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Network Industrial Clustering in China’s Ultimate Pin Factories

  • National and regional economies tend to develop, not in the isolated industries, but in clusters of industries related by buyer-supplier links, common technologies, common channels or common customers. The economies of the Pearl River Delta region are no exceptions. The region has developed a broad range of clusters in garments and textiles, footwear, plastic products, electrical goods, electronics, printing, transportation, logistics, and financial services. The Pearl River Delta region’s electronics and electrical cluster is particularly strong and accounts for the vast majority of Chinese production in a wide range of industries.

    Regional Powerhouse16

The world can rightly howl about the unfairness and illegality of many aspects of the China Price—whether it be lax pollution controls or the many and various mercantilist trade policies discussed shortly. However, what no one can legitimately complain about—and what every business executive and bureaucrat can learn from—is China’s incredible “industrial network clustering.”

For the production of a wide range of China’s export goods, companies located in close physical proximity to one another have formed highly synergistic networks and clusters of activity that yield significant economies of both scale and scope. In doing so, these industrial network clusters have become the modern embodiment of Adam Smith’s famous pin factory, where an extreme division of labor and hyper-economic efficiency both rule.

To understand the nature of these network clusters, take a look at the figure on the following page from the book Regional Powerhouse. It illustrates the famous toy cluster in Guangdong Province. This province, located in the Pearl River Delta along with Hong Kong and Macao, has effectively cornered the world market on toy production.

You can see in this figure that every single factor needed for toy production is produced in close proximity to the major toy manufacturers. These factors of production range from packaging, plastic parts, paint, and label printing to springs, screws and nuts, soft filling, and synthetic hair.

Perhaps what is most impressive about the clustering is that it is often done by whole townships or cities. In an extreme and extremely efficient modern version of Adam Smith’s specialization of labor, China features entire cities or towns that specialize in particular industries or industry segments.

For example, in Guangdong Province, the city of Huizou is the world’s largest producer of laser diodes and a leading DVD producer. Foshan and Shunde are major hubs for appliances such as washing machines, microwave ovens, and refrigerators. Dongguan’s Qingxi Township is one of the largest computer production bases in China. Hongmei focuses on textile- and leather-related products, Leilu on bicycles, Chencun on flowers, Yanbun is the underwear capital, and so on.17

The result of industrial network clustering is the generation of tremendous synergies and economies of scope along the supply chain. In this regard, it is worth noting how similar—yet so different—this form of industrial organization is to the kind that triggered the vaunted Japanese miracle of this past century.

During the 1980s, Japanese industry made famous the use of “just-in-time” systems in which the various parts necessary for production arrive from all over the world just in time for assembly and manufacturing. This type of uniquely Japanese manufacturing, borne of geographic necessity, dramatically cut inventory costs.

The Chinese have taken this system one level higher because it has been able to transform quickly whole cities and towns and tens of thousands of acres of “green field” farmland into industrial production sites. In their industrial network clustering model, Chinese manufacturers do not have to rely on an elaborate and globally dispersed supply chain as the Japanese do to bring in all the various parts to produce the whole. Instead, most of the various factors of production are located in close proximity in any given industrial network cluster, providing great savings in transportation and transactions costs and accelerating the spread of knowledge sharing.

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