Analysis of China's Manufacturing 2025 initiative
The ECCT's Greater China Business committee hosted a lunch with guest speaker Carl Hayward, General Manager & Director of Communications at the European Union Chamber of Commerce in China. The speaker introduced the latest report released by his chamber, which highlights the impact that heavy, state-steered intervention is having on China's Manufacturing 2025 (CM2025) initiative. At the lunch the speaker, who was the chief editor of the report, gave a summary of the report's main findings and the implications for European business in China.
The report, titled China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces, analyses the initiative's goals, which include achieving domestic and international market-share targets in ten industries, attaining self-reliance for key components and turning the concept of ‘indigenous innovation' into reality. It draws on research and interviews with European Chamber members.
While many see CM2025 as the equivalent of Germany's Industrie 4.0, the Chinese plan is actually a much broader proposition – whereas the German Government is looking to take the step from 3.0 to 4.0 and digitise its manufacturing industry, China is looking to upgrade its entire industrial base. This is seen as a welcome and necessary initiative, not only because China needs to climb the value chain and generate more sustainable economic growth, but also because its environment cannot sustain the punishment it has taken from decades of breakneck growth through low-end, high-polluting manufacturing.
The report also finds a number of fundamental differences in how the two plans are being implemented. The German Government has set an overall target, invested €200 million (mostly in the form tax credits for R&D) and left the market to decide how the goal will be achieved. They have focused on establishing strong institutions, IPR protection and supporting R&D at the basic level in order to create the right environment for innovation. By contrast, China's approach appears heavy-handed and top-down. The government has invested hundreds of billions of euros in the project (through subsidies, government-backed funds and other channels) and has even selected the 10 sectors through which it believes the plan can be realised. The 10 sectors targeted to drive China's economy over the coming decades are next generation IT (cloud computing, telecoms, semiconductors); high-end numerical control machinery and robotics; aerospace and aviation equipment; maritime engineering equipment and high-tech maritime vessel manufacturing; advanced rail equipment; energy-saving vehicles and new energy vehicles; electrical equipment; agricultural machinery and equipment; new materials; and biopharmaceuticals and high-performance medical devices. The very idea of ‘picking winners' runs contrary to the definition of ‘innovation', which is driven by market demand not industrial planning.
In addition to subsidies and government-backed investment funds, other old-school policy tools to support the initiative include market access and government procurement restrictions for foreign business, government-steered mergers and acquisitions and forced technology transfers for near-term market access. In the new energy vehicle (NEV) industry, for example, in order to compete in the market European automotive manufacturers (who can at most hold a 50/50 joint venture position in China) are facing intense pressure to turn over advanced technology to their JV partners. Although Chinese authorities have recently announced their intention to rescind the 50/50 JV requirement "in an orderly fashion", no timeline has been released and no clarification has been provided as to whether the lifting of this cap will apply to the whole industry or just certain sectors.
While previous Chinese Communist Party plenums had described the market as having a "basic role" in the economy, the Decision of the Third Plenum in 2013 stated, "The focus of the restructuring of the economic system... is to allow the market to play a ‘decisive role' in the allocation of resources." The Chinese Government's carefully orchestrated efforts to funnel investments to specific sectors under CM2025 is a large deviation from this principle. This has resulted in a surplus of manufacturers rushing into certain targeted sectors in order to soak up the subsidies on offer. In the field of industrial robotics this has already contributed to overcapacity in the low- and mid-tiers of China's market. The initiative has also led to a massive misallocation of capital, for example in the semiconductor industry, which is highly consolidated and extremely competitive – the huge sums that China is investing here could be better spent in other areas.
One of the biggest oversights of the CM2025 initiative is the lack of focus on HR and a dearth of vocational training in the kind of skills that are desperately needed for China to make the transition to high-end manufacturing. The scale of this problem is illustrated in a 2015 report by Boston Consulting (titled Industry 4.0 Will Promote Job Growth, but Stakeholders Must Help the Workforce Adapt) which estimates that the digitisation of Germany's industry will result in the loss of 610,000 jobs, but that this will be offset by the creation of approximately 960,000, mostly in the areas of information and communication technology. Without large investments in education and vocational training in these areas, it is difficult to see how China will be able to succeed with CM2025.
One of the ways that China is closing the technology gap is through ‘shopping' overseas. Around €35 billion was spent in 2016 in Europe, mostly by State-owned enterprises (SOEs), much of it for technology of direct relevance to the CM2025 initiative. This was up 77% from the previous year. By contrast, investments from Europe into China decreased by 23% year-on-year to €8 billion in 2016. The nearly €200 billion that European companies invested in the US over the same period suggests that this has nothing to do with a diminishing interest in overseas markets. The kind of investments that China has made into Europe, for example, Midea's acquisition of robotics company Kuka - the jewel in Germany's 4.0 crown - would simply not be possible the other way around. This lack of reciprocity is leading to a regrettable increase in anti-China sentiment in Europe, which is further fuelled by a general growth of the anti-globalisation movement.
The report urges European Union authorities and Member State governments to maintain openness in the face of increasing populism, successfully conclude the Comprehensive Agreement on Investment (CAI) to emphasise that Europe welcomes market-driven investment by Chinese firms and upgrade investment review mechanisms.
Recommendations in the report to European business include aligning long-term plans with China's industrial upgrade initiatives, monitoring state-steered mergers and acquisitions and maintaining a competitive edge – while Chinese companies are mostly someway behind their western counterparts in terms of innovation, European firms cannot be complacent and should expect Chinese companies to catch up over the next few years.
The full report can be read here: http://www.europeanchamber.com.cn/en/china-manufacturing-2025