1.05  Leveraging on Internet for Growth II: Made in China 2025 

2 August 2018

Why the Need for Made in China 2025?

 

As explained, Internet Plus Initiative (互联网+) seeks to rebalance the Chinese economy by integrating the services sector with China’s highly successful internet industry so as to increase the overall economic contribution of consumption relative to export and of services sector relative to the manufacturing sector. At the same time, the initiative also seeks to revitalize Chinese companies in the services sector so that they can compete more effectively outside China and increase their international presence.

 

The game plan of Internet Plus Initiative, however, is not limited to just services sector. It plays an important role in rejuvenating the manufacturing sector as well through the Made in China 2025 (MIC2025, 中国制造2025) initiative launched also in 2015. MIC2025 is a 10-year blueprint that builds on the Internet Plus Initiative to restructure industrial sector from the low value-add investment-driven to high value-add and innovation-driven using Chinese-owned technologies instead of imported technologies. It came at a time when China’s manufacturing as the main engine of growth had plateaued. Even though China’s rise to manufacturing pre-eminence in recent years has been amazing, its advantages gained through lower costs of labour and capital as well as efficiency-driven innovations are fast eroding. Unless effective measures are drawn to fundamentally reform China’s manufacturing sector, there is a real danger that China falls into the middle-income trap that have plagued many developing economies.

[Middle Income Trap] A country falls in to a middle-income trap when per-capita income stalls before it becomes rich. Usually that happens because rising wages and costs erode profitability at factories that make basic goods like clothes or furniture, and the economy fails to make the jump to higher-value industries and services. Only five industrial economies in East Asia have succeeded in escaping the trap since 1960, according to the World Bank. They are Japan, Hong Kong, Singapore, South Korea, and Taiwan.

On the whole, China has performed exceeding well economically over the four decades. Structurally, the services sector has gone from just 24.6% of GDP in 1978 to 51.6% by the end of 2017 while manufacturing declined marginally from 47.7% to 40.5% during the same period. To escape the middle-income trap, what China needs to do from this point is to move up the value-add ladder of both the secondary and tertiary sectors, particularly by pursuing indigenous innovations in core technologies.

Contribution of major sectors to GDP.jpg

In the decades ahead, Xi must therefore effect the transformation of both the services and manufacturing sectors so that China can join the rank of high income countries. His challenge is compounded by an aging workforce, the mountain of corporate and local government debt, and an environmental clean-up that will take decades. Moreover, no major economy that is not democratic has managed to surpass the middle income trap. In short, the odds are stacked against China.

To map out a strategy, China again looked to the West, drawing inspiration from “Industrie 4.0” plan (工业4.0), Germany’s strategy for the Fourth Industrial Revolution that the industrialized economies in the West have embarked on since 2013. “Industrie 4.0” was first discussed in 2011 and later adopted by the German government in 2013. Diligent studying of the German concept revealed to the Chinese that advanced industrial digital technologies (IDTs), when combined with the internet technologies, can yield significant gains in productivity, efficiency, and precision. Based on the lessons learned, the Chinese Ministry of Industry and Information Technology (MIIT) drafted MIC2025 over two and a half years with input from 150 experts from the China Academy of Engineering.

Internet Plus Initiative Concept.jpg

MIC2025 is thus also China’s strategy for the Fourth Industrial Revolution. It embodies Chinese policymakers’ efforts to help Chinese manufacturing industries revamp their entire value chain and create a more enduring competitive advantage by marrying emerging innovative industrial digital technologies (IDTs) with internet technologies which China is already strong in. Through MIC2025, Chinese businesses can use real-time data to link product designers, “smart” factories, and distribution centres across the value chain so that they can differentiate themselves beyond low-cost labour focusing their efforts either upstream (to harness innovation and product-development efforts) or downstream (to tame supply-chain complexity) or both, depending on the characteristics of competition in their sectors.[1]

 

The goal of the Chinese government is not merely to uplift the stagnating economy so that China could escape the middle income trap. Instead, they see this emerging global race as an excellent opportunity to catch up with or even overtake the industrial economies technologically and economically.[2]

