 2.0 Leaders are more likely to have a presence in these areas:

Made in China 2.0 Leaders are:

Target regions Target markets

Oceania

Western Europe

Eastern Europe

Asia

546%

59%146%

21%

Thailand

TaiwanHong Kong

KoreaJapan

Indonesia

France

UK

161%

82%151%

97%76%

116%

126%

115%

South America

Central America

North America

31%

46%

71%



When it comes to the expansion plans of the Made in China 2.0 Leaders, Asia is a key focus. They are more likely than other businesses to consider expanding to Malaysia and the Philippines in the next couple of years.

Aside from the focus on Asia, the most sold-to markets on a region-by-region basis are Western Europe and North America. Made in China 2.0 Leaders are six times more likely than other Chinese manufacturers to sell to Oceania and more than twice as likely to sell to Eastern Europe, although they represent smaller markets overall.

Made in China 2.0 Leaders do a better job of leveraging their presence in these markets in order to enter neighbouring markets that may have previously been overlooked. For example, Leaders not only focus on the USA, but also on Canada.

Oceaniamore likely to sell to more likely to sell to

Eastern Europe

6x 2x

Diversifying your B2B and B2C customer baseMade in China 2.0 Leaders have also developed a more diverse customer base than other export manufacturers. With the manufacturing sector shifting away from selling only to B2B customers or only to B2C customers, Leaders are at the forefront of this shift.

Two-thirds of Made in China 2.0 Leaders sell to a mix of both B2B and B2C customers, making them 49% more likely to do so than other export manufacturers. Meanwhile, other export manufacturers are considerably more focused on B2B manufacturing, which is often associated with lower-margin and lower-quality production.

Customer type – Made in China 2.0 Leaders vs. other export manufacturers

Sell primarily to B2B customers

Sell to both B2B and B2C

customers

Sell primarily to B2C customers

Other export manufacturers


43%

15%

64%

18%

42%

18%



Understanding the role of logistics

Made in China 2.0 Leaders know that investing in logistics can add value across a range of key corporate objectives.

Made in China 2.0 Leaders also have a more expansive view than other companies about the role of logistics in driving competitive advantage. Leaders are three times as likely to recognize that logistics play a highly important role in reducing costs and growing sales. They are also more than twice as likely to identify the highly important role it can play in enhancing customer experience.

Made in China 2.0 Leaders are more likely to recognize the important role of logistics than others

Cost reduction

>3Xmore likely

>3Xmore likely

>2Xmore likely

Sales growth

Enhanced customer

experience



Leaders are more likely to understand that logistics can reduce costs by…

The chart below outlines the Made in China 2.0 Leaders' view on the role of logistics in driving business objectives.

Reducing labor costs

Reducing storage fees from a more efficient supply chain

Managing compliance activities better to avoid fines and delays

Reducing costs from fewer lost documents and lost shipments

Reducing training costs through simplified shipping and tracking processes

Allocating staff more effectively thanks to enhanced workflow visibility

Reducing printing costs by using shipping labels to print logos, ads and links to product warranties and return policies

Increasing repeat sales

Improving cash flow and payment speed

Increasing customer satisfaction by reducing shipping errors

Increasing customer bases by shipping to new markets

Increasing customer satisfaction through better shipment tracking

Better managing stock levels to avoid stock outs and allowing sales of in-bound inventory

Leaders are more likely to understand that logistics can grow sales by…

Enhancing quality assurance of order fulfilment

Simplifying product return processes

Providing better visibility and certainty to customers of delivery times

Being able to better forecast shipment delays and put in place mitigation strategies

Offering shipping options to fulfil customer needs

Sending a customer survey upon product delivery to better identify customer needs

Streamlining customs and other procedures to reduce delays and speed up delivery times

Leaders are more likely to understand that logistics can enhance customer experience by…

Offering shipping options to balance speed and cost to meet customer needs

Role of logistics as recognized by Made in China 2.0 Leaders



Made in China 2.0 Leaders understand the importance of agility. They know that they need to constantly scan their surroundings to understand the key driving factors underpinning emerging trends in their market. Just as importantly, they need to be poised to move quickly and decisively in response to these trends both now and in the future. Leaders regularly review their business strategies to ensure they are continuing to meet customer expectations.

Priorities for the future

When asked to rate priorities for the future success of their company, Made in China 2.0 Leaders were significantly more likely than other companies to rate all priorities as highly important.

Among the seven future priorities, improving logistics and growing sales were the two areas where the gap between Made in China 2.0 Leaders and other companies was greatest. Made in China 2.0 Leaders were 170% more likely to identify improving logistics as highly important and 168% more likely to say the same of improving sales growth. These are the two areas where the assessment of Leaders and other companies diverge the most, suggesting that they represent the areas most overlooked by other export manufacturers.

