CHAPTER 8 THE MANUFACTURING SECTOR
PHASES OF INDUSTRIAL DEVELOPMENT
Macau's manufacturing industry started to develop in the 17th century.Copper guns and cannons as well as fishing junks were initially the major products. In the 19th century, some traditional craft industries emerged. Other than junk building, factories for matches, firecrackers and incense rose to provide most jobs for the working class, which comprised the majority of Macau's population.
Traditional craft activities continued to prevail in the manufacturing sector in the first few decades of the 20th century, while some textile activities also developed. Rudimentary manufacturing goods were handicrafts with little machinery application, and the manufacturing establishments were small and family-styled. Typical products included towels and low-priced clothes.In the 1950s, Portugal granted tariff-free privileges for products from Macau.Local manufacturers were thus encouraged to produce some traditional merchandise such as plastic/cloth shoes, Chinese furniture and China articles for exports to Portuguese dependent territories.
Macau fulfilled the pre-conditions for industrial take-off in the 1960s.An increasing number of modern factories were established. Some 300 manufacturing establishments employed about 20,000 workers. With an apparent industrial upgrade, Macau's products, in particular textiles and garments,entered into European and US markets. Correspondingly, traditional industries started to assume lesser significance in manufacturing growth.
Macau experienced an industrial take-off in the 1970s. The textiles and garments industry was rising rapidly, while other light industries such as plastics, electronics, toys, artificial flowers, construction materials and food manufacturing also experienced respectable growth. The number of manufacturing establishments exceeded 900. Meanwhile, the US surpassed all other countries to become the largest market for Macau.
Textiles and garments further increased its dominance in the manufacturing sector towards the end of the 1980s. The manufacture of toys, electronics and artificial flowers showed strong growth in the middle of the 1980s but the rally proved to be temporary. The number of manufacturing establishments rose to over 2,000, and manufacturing became the largest economic sector in Macau. One notable development during the period was the activegovernment participation in industrial promotion. The Decree Law No. 49/85/M provided a legal basis for granting incentives to industrial modernization and diversification. The Industrial Training and Development Centre was established within the Industry Department in 1985.
The manufacturing sector has undergone a major correction in the 1990s.Manufacturing output has hardly seen any meaningful growth in recent years. In line with the declining number of establishments and persons engaged in the sector, its significance in the domestic economy has been consistently downgraded (Table 8.1). Increased degrees of concentration were witnessed in both production and sales. Production has been increasingly concentrated in textiles and garments, while sales to the US have become overwhelmingly important.
Note: Figures in brackets are based on a revised industrial classification (C.A.M.) system.
Source: Recenseamento Industrial, various issues.
SPECIAL FEATURES
In this section, we identify eight special features of the manufacturing sector, which help explain the current stage of the manufacturing develop-ment. These are:
1. Export orientation. In 1997, 88.5 percent of the manufacturing sales were export- related. The export-sales ratio normally stays at about 90 percent.
2. Concentration on textiles and garments. Textiles and garments have been the dominant manufacturing products since the 1970s. In 1997,close to 80 percent of the manufacturing workers were engaged in textiles and garments activities (Table 8.2). Textiles and garments accounted for 40.7percent of manufacturing establishments, 78 percent of manufacturing output and 56.1 percent of manufacturing investment.
Unit: % share
Source: Recenseamento Industrial, various issues.
3. Small establishment, small production scale. The sector is crowded with small- and medium-sized enterprises (SMEs). In 1997, only five factories in Macau employed over 500 workers. Ninety two point seven percent of the establishments employed less than 100 workers. Sixty point five percent ofthe establishments only had less than 10 workers. Under this industrial structure, the popular production and operation mode is sub-contracting. A few large factories receive orders and assign parts of jobs to small or family-based establishments. This arrangement means high flexibility to the large companies and helps contain costs.
4. Labour intensive and low value added production. In line with the domination of SMEs, the manufacturing production remains labour intensive and sees slow pace of industrial upgrade. The degree of labour intensity, as measured by the ratio of labour compensation to value added output, has stayed over 50 percent (Table 8.3). Fixed capital stock of machinery and equipment amounted to MOP810,384,000 in 1997. The money value of machinery and equipment per worker was merely MOP21,000 that was even less than the annual salary of an average worker. It explains the low ratio of value added to gross output and the small gain in value added output per person engaged in real terms in the 1990s.
Note: *The nominal increase in value added per person engaged is not 100% equivalent to a real increase in productivity. Macau's GDP deflator increased by 54.8% in 1990-97 while value added output per person engaged increased by 58%.
Source: Recenseamento Industrial, various issues.
5. Reliance on quota protection and Generalized Scheme of Preferences (GSP). The quota system under the Multi-Fibre Arrangement (MFA),which is applicable to textile exports, has protected Macau from international competition.1 Since the 1970s, Macau has also been a beneficiary of the GSP.Under the GSP, some developed countries have granted preferential tariffs for selected exports from developing economies, including Macau.
6. Reliance on Hong Kong. Since the 1960s, Hong Kong industrialists have established production facilities in Macau as a way of reducing costs and getting round increasing trade restrictions by western countries. Hong Kong is estimated to account for 60 percent of cumulative investment in Macau's manufacturing sector. Almost all of the largest manufacturing establishments in Macau are owned by industrialists from Hong Kong. As a result, Macau's manufacturing sector has heavily relied on Hong Kong's capital, management, technical supports, orders and inputs.
