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U.S. Manufacturers Succeed at Serving China’s Growing Middle Class

Feb. 5, 2014
This opportunity grows in strategic importance as domestic demand for many products remains stagnant.

U.S. Consumer goods and machinery and equipment manufacturers were the primary drivers of exports to China growing at an average annual rate of 12.2% between 2008 and 2013, reaching $124.2 billion. These numbers, courtesy of the United States International Trade Commission and IBISWorld, are evidence of China's growing middle class and aging population.  Furthermore, IBISWorld analysts say that exposure to China’s growing economy is becoming increasingly important for American manufacturers, especially as domestic demand for many products remains stagnant.

IBISWorld developed a list of U.S. industries that are expected to perform particularly well exporting products to China. These companies are in industries that have had high barriers to entry, but now benefit from economies of scale. These industries often have a high market share concentration and the biggest players have strong, well-recognized brands. While Chinese companies are trying to make inroads into many of these industries, they face several obstacles that prevent them from serving these markets in the short term.

China’s Consumption

Many Chinese consumers have experienced an improvement in living standards over the past five years, driven by higher incomes. In the five years to 2013, per capita income in China grew at an average annual rate of 10.2%, causing an increase in China’s middle class. In Shanghai, one of China’s richest cities, the average annual income is estimated to be slightly above $20,000, according to World Bank data, putting the city on par with some U.S. cities, such as Detroit. While China’s savings rate remains high relative to OECD members, consumption has increased, especially in durable goods.

In the U.S., the automotive industry is one of those benefiting from China’s growing middle class.  Over the past five years, demand for American-made automobiles has surged. Between 2008 and 2013, motor vehicles exported from the United States to China grew at an average annual rate of 42.6%, exceeding $7.0 billion. IBISWorld estimates that 15.5% of China’s passenger car imports came from the United States in 2013. Still, U.S. auto-manufacturing industries currently face strong external competition from Germany and Japan. That said, General Motors and its partners sold more than 2.8 million vehicles in China in 2012, with company management stating that it expected to increase vehicle exports to China by 70.0% in 2013. Today, GM sells more cars in China than in the United States. In the five years to 2018, these industries are expected to continue benefiting from China’s expanding middle class. IBISWorld expects that the Car & Automobile Manufacturing industry and the SUV & Light Truck Manufacturing industry will grow at an average annual rate of 2.4% and 3.1% respectively, with exports to China rising as a share of total industry revenue.

China is also a major market for the Medical Device Manufacturing industry, which produces electromedical equipment such as pacemakers and imaging equipment. Since these products assist medical practitioners in spotting health concerns earlier, China’s growing middle class and its aging population provide strong demand for this industry.

According to the USITC, the United States has the largest medical device industry in the world, with 20 of the 30 largest manufacturers. In the five years to 2013, medical devices exported from the United States to China increased at an average annual rate of 4.6%, reaching $2.5 billion. Additionally, U.S. exports of orthopedic, cardiovascular and imaging devices grew at an annualized rate of 2.3% between 2008 and 2013, reaching $2.0 billion. The U.S. specializes in these products as they require significant investment in research and development and highly skilled labor. While local Chinese companies have started manufacturing medical devices, these companies primarily focus on supplying low-tech devices and hospital supplies.

Procedures in many of the major orthopedic segments are expected to achieve double-digit growth due to China’s increasing aging population, driving demand for high-end imaging devices. Between 2008 and 2013, IBISWorld estimates that U.S. exports to China for MRI devices, stents and ultrasound devices grew at an average annual rate of 14.9% reaching $585.0 million. U.S. manufacturers, with established supply chains and reputations, still maintain a competitive advantage in this high-tech, highly skilled industry. Therefore, exports to China from this industry are expected to remain strong going forward as China’s aging population increases, with industry exports growing at an average annual rate of 2.9% in the five years to 2018, reaching $2.8 billion.

Servicing the Chinese Transportation Market

As per capita income continues to rise, demand for air travel within China is expected to increase rapidly. Consequently, demand from China for the Aircraft, Engine, & Parts Manufacturing industry has been high. IBISWorld estimates that in the five years to 2013, exports to China for industry products grew at an annualized 17.2% reaching $11.8 billion. The majority of this growth was for fully completed commercial aircrafts. While China’s leaders are investing in building a local aircraft manufacturing industry, this globalized industry is characterized by a high level of capital intensity and high technological requirements, making it difficult for a new Chinese competitor to capture significant market share in the short term. In the five years to 2018, IBISWorld anticipates that industry exports to China will continue to grow though at a slower average annual rate of 5.3%, reaching $15.3 billion. This is primarily because China is planning to start manufacturing its own commercial aircraft through COMAC, a state-owned enterprise established in 2008.

The Engine & Turbine Manufacturing industry has also seen strong demand originating from China over the past five years. To modernize its infrastructure and transportation sectors, China has been forced to import power generation equipment and diesel engines. Between 2008 and 2013, industry products exported to China grew at annualized rate of 12.7%, reaching $1.8 billion. Companies in this industry are characterized by a high capital intensity as well as significant research and development outlays. For instance, major industry players such as General Electric and Caterpillar Inc. offer highly advanced and energy-efficient commercial engines to their Chinese clients. In the five years to 2018, this industry is still expected to be among the top 10 products exported to China ranked by total value. However, industry operators will need to adjust for slower expected growth in China during this period. IBISWorld anticipates that in the next five years industry exports to China will grow only at an average annual rate of 2.2%, reaching $2.1 billion by 2018.

Continued Growth

The strong growth of exports from these U.S. manufacturers to China is expected to continue over the next five years as China’s middle class expands, its population ages and consumption as a share of the country’s economy rises. IBISWorld estimates that in the five years to 2018, U.S. exports to China will grow at an average annual rate of 5.2%, reaching $158.6 billion. While local Chinese manufacturers are seeking to meet China’s growing market, IBISWorld expects that U.S. manufacturers in industries that are characterized by a high level of technological change, high capital intensity and produce innovative product designs will continue to do well during the short to medium term.