 

Soon after his ascent to power, President Xi Jinping espoused his China Dream of the “Great Revival of the Chinese Nation” (中华民族伟大复兴的中国梦). MIC2025 is therefore also part of Xi’s plan to make China great again by transforming China from just a mere manufacturing giant (制造业大国) to a leading manufacturing power (制造业强国). This would be achieved in three steps. The first will see China ranked among the manufacturing powers by 2025 with the help of MIC2025. In the second step, China's manufacturing sector will reach a generally moderate level among the manufacturing powers by 2035. Finally, by 2049, the 100th anniversary of the founding of the People's Republic of China, China will have completed its transformation to become the leading manufacturing power.[3]

 

In short, MIC2025 embodies multiple visions of Chinese policymakers for the future of China. It is, at the same time, a long-term industrial strategy to restructure its economy so that China can escape the middle-income trap; an opportunity for China to catch up with or even overtake the industrialized economies technologically and economically; and a roadmap to bring to fruition President Xi’s China Dream of the “Great Revival of the Chinese Nation”.

 

What exactly is Made-in-China 2025?

 

Technically, MIC2025 basically involves the digitization of all aspects of operations within a value chain to enable all machines and devices to be connected via the internet to form cyber-physical systems so that activities within the entire value chain can be controlled in real time via machine-to-machine and machine-to-human communication. The backbone of MIC2025 is thus the industrial Internet of Things (IIoTs).

 

In other words, MIC2025 is the merging of China’s industrial sector with its “Internet Plus Initiative” driven by IIoT (i.e. IoT of all industrial assets) and supported by emerging industrial digital technologies, including additive manufacturing (e.g. 3D printing), big data and its analytics, cloud computing, artificial intelligence, augmented reality, and virtual reality.

 

As in all Chinese policies, MIC2025 is government-guided but market-oriented (市场主导、政府引导). The state plays a significant role in drawing up an overall framework, providing fiscal support, and supporting the creation of manufacturing innovation centres (制造业创新中心,15 by 2020 and 40 by 2025). But the plan also calls for setting up of market institutions, strengthening intellectual property (IP) rights protection for small and medium-sized enterprises (SMEs), promoting the more effective use of IP in business strategy, and allowing firms to self-declare their own technology standards while also helping them to better participate in international standards setting.

 

MIC2025 targets ten key industries: 1) New advanced information technology; 2) Automated machine tools, numerical control tools & robotics; 3) Aerospace and aeronautical equipment; 4) Maritime equipment and high-tech shipping; 5) Modern rail transport equipment; 6) New-energy vehicles and equipment; 7) Power equipment; 8) Agricultural machinery; 9) New materials; and 10) Biopharma and advanced medical products.

 

Execution of the plan will be based on five guiding principles: making manufacturing innovation-driven, emphasizing quality over quantity, achieving green development, optimizing the structure of Chinese industry, and nurturing human talent.[4]

 

The goal of MIC2025 is thus to comprehensively upgrade the ten key Chinese industries, making them develop high quality products using more indigenous innovative elements, more China-developed parts and internationally-recognized Chinese branding (包含更多中国创造因素,更多依靠中国装备、依托中国品牌) so that Chinese companies in these targeted industries can gravitate towards the high end of global value chains.

 

In essence, China’s strategy is one of gradually substituting foreign with Chinese indigenously developed technologies while preparing the ground for Chinese technology companies to enter international markets.[5] Specific targets for each industry have been laid out by the government:[6]

  • In smart manufacturing, China wants domestic firms to have 60% of the market in industrial sensors by 2025.

  • For the making of smartphones, China wants home-made chips used in 40 % of them

  • Chinese-made industrial robots should make up half of the market by 2020 and 70% by 2025 The country is aiming for 2-3 local champions ready to compete with global rivals.

  • In the space race, China wants 80% of civil space industry equipment to be domestically sourced by 2025.

  • For out-at-sea engineering equipment, China wants critical systems and equipment capturing 80% of the high-tech ships market by 2025.

  • Train makers, which are already dominant at home, should make 30% of their sales abroad by 2020, raising this to 40% by 2025.