However, across all of the priorities tested, Made in China 2.0 Leaders were considerably more likely than all other companies to recognize the significance of these priorities to their company's future success.

Made in China 2.0 Leaders are more likely to believe that the following are highly important:

Increasing product quality

Cost reductions

Product innovation

Growing sales

Business model innovation

Improving logistics

Enhanced customer experience

85%

111%

168%

170%

100%

96%

136%



130%

Sellingfinishedgoodsvs.unfinishedgoodsProduct innovation is pushing the Made in China 2.0 Leaders up the value chain. As Leaders focus on product innovation, we can see a move away from selling unfinished goods and towards more finished goods. Made in China 2.0 Leaders are 63% less likely than other export manufacturers to sell mainly unfinished goods.

Identifying the impact of emerging trendsMade in China 2.0 Leaders also have a more finely tuned radar for future developments in their market and are considerably more focused on identifying and dealing with these changes. When asked to rate the impact of a series of emerging industry trends, Leaders were more likely than other Chinese export manufacturers to say that all of the tested trends would have a significant impact on them.

Made in China 2.0 Leaders differ most from other businesses when it comes to their assessment of the impact of nearshoring as well as industry and consumer e-commerce (which allows companies to sell directly to their business and consumer clients respectively).

Made in China 2.0 Leaders are more likely to recognize that the following trends will have a big impact:

Emerging market pressures

Nearshoring

Pre-purchase online reviews

Consumer e-commerce

Industry e-commerce

23%

24%

24%

29%

41%



Made in China 2.0 Leaders not only have a better roadmap for success, they are also much more attuned to emerging industry trends and the inherent threats and opportunities. Logistics, in particular, has a key role to play in many of the trends currently overlooked by other export manufacturers – from negating the impact of nearshoring to opening up new channels for consumer and industrial e-commerce.

27 Conclusion

Lessons from the leaders Guiding the future of China's export industry

This year's Made in China 2.0 Report shows that both China's export manufacturing sector and the overall economy are experiencing stiffer headwinds than when we first surveyed manufacturers in 2014. Export manufacturers face growing pressure from falling domestic demand and growing competition – both domestically and internationally.

The Made in China 2.0 Readiness Index Score － which assesses the extent of China export manufacturers' readiness for a more competitive export environment － fell from 46.6 in 2014 to 45.2 in 2015. There is room for improvement when it comes to how well export manufacturers recognize the importance of being prepared for the future of manufacturing, particularly when it comes to working closely with their customers on expanding to new markets and innovation.

Much can be learned from the Made in China 2.0 Leaders – export manufacturers who are the most ready for China's export future, who have experienced stronger business performance and are on a growth trajectory.

Key differences between the Made in China 2.0 Leaders and other export manufacturers include

• Having a broader geographic footprint: Made in China 2.0 Leaders have diversified their investment into new emerging regions to harness growth. They are looking to source growth from Eastern Europe and Oceania.

• BuildingadiversifiedB2BandB2Ccustomerbase: Made in China 2.0 Leaders have shifted away from selling only to B2C or B2B customers to include a mix of both types of customers.

• Being able to better identify the impact of emerging trends: Leaders are much more attuned to macro emerging industry trends and are able to recognize the huge impact of 'nearshoring' to their future success.

• Understanding the role of logistics: Leaders recognize that investing in logistics can add value and offer the competitive advantage in cost reduction, sales growth and better customer experience.

As we have established in 2014, this report reminds export manufacturers that there is value today in being prepared for tomorrow. From profitability to productivity, and from market share to revenue, Made in China 2.0 Leaders continue to significantly outperform those who are less ready for the changes to come. Leaders sell in more markets around the world and enjoy greater success in them. These market leaders are the export champions of tomorrow and have set a strong example for Chinese companies, as well as for companies throughout Asia. By adopting the lessons learned from these Leaders with a more expansive outlook of the future, export manufacturers could continue to thrive in the increasingly competitive environment.

This is the time of Made in China 2.0, a laboratory for global business and commerce, a dynamic environment in which ingenuity and problem solving will fuel unprecedented innovation. Made in China 2.0 is here to present the growth opportunities for export manufacturers as China enters the New Normal.

To understand how Made in China 2.0 applies to your organization, we invite business leaders to visit the Made in China 2.0 platform at ups.com/lianhe. UPS is driven by the belief that great things happen when people work together. Our uniquely human logistics network of more than 400,000 employees collaborate with our customers and stakeholders to solve complex challenges for the transformation of companies and industries. This is an invitation to policy-makers, businesses of all sizes playing different roles in the global value chain, in China and around the world, to join in the Made in China 2.0 conversation.

For more information, kindly contact:Faith WangUPS China, Brand Communication [email protected]

Conclusion

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