The world's current leaders in advanced manufacturing must prepare for growing competition and ensure that China’s industrial upgrade doesn’t come at their expense, the authors of a new MERICS Paper on China argue in an article for our partner publication The Diplomat.
China has launched a high-tech revolution. Recognizing that the country can no longer play the role of the world’s factory for cheap products, the leadership in Beijing has devised a master plan to catch up with leading industrial nations by 2049. “Made in China 2025,” intended to give Chinese industry a leg up in entering the age of smart manufacturing and interconnected production, is China’s answer to Germany’s “Industry 4.0” and to the “Industrial Internet” in the United States.
As our new "MERICS Paper on China" shows, this strategy has the potential to challenge the high-tech leadership of many advanced economies.
For companies from these advanced economies, the strategy, which was launched in 2015, promises attractive business opportunities in the areas that China has singled out for upgrading. These sectors range from information technology, computerized machines, robots, energy-saving vehicles, and medical devices to aerospace technology as well as maritime and rail transport.
But the gold rush may only last a short time. China has made it clear that it aims to eventually replace foreign with domestic technology in its own market and to groom national champions who can compete worldwide. South Korea, Germany, and Japan are among the first who will feel the heat, along with the Czech Republic, Italy, and Hungary – these countries generate more than 40 percent of their industrial output from the sectors targeted in China’s plan.
Industrial countries should welcome the emerging competition, as long as it occurs in a fair market environment. What should have them worried, though, is the extent of political backing that Chinese companies will have in their race to the top.
China deploys enormous financial resources to support its mission of industrial upgrading. The recently established “Advanced Manufacturing Fund” is charged with allocating CNY 20 billion (EUR 2.6 billion/ $3 billion) for upgrading the technology of key industries. The “National Integrated Circuit Fund” alone has CNY 139 billion at its disposal and the Emerging Industries Investment Fund holds another CNY 40 billion. In comparison, the German government so far has only spent around EUR 200 million on research for “Industry 4.0.”
Despite these impressive figures, it may be tempting to dismiss China’s plans as unrealistic and overambitious. The degree of automation in China’s industries is very low. Chinese enterprises currently utilize an average of just 19 industrial robots per 10,000 industry employees – compared to 301 in Germany and 531 in South Korea. Domestic makers of industrial robots start from an equally low level. As of now, imported components still make up three-fourths of the production costs of industrial robots made in China.
Many documents related to “Made in China 2025” betray a mismatch between political priorities and industrial needs. The fixation on quantitative targets and the inefficient allocation of funding, among other factors, might diminish the strategy’s impact.
Yet while the plan will struggle to have the desired impact on the broad mass of Chinese enterprises that are not prepared for such a deep and sudden technological transformation, they will benefit a smaller group of companies that are already gearing up to play in the global league. These frontrunners, as well as a large group of hopefuls, will rapidly increase their international competitiveness – while being shielded from foreign competition in their home market.
The development of social media in China has proven that this strategy can be successful: Facebook, Twitter, and Google are blocked in China, leaving the market to homemade service providers like Baidu, Sina Weibo, and WeChat. In the meantime, WeChat owner Tencent, a behemoth in the online gaming industry, and the Chinese Amazon competitor, the online shopping portal Alibaba, have started to venture into markets abroad.
In areas like robotics and 3D printing, the Tencents and Alibabas of advanced manufacturing are already waiting in the wings. Robot makers like Siasun and 3D printing companies like Farsoon are among the Chinese players to watch out for.
Apart from the suppliers, a small group of leading Chinese manufacturers is also making fast progress in the application of smart manufacturing technologies. Home appliance firms Haier and Hisense, along with Midea and Gree, are frontrunners when it comes to integrating their fridges and air conditioners in the Internet of Things.
Many of these Chinese companies have also embarked on a global quest to acquire foreign companies with relevant technological expertise. From 2005 until the middle of 2016, Chinese investments in Germany rose to $13.6 billion. The United States recorded an inflow of Chinese investments of $135 billion.
Many of these investments are flowing into the real estate and service sectors, where the experiences with Chinese investors have been mostly positive. But Chinese takeover bids for high-tech enterprises like chipmaker Aixtron or lighting specialist Osram have raised questions over the extent of Chinese state involvement behind such attempts.
Citing national security concerns, the U.S. administration stepped in to prevent a Chinese takeover of Aixtron, a German company with substantial assets in the United States. The White House relied on an assessment by the Committee on Foreign Investment in the United States (CFIUS), an advisory body that examines national security implications of foreign investments.
In the face of this new challenge, industrial nations cannot stand by. They have to engage China to prevent it from closing its own market to foreign competition in its attempt to strengthen emerging domestic players in a number of industries. They will also have to reconcile the principle of openness to investment with the legitimate need to prevent a sell-out of technologies that are at the core of their national interest or economic growth model.
Industrial countries will have to expand their own screening mechanisms to uncover possible state involvement in takeover bids by foreign companies. This is especially the case in the EU where no equivalent to CFIUS exists. Apart from devising methods to increase the transparency of foreign investors, the EU could also apply its internal competition policy to investors from third countries. These rules prohibit state subsidies that distort competition.
Industry associations should also be part of the solution. They should advise their members to limit research and development cooperation with Chinese partners to areas in which China has already reached an advanced technological level. Examples are the telecommunications standard 5G, wireless-sensor networks, 3D printing, industrial e-commerce, cloud computing, and big data.
These nations could also use China’s need for expertise in high-tech production to gain leverage in discussions on cybersecurity, IT security standards, and protection of sensitive company data.
There is no time for complacency. The time for action is now. Despite its weak spots, Made in China 2025 will rapidly increase the competitiveness of key Chinese companies in the most important industries of the future. Decision-makers in advanced economies will have to come up with smart answers to this challenge.
This article was first published in our partner publication "The Diplomat" on December 16, 2016.