7. Reliance on China. It is mainly related to China's contribution of low-cost labour to Macau's manufacturing production, within and outside the Territory. Since the 1980s, many Macau manufacturers have established their outward-processing facilities across the border. It is reported that the number of workers employed in the offshore production bases is significantly larger than the number of manufacturing workers in Macau. Meanwhile, about 40 percent of manufacturing workers in Macau are estimated to be imported from the Mainland.
THE SURVIVAL ISSUE
Since the early 1990s, the manufacturing sector has consistently contracted. Once the largest economic sector in Macau, its share of the Territory's GDP slid to below 10 percent in 1994, and has continued to go down in the past few years. The lethargy of the manufacturing sector has already been transmitted to merchandise exports as mentioned in Chapter 6.
The outlook for manufacturing remains clouded. Macau has been losing its traditional competitive advantages. Currently, its costs are no lower than those of China and most Southeast Asian countries. The quota system under the MFA will be revoked at the end of 2005.2 Even more worrisome is the industry's slow response to the growing international competition. While it is widely recognized that Macau will continue to lose its market of low valueadded products to its regional rivals, the manufacturing industry has had little progress in upgrading its productivity and value added.
Three fundamental weaknesses have hindered the industrial upgrade.First, manufacturing and sales of high value added products involve innovation, design, establishment of brand names and marketing. For the past three decades, the Territory's manufacturers have basically lived on "cross-bordersubcontracting", where Hong Kong trading companies provide product orders and designs for their correspondent manufacturing establishments in Macau. The finished goods are exported to Hong Kong for distribution and sale, or directly exported to designated countries from Macau. Under this ancillary and unsophisticated operation model, the level of labour quality in the sector has been kept low. An estimated 40 percent of the 40,000 employees in the manufacturing sector are imported unskilled or semi-skilled workers. As a result, the sector simply does not possess the expertise and human resources to develop and market its own products.3
Second, SME-dominated industrial structure is not supportive to investment in high value-added production. The SMEs do not have the necessary capital and technical endowments. It is generally difficult for them to raise investment funds as local banks are hesitant to extend long term loans to SMEs. In addition, most local manufacturers rely on subcontracting orders,which are irregular and unstable. The high degree of business uncertainty implies that they are reluctant to invest in capacity or the training and development of their staff.
Finally, large manufacturing companies in Macau mainly come from Hong Kong. While maintaining sophisticated operations in their headquarters in Hong Kong, they tend to avoid long-term, big investment commitments, as reflected in their heavy reliance on sub-contracting rather than expansion of own capacity. The distinct seasonal fluctuations of demand for textiles and garments would also undermine the investment incentive of big firms.
The above discussion seems to support the gloomy comment that Macau's manufacturing sector does not have a future.4 The pessimists predict that the hallowing out process of the local manufacturing sector will accelerate, once the MFA quota system is repealed in 2005. Most manufacturing activities will eventually be moved to low-cost offshore bases in China.
While this pessimistic assessment is not completely irrelevant, it tends to ignore a number of favourable factors, which may inject new life into the declining manufacturing sector. It should be noted that the successful industrial upgrade in the Asian Newly Industrialized Economies, to some degree,counts on government support and promotion. In recent years, the Macau Government has stepped up its efforts to encourage industrial upgrade and investment. For example, the Government has established the Macau Productivity and Technology Transfer Centre, which currently plays a supportive role in "the development of productivity and competitiveness of the local industry". In 1996, the government-sponsored Concordia Industrial Park was established on the island of Coloane. Until the middle of 1999, eight high- and medium-technology industrial units occupied over 90 percent of the area.5Macau's return to Chinese sovereignty would also bring new opportunitiesfor the manufacturing sector. It has been suggested that China can provide the necessary skills and human resources for Macau's development of new industries in such areas as biochemical and computer software manufacturing companies.6 In this regard, cooperation and exchange at government level are deemed to be necessary.
To summarize, the manufacturing sector will have little chance to regain its dominant position in the domestic economy in view of its fundamental deficiencies. Despite these factors, the possible strengthening of government promotion of industrial upgrading and in China-Macau cooperation will provide room for optimism regarding the continued development of the manufacturing sector.
NOTES
1 The distribution of Macau's export quotas is regulated under Decree Law No. 50/80/M.Export quotas are distributed by the Direccao dos Servicos de Economia in the form of basic and free quotas. Basic quotas are given to manufacturers on the basis of their last year's export performance. The balance is regarded as free quotas, for which any registered manufacturers with over three years' history of operation may apply. Free quotas acquired by manufacturers will become their basic quotas in the coming year. On the other hand, unused quotas will be deducted from the quotas distributed to the concerned manufacturer. Quotas may be transferred between manufacturers at a price.
2 Macau's exports have not been influenced much by the early stages of the phasing out of the MFA, implemented under the Uruguay Round Agreement on Textiles and Clothing, because of the heavy end-loaded phasing-out of MFA quantitative restrictions, which would only extend to Macau's products at the final stage, i.e., by the end of 2004. See IMF (1999).
3 Similarly, Cremer (1990) argues that Macau lacks entrepreneurship in production and marketing to push for an industrial upgrade.
4 See Ng and Tsang (1997), Chapter 6.
5 See Macau Magazine, June 1999, pp. 48-51.
6 See, for example, proposal of the China-Macau cooperation in Yeung (1993).