  • China wants its own firms to take 80% of the fast-growing smart green cars market by 2025, with two local champions among the world’s leading new-energy vehicle companies.

  • In the renewable energy equipment and energy saving equipment market, China wants over 80% share by 2025, with three home-grown firms with enough scale to compete globally.

  • For agricultural tech, China aims to produce 90% of its own farming equipment with high-end machines like tractors holding around a one-third share of their segments by 2020. This should rise to 95% and 60% respectively by 2025.

  • Advanced basic materials, such as for construction or textiles, and essential strategic materials including rare earth and special alloys, should hold a 90% and 85% share of the domestic market respectively by 2025.

  • China wants home-grown drug firms to be up to international standards by 2025, with 5-10 locally-developed drugs having won approval by then in the United States or Europe. In medical devices - an area in which China has been heavily reliant on imports - Beijing wants its own companies to capture 70% of the market for middle and high-end medical equipment at county-level hospitals.

[The Green Book] A key element of China’s MIC2025 blueprint is an unofficial document that’s slipped largely under the radar: The Made in China 2025 Major Technical Roadmap, better known as the Green Book after the colour of its original cover. Whereas the official Made in China 2025 plan has no specific targets for Chinese companies to seize domestic and global market share and even says implementation must be dominated by markets, the Green Book’s 296 pages are full of goals. The Green Book was first published in October 2015 by the National Manufacturing Strategy Advisory Committee and updated most recently in January without its green cover. It had input from 25 academics and over 400 specialists and high-ranking industry representatives, according to its introduction section. It breaks down targets for dozens of industries that supply the above-listed 10 key sectors prioritized by Made in China 2025.

 

How is MIC2025 Different from Hu-Wen’s "Strategic Emerging Industries" Initiative?

The Hu-Wen administration launched its 15 year plan in 2006 to foster "indigenous innovation" (自主创新) in advanced technologies as the core of China’s 11th Five-Year Plan (2006 – 2010). In October 2010, on the eve of the 12th FYP (2011 – 2015), their plan further culminated in the identification of seven "strategic emerging industries" (SEI, 战略性新兴产业) that were seen as vital for China to achieve mastery in if it was to become an advanced economy. The plan sought to develop leading-edge advanced technologies through investment in R&D from state and industry sources, accumulation of intellectual property, setting of distinct technical standards, and leveraging access to the Chinese market in exchange for foreign technologies. It also set a target for the SEI industries to account for 8% of the economy by 2015 and 15% by 2020.

 

MIC2025 is different from Hu-Wen’s approach in multiple respects. Firstly, MIC2025 focuses on the entire value chain and not just innovation. Secondly, even though MIC2025 targets ten key industries, it still provides an avenue for not just the high-tech industries but all traditional industries to upgrade as long as they are able to adopt the digital technologies. Next, despite the state’s active involvement in MIC2025, market mechanisms are more prominent than in SEI. For example, instead of focusing on top-down, unique domestic technical standards, the attention is on self-declared standards and the international standards system. Finally, there are clear and specific measures for innovation, quality, intelligent manufacturing, and green production, with goals set for 2020 and 2025.[7]

 

Overall, MIC2025 is much better conceived and more appropriate for China's current situation than the Hu-Wen’s approach of "indigenous innovation" and identifying SEIs which was perceived as too narrow and by 2015, was not fully exploiting China’s strength in its fast-growing internet industry which began to blossom after 2013, putting China’s digital economy ahead of that in even the developed economies. More importantly, the vision painted by MIC2025 is politically more in tune with Xi’s ambitious China Dream of the “Great Revival of the Chinese Nation” by 2050. Hence, MIC was conspicuously not presented as the successor to or extension of Hu-Wen’s innovation and SEI approach.

 

Execution of the MIC2025 Strategy

Comparatively, China is in a poorer starting position in the global race for smart manufacturing. The current level of automation and digitisation in China’s industry is much lower than in other industrial economies.

