Made in China 2025 is one two mammoth economic efforts announced in the last decade aimed at solidifying China’s global economic prowess (the other being One Belt and One Road initiative). The Made in China 2025 program is a comprehensive strategy to upgrade China’s manufacturing base by adopting ‘intelligent manufacturing’ principles, that is, integrating a set of advanced technologies into the production process. This program will go hand in hand with the Chinese government’s efforts to promote domestic industries in artificial intelligence, big data, robotics, and the Internet of things.
In the global context, this program is not entirely unique. Governments around the world are interested in swiftly advancing their domestic presence in emerging technologies and secure their share of the future. Just before China began this program, the German government launched its “Industrie 4.0” program and the U.S. launched the Advanced Manufacturing Partnership program, both of which are intended to promote advanced manufacturing industries.
As would be expected for an industrial policy initiative of this scale, leaders from throughout the government, including the Ministry of Finance and National Development and Reform Commission (the national macroeconomic planning organization) run the program. A major goal of the program is to increase the domestic content of high technology goods to 70% by 2025.
Foreign business participation in the Made in China 2025 program is a controversial issue. On the one hand, the Chinese government seeks to acquire a diverse array of foreign technical expertise to ensure the success of the program. On the other hand, the foreign business community has already begun to express concerns over market access and fairness. The Chinese government is explicitly committed to growing its domestic industrial base in advanced technology niches. As global technology companies assess the opportunities that this program presents, they should adopt a long-term focus and be aware of the risk that the system that may be rigged against them.
Industry 4.0 in the Chinese Economy
The made in China 2025 strategy has the potential to alleviate a number of weaknesses in the Chinese economy including rising labour prices, demographic challenges, manufacturing quality, and environmental issues.
The impetus for this program came, in part, from the rise in labour costs. Cheap labour markets in Vietnam, Cambodia, and Bangladesh have lured low valued added, labour-intensive manufacturing work away from China. Additionally, China’s workforce is poised to shrink dramatically in the coming decades. The Made in China 2025 strategy is intended to greatly reduce the importance of labour in the manufacturing sector by increasing the role of high technology in all areas of the manufacturing process.
China’s manufacturing quality continues to lag behind the Japanese and German manufacturing powerhouses. The intelligent manufacturing framework, at least in theory, helps to improve manufacturing quality by utilizing technology to minimize the limitations of human work. Intelligent factory principles upgrade manufacturing quality in a wide variety of ways including by using machine vision to take over the inspection process and using analytics to predict defects.
The adoption of intelligent manufacturing principles can reduce a factory’s environmental footprint by decreasing waste resulting from defects and human error, and by improving internal recycling efforts.
The push towards Industry 4.0 creates market opportunities in the manufacturing sector for industries that are traditionally not heavily associated with the industrial process such as IT, sensor technology, artificial intelligence, robotics, and data analytics. Both within China and abroad, the official interest in Industry 4.0 presents a significant market opportunity for high technology industries. The government’s Small Leading Group administering the Made in China 2025, will seek to mobilize these industrial segments.
The government will encourage the production of advanced manufacturing for equipment used in following industries :
- Material Science
- New energy vehicles
Market Access Concerns
The primary concern for foreign businesses seeking opportunities in China’s industrial grand strategy is the risk that the strategic industries involved will be protected from foreign competition. While they may be welcomed with open arms initially, once they have transferred technical knowledge to Chinese firms (a de facto requirement in a number of industries), they will find themselves on an uneven playing field, lose market access, and, eventually, give up on the Chinese market. China’s foreign business community, led by European businesses, has already expressed this concern.
In tandem with Made in China 2025, the state is leading a major effort to develop emerging technology industries in China, including robotics, AI, intelligent manufacturing, machine vision, and big data. The heavy state presence in these industries may crowd out foreign competition. Foreign companies may find themselves at a disadvantage against heavily subsidized companies with government connections. Additionally, there may be pressure on the purchasing departments of Chinese companies to pick Chinese suppliers of industrial technology over foreign companies.
The Chinese government has sought to alleviate concerns of unfair treatment of foreign companies in emerging industries by emphasizing its commitment to an “open door” for foreign competition. Nonetheless, a number of facts undermine the official words. First, China maintains the most restrictive foreign investment regime among the G20, according to the OECD. Additionally, half of the priority industries for the Made in China 2025 program face foreign equity restrictions or joint venture requirements. A major risk of these investment restrictions is that they, in effect, require technology transfer to domestic companies. When you combine this with the fact these domestic companies are heavily subsidized, they may very quickly pose a business threat to the current leaders in these technologies. Official statements to relax for concerns are further undermined by the official goal to increase domestic content of high-tech goods.
Favoring Domestic Companies through Hidden Protectionism
The foreign business community has also expressed concerns that industrial regulations will act as de facto protectionist tools designed to boost domestic companies at the expense of foreign players. For example, the National Security Law of 2015, involves requirements to surrender company information such as source code and encryption algorithms, while not providing definitions of the conditions that may require such decisions. Businesses would have less cause for concern if their Chinese competitors were not so heavily backed and prioritized by the Chinese.
While the push towards advanced manufacturing, combined with the size of the Chinese market, presents a significant opportunity, high technology companies are advised to proceed with caution. The treatment of foreign companies in China is an ongoing issue of controversy. Foreign companies may have difficulty detecting the ways in which the system could be rigged against them. This is not to say that foreign companies will be treated unfairly. It is only to point out uncertainties worthy of careful consideration, particularly for companies whose competitiveness and success is based on technical knowledge and intangible assets.