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MERICS study analyses “Made in China 2025”

China has launched a high-tech revolution: Beijing has devised an industrial masterplan named "Made in China 2025" and is investing billions to turn China into one of the leading industrial countries by 2049. A study by the Berlin-based Mercator Institute for China Studies (MERICS) shows that China's ambitious strategy is starting to bear fruit. Industrial countries like Germany and the United States have to be prepared for strong competition.

The Chinese leadership under President Xi Jinping launched "Made in China 2025" in 2015. The strategy is intended to help Chinese suppliers of advanced manufacturing technology to reach a domestic market share of 70 per cent by 2025.

China strives for market leadership in main growth areas for a large number of industrial countries. Information technology, computerised machines, robots, energy-saving vehicles, medical devices as well as high-tech equipment for aerospace technology, maritime and rail transport are in the focus of the major industrial revamp called "Made in China 2025."

Cover Merics Paper on China

„Made in China 2025“: leaping into the age of the smart factory

China aims to propel its factories into the age of smart manufacturing and interconnected production by adapting concepts like the German "Industry 4.0" and the "Industrial Internet" in the United States. This may seem overambitious considering the low degree of automation in China's industries. Currently, Chinese enterprises utilise an average of just 19 industrial robots per 10,000 industry employees - compared to more than 300 in Germany and 531 in South Korea.

China is funneling enormous financial resources into its ambitious project. The recently established "National Investment Fund for the Advanced Manufacturing Industry" alone amounts to 20 billion yuan (2.6 billion euros), while the "National Integrated Circuit Fund" received 139 billion yuan (19 billion euros). In comparison, the German government so far has spent only around 200 million euros for research on "Industry 4.0."

The Chinese government also intervenes to protect emerging domestic high-tech producers from foreign competition. The development of social media in China has proven that this strategy can be successful: Facebook, Twitter and Google are blocked in China, which is why homemade equivalents like Baidu, Sina Weibo and Wechat now dominate the domestic market. China's high-tech production has not yet reached that stage: imported components for industrial robots made in China still make up three fourths of the production costs.

China goes shopping abroad to close the technology gap

Chinese enterprises have invested heavily in industrial countries with the aim to close the technology gap. From Januar to September, Chinese investment in the EU amounted to 16 billion dollars. This figure is likely to reach more than 20 billion by the end of 2016. In the U.S., Chinese firms invested more than 18 billion dollars in the first six months of this year. Many investments are flowing into the real estate and service sectors, and the cooperation with Chinese counterparts has been mostly positive in these areas. But Chinese takeover bids for high-tech enterprises like German robot manufacturer Kuka, machine maker Aixtron, or lighting specialist Osram have raised questions over the extent of Chinese state involvement.

The authors of the MERICS study argue that "Made in China 2025" can be boost for China’s competitiveness, provided that political priorities and industrial needs line up. The overemphasis on quantitative targets and the inefficient allocation of funding, among other factors, might diminish the strategy’s impact. However, in some sectors, like robotics and 3D printing, leading industrial economies and international enterprises might soon feel the heat from Chinese competitors. Economic growth in countries that rely heavily on high-tech industries (among them EU countries like Germany, Hungary, Czechia, Ireland, and Austria, but also South Korea and the United States) could suffer in the longer term.

Industrial countries need smart answers to China's offensive

Political and economic decision makers should not be blindsided by the lucrative business opportunities that "Made in China 2025" offers to foreign high-tech suppliers in China in the short run. They have to be aware that China’s long-term goal is to replace foreign with domestic technology.

According to the MERICS researchers, industrial countries will have to devise a smart response to China's strategy. European policymakers in particular need better policy tools to react to the state-led acquisitions of European high-tech enterprises. The background of investors has to be made more transparent to shed light on possible state involvement. Also, foreign direct investment into Europe should be more comprehensively screened for national security implications. Extending EU competition policy to investors from third countries might be another option: these regulations prohibit state subsidies that distort competition.

The authors also suggest to concentrate research and development cooperation with Chinese partners in areas where China has already reached an advanced technological level, as in the telecommunications standard 5G, wireless-sensor networks, 3D printing, industrial e-commerce, cloud computing and big data.

They also call for more dialogue with China. Industrial countries could use China's need for expertise in high-tech production to gain leverage in discussions on cyber security, IT security standards and protection of sensitive company data.

According to the authors, China is willing to participate in international standardisation efforts. But it has also established its own standards in mobile communication, making life harder for foreign competitors. If domestic standardisation becomes the norm in other areas as well, the market access barrier for foreign high-tech producers in China may soon become unsurmountable.

Research methods

The authors analysed government documents related to “Made in China 2025” and other strategies like “Internet Plus.” The research is also based on interviews with more than 60 experts from enterprises, business associations and political institutions in China, Germany and other European countries. The researchers measured the progress of China's strategy by scrutinising patent activities and the allocation of subsidies. In several case studies, based on field research and investigations in China, the authors assessed the stage of development of Chinese companies in key segments of high-tech production.

Click here to download this study as PDF.

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