 

Moreover, even though the Chinese drew inspiration from Germany’s “Industrie 4.0”, MIC2025 is a far broader effort, as the efficiency and quality of Chinese producers are highly uneven, and multiple challenges need to be overcome in a short amount of time if China is to avoid being squeezed by newly emerging low-cost producers while attempting to cooperate and compete more effectively with advanced industrialized economies.[8]

 

Achieving the bold vision of overtaking the others within three decades thus requires a lot more efforts not just from the industries but perhaps even so from the Chinese government.

 

Indeed, government entities at all levels have been funnelling large amounts of money into supporting R&D and technological upgrading of Chinese enterprises. Examples of national level funds Advanced Manufacturing Fund and National Integrated Circuit Fund which received RMB 20 billion (€2.7 billion) and RMB 139 billion (€19 billion) of initial funding respectively. They are complemented by a plethora of provincial level financing vehicles. The financial resources are enormous compared to, for instance, the €200 million of federal funding that the German government has provided for research on Industry 4.0 technologies so far.[9] According to MERICS, 2.1% of China's GDP (more than $230 billion) went into research and development in 2016 alone. No country, including the US, spends more than China today on research.[10]  

 

Meanwhile, Chinese companies are busy setting up research centres outside China to extract international IT knowledge and expertise. Telecommunications giant Huawei, for example, operates more than a dozen research centres around the world. Electric carmaker NIO was founded in 2014 and already has 30 sites worldwide with both Chinese and international teams working on different prototypes and battery technologies. IT companies Baidu, Tencent and Didi have AI research centers in Silicon Valley while Alibaba had plans to invest more than €10 billion in research in the next few years, in collaboration with top researchers at some elite US universities. According to MERICS, Alibaba already employs 25,000 scientists and engineers worldwide.[11]

 

At the same time, the government is helping Chinese companies to accelerate their acquisition of foreign high-tech firms with proprietary technology to speed up China’s technological catch-up and to leapfrog stages of technological development. This is especially so for the semiconductor industry in which Chinese businesses are heavily dependent on imports. Via the state-controlled Integrated Circuit Industry Investment Fund, for example, the government will be providing an additional €25 billion in 2018 to help Chinese companies buy high-tech chip companies around the world.[12]

 

Back on home ground, the Chinese government also wants to ensure that local high-tech companies are not overwhelmed by foreign competition. Hence, in addition to the government subsidies, heavy investments in research and innovation, and targets for local manufacturing content, MIC2025 also builds on earlier government policies encouraging or requiring foreign companies seeking to access the Chinese market to enter into joint ventures with, and transfer technology to, domestic firms.

Will the MIC2025 Strategy Succeed in Transforming the Chinese Economy?

It is too early to foretell at this stage whether MIC2025 will succeed in transforming the Chinese economy in the way and timeframe as envisaged. Despite the ambition of the Chinese policymakers, the strategy is limited by a number of significant weaknesses, diminishing its scope and impact.

 

One such limiting factor is the level of preparedness of the Chinese companies. Unlike Germany’s 4.0 and US’ Industrial Internet, which are driven by bottom-up initiatives, MIC2025 is a top-down program driven by state guidelines.

 

In June 2016, a McKinsey survey of 130 companies across sectors shows that, while Chinese manufacturers are more optimistic than their counterparts in Germany, Japan, and the US on the potential of Industry 4.0 to transform industry, they lack a solid game plan. Only 44% of the state-owned enterprises report that they are prepared.[13] Organizational capabilities, talent, and mind-sets are all lagging in many companies. Only 9% of companies have assigned responsibilities for Industry 4.0 initiatives versus more than a third in the United States and Germany. An even smaller number of Chinese companies, 6%, have a clear road map of the way ahead versus a fifth or more in the developed-economy cohort. Few companies have made digitization a priority or raised the awareness and skills of frontline managers. There are also inadequate digital manufacturing tools along the value chain. Chinese auto companies, for example, lack the digital grounding to analyze, manage, and use data collected from production lines. Such data are crucial to the product development and R&D efforts required to raise quality and create globally competitive cars.[14]  Moreover, China’s economy is currently experiencing downward pressure. Upgrading the production processes might result in job losses among the less skilled workforce.

