The Business Form of Vertically Integrated Industrial Enterprises
The case of an urban leisure-dining supply-chain platform that settled in Guangzhou illustrates the characteristics of vertically integrated industrial enterprises. The platform provides one-stop services to a hundred thousand customers across the Pearl River Delta, with its core competitiveness resting on traffic, algorithms, and its supply-chain system.
SHEIN is regarded as a textbook case of a vertically integrated industrial enterprise — "a digital enterprise that fuses e-commerce and manufacturing." Through the internet, AI design and algorithms, and modern supply chains, SHEIN is driving transformation and upgrading among Guangdong's traditional garment manufacturers, giving rise to an entirely new business model.
Similarly, cases of vertical integration between Shenzhen internet companies and Foshan manufacturers show that coordinating production capacity via internet traffic data and algorithms can raise industrial efficiency by more than 30%.
The Foundation of Vertical Industrial Integration
Vertical industrial integration requires economies of scale as its foundation. The Pearl River Delta's urbanization rate, population size, and consumption power provide internet platforms with a vast market. The success of Xiaomi and SHEIN rests on powerful industrial clusters and supply-chain systems.
China's infrastructure and raw-materials industries give its manufacturing sector a distinctive advantage — "not something India or Southeast Asian countries can replicate within a few years." The Pearl River Delta is rich in specialized towns, allowing innovative combinations to form quickly, an essential condition for vertical industrial development.
Key Elements Enabling Vertical Integration
Standardization is the critical element in advancing vertical industrial integration. In the electric motor industry, for example, manufacturing standardization can shorten production cycles by 70% and raise per-capita output sixfold. Standardization also enables domestic substitution along the industrial chain, reducing dependence on high-precision imported equipment.
Beyond that, self-reliance in motor control systems and industrial software is crucial. "Standardization can be said to be the ultimate expression of manufacturing's voice in the industry." It creates new financial instruments and service models for industrial integration.
What Vertical Integration Means for Guangdong Manufacturing
Guangdong has the most complete range of industrial categories in China and enormous industrial clusters. By reorganizing industries through the internet, digitalization, and brand and design, there is vast room for development.
"Today, as we re-examine our industries, we discover scale, we discover space and value chains — and that's our chance to push industries toward the higher end of the value chain." In an era of stock-based economic growth, reorganizing and upgrading industries becomes all the more important, requiring research and mapping with the help of think tanks.
Chinese manufacturing needs to shift from a "top-down" model of global division of labor to a "bottom-up" model of building its own system, using economies of scale to amortize R&D costs and ultimately realize high-quality development.
Originally published: Economic Observer · Microscope · 2023-03-10 · Read original →
Originally published in the "Economic Observer · The Walker’s View" column. The author is Executive President of the Guangdong SME Development Promotion Association. For reprints or citations, please contact the author or the Association Secretariat.