 

Critics therefore hold that the MIC2025 strategy is likely to succeed in elevating a small vanguard of Chinese manufacturers to a higher level of efficiency and productivity, allowing them to dominate their sectors on the Chinese market and become fierce competitors on international markets. [15] However, China is unlikely to realize the deep transformation of China’s entire manufacturing base as envisaged by MIC2025 within the ambitious timeframe set by the Chinese leadership.[16]

 

Indeed, in several sectors — telecommunications, high-speed trains, power generation — China is already well on the way to achieving its 2025 goals. However, it is still lagging a distance behind the industrialized economies in areas such as industrial software and the semiconductor industry.[17]

Moreover, China faces increasing European countries’ concerted effort to protect sensitive technologies from being acquired by Chinese firms. It remains to be seen also how Trump’s efforts to coerce China to abandon its MIC2025 plan will impact the eventual outcomes. Notwithstanding, MIC2025 is without a doubt a bold and sophisticated strategic industrial policy. Given China’s impressive track record of leveraging on its huge domestic market to drive economic developments, the odds are that China will emerge at least a formidable, if not the leading, manufacturing power in the decades ahead. Assuming anything less will be foolhardy.

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REFERENCES

[1] See Forest Hou, Arthur Wang, and Ting Wu. (2071). “A digital upgrade for Chinese manufacturing.” McKinsey Quarterly. May 2017.

[2] See赵之林. (2015). “李克强:推动中国制造由大变强.” 人民网. 26 March, 2015.

[3] See左娅. (2015). “中国制造2025 瞄准十大重点领域.” 人民网, 20 May, 2015.

[4] See左娅. (2015). “中国制造2025 瞄准十大重点领域.” 人民网, 20 May, 2015; See People’s Daily. (2015). “'Made in China 2025' to focus on ten key sectors.” 22 May, 2015.

[5] See Jost Wübbeke, Mirjam Meissner et. al. (2016). “MADE IN CHINA 2025: The making of a high-tech superpower and consequences for industrial countries.” Mercator Institute of China Studies. No 2. December 2016.

[6] See Reuters. (2018). “Factbox: Made in China 2025: Beijing's big ambitions from robots to chips.” 20 April, 2018.

[7] See Scott Kennedy. (2015). “Made in China 2025.” Center for Strategic & International Studies. 1 June, 2015.

[8] See Scott Kennedy. (2015). “Made in China 2025.” Center for Strategic & International Studies. 1 June, 2015.

[9] See Jost Wübbeke, Mirjam Meissner et. al. (2016). “MADE IN CHINA 2025: The making of a high-tech superpower and consequences for industrial countries.” Mercator Institute of China Studies. No 2. December 2016. Pg 7.

[10] See Thomas Kohlmann. (2018). “From the world's workshop to the world's tech hub: China's economic leap forward.” DW.com. 10 May, 2018.

[11] See Jost Wübbeke, Mirjam Meissner et. al. (2016). “MADE IN CHINA 2025: The making of a high-tech superpower and consequences for industrial countries.” Mercator Institute of China Studies. No 2. December 2016.

[12] See Jost Wübbeke, Mirjam Meissner et. al. (2016). “MADE IN CHINA 2025: The making of a high-tech superpower and consequences for industrial countries.” Mercator Institute of China Studies. No 2. December 2016.

[13] See Forest Hou, Arthur Wang, and Ting Wu. (2071). “A digital upgrade for Chinese manufacturing.” McKinsey Quarterly. May 2017.

[14] See Forest Hou, Arthur Wang, and Ting Wu. (2071).

[15] See Jost Wübbeke, Mirjam Meissner et. al. (2016). “MADE IN CHINA 2025: The making of a high-tech superpower and consequences for industrial countries.” Mercator Institute of China Studies. No 2. December 2016.

[16] See Jost Wübbeke, Mirjam Meissner et. al. (2016).

[17] See Thomas Kohlmann. (2018). “From the world's workshop to the world's tech hub: China's economic leap forward.” DW.com. 10 May, 2018.